Economics for Business

1. Economics for Business • MSc in E&M: Joint Program of SUFE and CUHK • Lecturer: Dr Hongjun Zhong • 钟鸿钧博士 • 上海财经大学经济学院助理教授 • 牛津大学纳菲尔德学院博士后研究员 • Time: Tuesday 8:30-11:30 • Avenue: Room ???

2. OHT 0.1 Textbook • Principles of Business Economics • By Joseph G. Nellis and David Parker • Principles of Economics • By Gregory Mankiw • 中文版，曼昆

3. Other Useful Resources • English magazine • The Economists • Business Week • Chinese magazine/newspaper • 《财经》 • 21 世纪经济报道

4. OHT 0.2 Contents 1 Business economics: an overview 2 The analysis of consumer demand 3 The analysis of production costs 4 Analysis of the firm’s supply decision 5 Demand, supply and price determination 6 Analysis of perfectly competitive markets 7 Analysis of monopoly markets 8 Analysis of monopolistically competitive markets 9 Oligopoly 10 Managerial objectives and the firm 11 Understanding competitive strategy 12 Understanding pricing strategies 13 Understanding the market for labour 14 Understanding the market for capital 15 Understanding the market for natural resources 16 Government and business 17 Business and economic forecasting 18 Business economics - a checklist for managers

5. Lecture 1 Business economics: an overview

6. OHT 1.1 Ch1: Business economics: an overview • Microeconomic Environment • deals with the operation of the firm in its immediate market • involves determination of prices, revenues, costs, employment, etc • Macroeconomic Environment • deals with the general economic conditions of the larger economy of which each firm forms a part. • involves the impact of political, legal and economic decisions, both nationally and internationally.

7. OHT 1.2 Figure 1.1 The business environment

8. Learning outcomes • This chapter will help you to: • Understand the core terms and concepts used in business economics. • Appreciate the nature of a firm’s production decisions with respect to what to produce, how to produce and for whom to produce. • Employ economic reasoning when making choices in the use of resources and to recognise the importance of diminishing returns. OHT 1.3A

9. OHT 1.3B • Comprehend the nature of marginal analysis in the context of business and consumer decisions. • Recognise the different objectives which different firms may pursue and the consequent impact on price and output decisions. • Distinguish between the short run and long run in business economics. • Understand the nature of different competitive structures in market economies ranging from perfectly competitive to monopoly situations.

10. OHT 1.3C • Analyse the external environment and internal capabilities of a firm using core techniques in business economics and thereby understand the forces shaping the firm’s competitive environment. • Appreciate the choice of generic strategies facing firms in terms of cost leadership, differentiation and focus options.

11. OHT 1.4A Basic concepts in business economics There are a number of basic concepts which lie at the heart of business economics and managerial decision-making.The most important of these are the following: • Resource allocation. • Opportunity cost. • Diminishing marginal returns. • Marginal analysis. • Business objectives.

12. OHT 1.4B Basic concepts in business economics • Time dimension. • Economic efficiency and equity. • Risk and uncertainty. • Externalities. • Discounting. • Property rights.

13. Resource allocation Economics is concerned with the efficient allocation of scarce resources. When purchasing raw materials,employing labour and undertaking investment decisions,the manager is involved in resource allocation.Decisions need to be made at three levels, namely: OHT 1.5 • What goods and services to produce with the available resources, • How to combine the available resources to produce different types of goods and services;and • For whom the different goods and services are to be supplied.

14. OHT 1.6 Figure 1.2 The production decision

15. OHT 1.7 The opportunity cost of any activity is what we give up when we make a choice.In other words,it is the loss of the opportunity to pursue the most attractive alternative given the same time and resources. A production possibility curve shows the maximum output of two goods or services that can be produced given the current level of resources available and assuming maximum efficiency in production. The concept of diminishing marginal returns refers to the situation whereby as we apply more of one input (e.g.labour) to another input (e.g.capital or land),then after some point the resulting increase in output becomes smaller and smaller.

16. OHT 1.8 Figure 1.3 Production possibility curve

17. OHT 1.9 Marginal Analysis • Marginal utility is the amount by which consumer well-being or total utility changes when the consumption of a good or service changes by one unit. • Marginal product is the amount by which total product changes due to a one unit change in the amount of input used. • Marginal revenue is the change in total revenue which results from increasing the quantity sold by one unit. • Marginal cost is the change in total cost which results from increasing the quantity produced by one unit.

