Po b lecture 3 macro economics and regulation students
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Transcript of Po b lecture 3 macro economics and regulation students
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Principles of Business
Macro economics and regulations – Part 1
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2
Overview
• Overview of what the economy is and how to understand its main levers i.e. Micro vs Macro and interest rates, inflation, employment etc
• Define and describe key economic measures and monitoring activities e.g. CPI and GDP
• What is the role of scarcity in creating economic value and looking at opportunity costs
• What are the key factors of production and how does this flow through the value chain to create economic value
• Explain the forces of supply and demand detailing the impact on the economy
• Provide an overview of the different types of competition in a free-market system i.e. pure competition, monopoly, oligopoly etc.
• Overview of absolute and comparative advantage theories in international business
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3
Learning Outcomes
• Define economics and explain why scarcity is central to economic decision making
• Explain the interaction between demand and supply
• Determine the different types of competition in a free-market system
• Demonstrate an understanding of the fundamentals of international trade theory
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Economics: Simple or Complex?
Basic economics 101: It’s the most
complicated simple subject there is.
Rush Limbaugh
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Lets start with the economy; what is it?
“The sum total of all the economic activity within a given region”
Bovee et al, 2013
“The state of a country or region in terms of the production and
consumption of goods and services and the supply of money.” Google,
Definition, 2014
“An economy or economic system consists of the production, distribution or trade, and consumption of limited
goods and services by different agents in a given geographical location.”
Wikipedia, 2014
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Who does it involve & how does it work?
Individuals
Businesses
Organisations
Government
Economic Agents Traditional View
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7
Economic Factors of Production
Source: Bovee et al, 2013
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What are we missing?
Technology Innovation
?
Also consider the role of:
Education Culture International Trade
History & Politics
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Macro Vs Micro Economics
Source: Bovee et al, 2013
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Macro Vs Micro Economics
Microeconomics
The study of how consumers, businesses, and industries collectively determine the
quantity of goods and services demanded and supplied at
different prices
Macroeconomics
The study of “big picture” issues in an economy, including competitive
behavior among firms, the effect of government
policies, and overall resource allocation issues
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Key Economic Indicators as per ONS
GDP Consumer Prices
IndexInterest Rates
UnemploymentPublic Sector
Borrowing
Government Receipts &
Expenditure
National Accounts
Personal Finances
Prices, Output &
Productivity
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GDP – A Good Indicator?
View video: https://www.youtube.com/watch?v=QUaJMNtW6GA#t=16
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Types of Unemployment
Source: Bovee et al, 2013
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Consumer Prices Index
Source: Bovee et al, 2013
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Gross National Income Data
Source: Bovee et al, 2013
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A Divided World
Source: Daniels et al, 2013
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GNI per Capita, 2011
Source: Daniels et al, 2013
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GNI Per Capita, 2011, Adjusted for Purchasing Parity
Source: Daniels et al, 2013
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19
Role of Scarcity in Creating Economic Value
Scarcity value is the economic factor that increases an item's relative price based more upon its relatively low supply. Whereas
the prices of newly manufactured products depends mostly on the cost of production (the cost of inputs used to produce them, which
in turn reflects the scarcity of the inputs), the prices of many goods—such as antiques, rare stamps, and those raw materials in
high demand—reflects the scarcity of the products themselves
The Cookie Jar Experiment by Worchel, Lee and Adewole, 1975
The fewer the cookies the
more they are valued!
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The Effect of Scarcity
Scarcity has two powerful effects: 1. It creates competition for resources 2. It forces trade-offs on the part of every
participant in the economy.
Opportunity cost The value of the most appealing alternative not
chosen
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The Forces of Supply and Demand
Buyers’ willingness and
ability to purchase products at various
price points
A specific quantity of a
product that the seller is able and
willing to provide at
various prices
Demand Supply
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A deep dive into Supply and Demand
View video: https://www.youtube.com/watch?v=qt0Hw5EYlqw
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Understanding Demand
Source: Bovee et al, 2013
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Understanding Supply
Source: Bovee et al, 2013
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The Equilibrium Point
• The point at which quantity supplied equals quantity demanded
• Because the supply and demand curves are dynamic, so is the equilibrium point
• As variables affecting supply and demand change, so will the equilibrium price.
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The Relationship between Supply and Demand
Source: Bovee et al, 2013
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Types of Competition in a Free Market
Source: Bovee et al, 2013
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Types of Competition in a Free Market
Competition Rivalry among businesses for
the same customers
Monopoly A situation in
which one company
dominates a market that it can
control prices
Oligopoly A market situation in which a very small
number of suppliers, sometimes only two, provide a particular
good or service
Pure competition A situation in which
many buyers and sellers exist that no single buyer
or seller can individually influence market
prices
Monopolistic competition A situation in which
many sellers differentiate their
products from those of competitors
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The Competition Commission
Source: https://www.gov.uk/government/organisations/competition-and-markets-authority/about
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International Free Trade Theories
Smith argued that it was impossible for all nations to
become rich simultaneously by following mercantilism because
the export of one nation is another nation’s import and
instead stated that all nations would gain simultaneously if they practiced free trade and specialized in accordance with
their absolute advantage.
Absolute Advantage Comparative Advantage
The law of comparative advantages has been
formulated by David Ricardo who investigated in detail
advantages and alternative or relative opportunity in his 1817
book On the Principles of Political Economy and Taxation
in an example involving England and Portugal.
Adam Smith
David Ricardo
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Theory of Absolute Advantage
Production Possibilities under Conditions of Absolute Advantage
Source: Bovee et al, 2013
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Theory of Comparative Advantage
Production Possibilities under Conditions of Comparative Advantage
Source: Bovee et al, 2013
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Comparative Advantage: Explained
View video: https://www.youtube.com/watch?v=FpTBjRf8lGs
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34
Essential work for next week
• Please consult the OLE for details of:– Essential readings*– Seminar/workshop preparation work*– Recommended further readings– Any additional learning
* Essential readings and preparation work must always be completed in time for the next session
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Appendix – Sources for illustrations
Slide 4:www.foxnews.com
Slide 5:www.mapsengland.com
Slide 6:www.mrscultz.com
Slide 8:www.ascensionwhispers.com
Slide 10:www.randomoriginal.com
Slide 19: www.cashingonkids.com
Slide 22: www.howthemarketworks.com
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End of presentation
© Pearson College 2013