ECO 1007: Key Concepts in Economics for Business

Scarcity

Unlimited wants vs. limited resources.

Microeconomics

Individual consumers/firms.

Macroeconomics

National aggregates like GDP, inflation.

Opportunity Cost

The value of the next best alternative foregone.

Types of Economies

Command, market, mixed.

Economic Questions

What, how, and for whom to produce?

Law of Demand

Inverse relationship between price and quantity demanded.

Law of Supply

Direct relationship between price and quantity supplied.

Movement vs Shift

Movement: Caused by price change. Shift: Caused by non-price factors (e.g., tastes, income).

Equilibrium

Where demand = supply.

Price Controls

Price ceilings (shortages) and floors (surpluses).

Price Elasticity of Demand (PED)

% change in quantity demanded ÷ % change in price.

Elasticity

Elastic > 1 | Inelastic < 1 | Unit = 1.

Determinants of Elasticity

Substitutes, proportion of income, necessity vs luxury, time.

Revenue & Elasticity

Elastic: ↓Price = ↑Revenue. Inelastic: ↑Price = ↑Revenue.

Marginal Utility (MU)

Extra satisfaction from one more unit.

Diminishing MU

Each additional unit gives less added satisfaction.

Consumer Surplus

Difference between willingness to pay and actual price.

Risk Attitudes

Risk averse, risk neutral, risk loving.

Expected Value

Sum of outcomes × probability.

Types of Costs

Fixed: Unchanged with output (e.g., rent). Variable: Changes with output (e.g., raw materials).

Total Cost

Total Cost = TFC + TVC.

Economies of Scale

Lower unit cost as output increases.

Diseconomies

Coordination and communication issues.

Perfect Competition

Many firms, price takers, no barriers, identical products.

Monopoly

One firm, high barriers, price maker.

Monopolistic Competition

Many firms, similar but differentiated products.

Oligopoly

Few firms, interdependent decision-making.

Profit Maximization

MR = MC.

Market Failures

Externalities (positive/negative), public goods, monopoly power, information gaps.

Interventions

Taxation/Subsidies, Regulation, Direct provision, Competition policy.

Competition Policy

Aims to prevent abuse of market power (monopoly, oligopoly).

Key Indicators

GDP (Real/Nominal), Unemployment Rate, Inflation, Business Cycle, Output Gap, Circular Flow of Income.

Fiscal Policy

Gov't spending & taxation to influence demand.

Monetary Policy

Interest rates & money supply.

Supply-Side Policy

Boost productive capacity (education, tax reform, deregulation).

Policy Conflicts

Inflation vs. growth, unemployment vs. deficit.

Injections vs. Withdrawals

Key in managing aggregate demand.

Macro vs Micro Issues

Macro deals with the whole economy (like inflation), Micro with individual sectors (like low wages). Some topics like exchange rates can be both.

Marginal Opportunity Cost

Includes only additional costs like materials or labour. Fixed costs like rent aren't included.

Marginal Cost vs Benefit

Firms compare extra cost vs extra gain. If the gain is higher, the decision is worth it.

Transaction Costs

Costs of making deals. Firms reduce these by organizing internally instead of using markets.

Owner vs Manager Objectives

Owners want profits; managers might want growth. Solutions: link pay to performance, monitor decisions.

Partnership vs PLC

Partnerships: simple but risky (unlimited liability). PLCs: safer for owners, better for raising money, but complex.

Multinational Organisation

Face challenges across countries. Use structures like H-form (semi-autonomous) or integrated models.

Strawberry Prices

Fall in season due to high supply. One grower can't prevent this.

Sale Pricing

Use knowledge of how demand changes with price (elasticity) to set sale prices.

Holiday Prices

Demand increases (richer, more interest), supply decreases (higher costs) → price rises. COVID reduced demand.

Cod Prices

Demand up (health), supply down (overfishing) → price rises.

Butter Price Changes

Various causes: complements, substitutes, joint supply, expectations, taxes, new laws.

Dual Shifts

Can predict direction of one variable (price or quantity), not both, unless one change dominates.

Minimum Price

If price floor > equilibrium → surplus. In the example, surplus = 30 kilos.

Elasticity Signs

Demand: negative (price ↑, quantity ↓). Supply: positive (price ↑, quantity ↑).