18. OHT 1.10 Business Objectives • Profit maximisation • The achievement of personal goals,involving personal security and reward,status, degree of discretionary power,etc. • Growth targets for the company in terms of scale of output,market share,geographical market,annual extension of physical capacity,size of departments or size of the labour force,etc. • Maximisation of sales revenue. • Pursuit of the interests of all stakeholders including employees,customers,suppliers, etc.as well as shareholders.

19. OHT 1.11 Time dimension The short run represents the operating period of the business in which at least one factor of production is fixed in supply. The long run represents the planning horizon for the business in which all factors of production may be varied.

20. OHT 1.12 Discounting The concept of discounting is concerned with the fact that costs and benefits arising in future years are worth less to us than costs and benefits arising today. Discounting formula NPV = where NPV is the net present value of the cash flow over the life of the project, S is the future sum, r is the rate of interest or discount rate, and t the number of years elapsing before the future sum is received.

21. OHT 1.13 The competitive environment & market structure • Perfectly competitive markets. • Monopolistically competitive markets. • Oligopolistic competition. • Monopoly.

22. OHT 1.14 • Defining the nature of the market • The number and size distribution of the buyers and sellers in the market. • The degree of product differentiation that exists. • The severity of the barriers to entry and exit that face potential new entrants to the market.

23. OHT 1.15 Figure 1.4 Characteristics of markets

24. OHT 1.16 • Porter’sFive Forces Model • The bargaining power of buyers: how much leverage buyers have in determining the price. • The bargaining power of (input) suppliers: the competition among suppliers which determines the price of inputs to the firm. • The threat from potential new entrants into the market: the degree of ‘market contestability 弛or the extent to which firms are able to enter the market and contest for consumers. • The threat from substitute products or servicese.g. mobile telephones for fixed-line services. • The degree of competition (rivalry)in the market.

25. OHT 1.17 Figure 1.5 Forces shaping the competitive environment

26. OHT 1.18 • Cost positioning of the firm • Cost leadership. • Differentiation. • Focus.

27. OHT 1.19 Figure 1.6 Strategy and the competitive environment - an overview

28. OHT 1.20A • Key learning points • Microeconomics deals with the operation of the firm in its immediate market, involving the determination of its prices, revenues,costs and input employment levels. • Macroeconomics is concerned with the interactions in the economy as a whole of which each firm forms a part. • Resource allocation is concerned with decisions regarding what, how , and for whom to produce.In a market economy the price mechanism is the major determinant of these decisions.

29. OHT 1.20B Key learning points • The opportunity cost of any activity is the loss of the opportunity to pursue the most attractive alternative given the same resources. • A production possibility curve shows the maximum output that can be produced given the current level of resources available and assuming maximum efficiency in production. • Diminishing marginal returns refers to the situation whereby,as we apply more of one input to a fixed amount of another input,then after some point the resulting increase inoutput becomes smaller and smaller.

30. OHT 1.20C Key learning points • Marginal analysis reminds us that most choices involve relatively small (incremental)increases or decreases in production (or consumption). • The short run represents the operating period of the business in which at least one factor of production is fixed in supply. • The long run represents the planning horizon of the business in which all factors of production may be varied in order to alter the scale of production. • Externalities represent wider outcomes of the market mechanism and arise when some of the benefits or costs of consuming a good or service spill over to others.

31. Key learning points OHT 1.20D • The concept of discounting is concerned with the fact that costs and benefits arising in future years are worth less to us than costs and benefits arising today. • Property rights are the rights to own,benefit from and transfer assets (tangible or intangible)in market economies • Perfectly competitive markets are made up of numerous small sellers each offering identical products with complete freedom of entry and exit. Each firm is a price-taker rather than a price-maker • In monopolistically competitive markets there are many sellers but there is also some degree of product differentiation.This form of market structure is also sometimes referred to as imperfectly competitive.

32. Key learning points OHT 1.20E • Oligopolistic competition arises where there exists a small number of relatively large firms which are constantly aware of each other’s actions and reactions regarding price and non-price competition. • A monopoly exists where the market is supplied by one firm producing a product for which there is no close substitute. A monopolist, therefore, tends to be a price-maker, in that the firm is able to set a price in the face of little or no competition. In practice, the term monopoly is often applied also to markets that are dominated by one firm. • Porter’s Five Forces Model describes the competitive environment as being determined by the power of buyers, the power of suppliers, the threat from potential new entrants, the threat from substitutes and the degree of rivalry in the market.

33. OHT 1.20F Key learning points • The external environment of business is determined by changes in political, economic, social and technological factors, i.e.PEST influences. • A SWOT analysis involves consideration of a firm’s internal strengths and weaknesses in the context of the opportunities and threats which it faces. • Generic strategies refer to the choice between pursuing a market strategy based on cost leadership, differentiation or focus .