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10 Principles of Economics: Usiness Conomics

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10 Principles of Economics: Usiness Conomics

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Lecture 02 -03

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10 Principles of Economics: Usiness Conomics

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10 Principles of Economics

BUSINESS ECONOMICS
Instructor
Dr. Amir Ikram
amirikram12@hotmail.com
www.amirikram12.blogspot.com
OUTLINE
The ten principles of economics
How people and businesses make decisions
Learn the meaning of opportunity cost

See how to use marginal reasoning when making decisions

Discuss how incentives affect people’s behaviour

Consider why trade among people or nations can be good for


everyone

Discuss why markets are a good, but not perfect, way to

allocate resources
HOW PEOPLE MAKE DECISIONS
PRINCIPLE 1:
DECISION MAKING INVOLVES TRADE-OFFS
‘There is no such thing as a free lunch’.
⚫ Efficiency
⚫ Equity
Efficiency: the property of society getting the most it can
from its scarce resources
Equity: the property of distributing economic prosperity
fairly among the members of society
PRINCIPLE 2: THE COST OF SOMETHING IS WHAT YOU
GIVE UP
TO GET IT

Opportunity Cost
whatever must be given up to obtain some item – the value
of the benefits foregone
PRINCIPLE 3: RATIONAL PEOPLE AND BUSINESSES THINK
AT THE
MARGIN
Marginal Changes
Small incremental adjustments to a plan of action
PRINCIPLE 4: PEOPLE AND BUSINESSES RESPOND TO
INCENTIVES
Public policy makers should never forget about
incentives.
Implication of Law of Demand & Law of Supply
HOW PEOPLE INTERACT
PRINCIPLE 5: TRADE CAN MAKE EVERYONE
BETTER OFF
Countries as well as businesses benefit from the ability to
trade with one another.
‘The Wealth of Nations’
Win-win situation
Specialization
Globalization
PRINCIPLE 6: MARKETS ARE USUALLY A GOOD WAY TO
ORGANIZE ECONOMIC ACTIVITY
Collapse of communism in the Soviet Union
Market Economy: an economy that allocates resources
through the decentralized decisions of many firms and
households as they interact in markets for goods and
services
Financial crisis of 2007–2008
Adam Smith: An Invisible Hand
PRINCIPLE 7:
GOVERNMENTS CAN SOMETIMES IMPROVE MARKET
OUTCOMES

If the invisible hand of the market is so wonderful, why


do we need government?
Market failure: a situation in which a market left on its
own fails to allocate resources efficiently.
There are two broad reasons for a government to
intervene in the economy – to promote efficiency and to
promote equity.
HOW THE ECONOMY WORKS AS A WHOLE
PRINCIPLE 8:
AN ECONOMY’S STANDARD OF LIVING DEPENDS ON
ITS ABILITY TO PRODUCE GOODS AND SERVICES
Economic growth
GDP
Standard of living
Productivity
PRINCIPLE 9:
PRICES RISE WHEN THE GOVERNMENT PRINTS TOO
MUCH MONEY
Inflation: an increase in the overall level of prices in the
economy…
The Case of Zimbabwe
PRINCIPLE 10:
SOCIETY FACES A SHORT-RUN TRADE-OFF BETWEEN
INFLATION AND UNEMPLOYMENT
Phillips curve
Business Cycle
PROBLEMS AND APPLICATIONS

Describe some of the trade-offs faced by each of the following:

a) A decision by an entrepreneur starting a small business


to borrow some start-up capital from a bank or raise the
funds through borrowing from friends and relations.
b) A member of the government deciding how much to
spend on some new military hardware for the defence
industry.
c) A chief executive officer deciding whether to invest in a
new more efficient heating system for the company’s
headquarters.
d) A worker in a hotel deciding whether to accept the offer
by her manager of extra shifts in the restaurant.

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