Inelastic Demand Benefits

Firms want inelastic demand so price changes don't reduce sales much. Achieved via branding, advertising.

iPhone Demand Change

Price fell by 15%, elasticity = -1.5 → demand increases by 22.5%, so 12.25 million units sold.

Inelastic Demand and Revenue

Firm can raise price to increase revenue—up to a point before people stop buying.

Totally Inelastic Goods

(a) None at all prices; (b) Possibly over small price ranges if no substitutes exist.

Cross Price Elasticity

Higher for close substitutes like two coffee brands, not coffee and tea.

Long-Run Elasticities

More time = more options. Demand/supply more elastic in long run.

Marginal Utility & Complements

A rise in the price of a complementary good reduces marginal utility and overall demand.

Elasticity and Consumer Surplus

When demand is elastic, small price changes cause big changes in quantity demanded—so less surplus.

Price vs Total Value

Price shows marginal value, not total value—some consumers would pay more.

Advertising Effects

Demand may shift left or become more elastic. Supermarket might cut prices or promote health benefits.

Advertising Pros/Cons

Helps inform but can mislead. Can boost competition or create false needs.

Expected Value & Risk

EV = (1/5)*£10,000 = £2,000. Risk-averse people may avoid this bet despite the gain.

Designing Ideal Product

You'd need to know preferences, budget, lifestyle, etc.

Product Differentiation

Branding, quality, features, packaging, location, service.

Mountain Rescue Example

This is moral hazard—taking risks because you're protected from consequences.

Short Run Duration

Depends on how fast a firm can change inputs. For big firms like power stations, it's longer.

Economies of Scale

Bulk buying, specialisation, efficient machinery. Some due to increasing returns, some to finance or admin.

Diseconomies of Scale

Eventually, management becomes harder, costs rise.

Economies of Scope

Cost savings from producing multiple products.

Normal Profit as Cost

It's the minimum return needed to stay in business—it's an opportunity cost.

Short-Run Losses

As long as variable costs are covered, keep producing. Stop when fixed costs can't be recovered.

Long-Run Losses

No fixed costs in long-run. If total costs can't be covered, shut down.

Fixed vs Variable Costs

Fixed: rent, machinery. Variable: materials, hourly wages.

MR = MC

This is the point of profit maximization. Beyond that, costs exceed revenue.

Profit Calculations

Work out MR, MC, total and average profits from given table data.

Why Perfect Competition is Rare

Most firms sell unique products, and info is imperfect. Barriers to entry are common.

Fresh vs Tinned Veg

Fresh is easier to enter. Tinned needs big investment, so it's less competitive.

Perfect vs Monopoly

Perfect competition is efficient, but lacks innovation. Monopoly may innovate, but can be inefficient.

Demand Curve & Rivals

Demand shifts with rival pricing. More elastic near rivals' prices.

Elasticity in the Long Run

More firms enter, so demand becomes more elastic over time.

Big Firms = High Prices?

Not always. Some big-firm markets are highly competitive—e.g., supermarkets.

Oligopoly & Profit

Price wars cut profits, but long-term gains from innovation may offset that.

Impure Public Good Example

A country park—non-rival up to a point, but can get crowded.

Externality Examples

Positives: vaccination. Negatives: pollution, drunk driving.

MSB > MSC

Produce more until MSB = MSC—this is social efficiency.

Consumer vs Producer Surplus

Consumer: pay less than willing. Producer: sell for more than cost.

Club vs Common Goods

Club: easy to exclude (Netflix). Common: hard to exclude, overused (public roads).

Govt Should Encourage/Discourage

Encourage: solar panels, health food. Discourage: pollution, smoking.

Ban vs Tax

Bans are clearer, faster in emergencies. Taxes may be ineffective if producers shift cost.

Tax Internalises Externality

Makes producers/consumers face the true social cost.

Property Rights Issues

Too strict = impractical to enforce. Could cause inequality and conflict.

Price Elasticity Definition

Percentage change in quantity ÷ percentage change in price.

Normal Profit

Minimum needed to stay in the market.

Positive Externalities

Unpaid benefits to others—like vaccinations.

Moral Hazard

When people take more risks because they're protected from the consequences.

Ryanair's Reputation

Bad image lowers demand and raises costs. Equilibrium falls.

Effect on easyJet

Demand may shift to easyJet—if it's a good substitute.