LO1 Lectures-Basic Concepts-For Class Test

  • Learning Objective (LO-1)

    • Understand and analyze basic economic concepts and apply them in business decision making.

  • Introduction to Economics

    • Economics studies how societies allocate limited resources to produce goods and services for present and future consumption.

    • It is classified as a social science focused on resource management to achieve growth and stability.

    • Important terms include:

      • Scarcity: Limited availability of resources.

      • Factors of production: Land, labor, capital, and entrepreneurship.

  • Key Rules of Economics

    • People Economize: Individuals select alternatives that minimize costs and maximize benefits.

    • All Choices Involve Cost: The cost of a choice includes the value of the next best alternative (opportunity cost).

    • People Respond to Incentives: Economic behavior changes in response to shifts in incentives.

    • Economic Systems Influence Choices: Rules (written and unwritten) direct how individuals cooperate and make choices.

    • Wealth and Productivity: Specialization increases production efficiency, leading to surplus and trade.

    • Future Consequences of Choices: Economics emphasizes future implications over past events.

  • Historical Definitions of Economics

    • Wealth Definition - Adam Smith (1776): Economics is a study of wealth creation and distribution.

    • Welfare Definition - Alfred Marshall (1890): Economics is about human actions in normal life and focuses on how income is obtained and spent.

    • Scarcity Definition - Lionel Robbins (1932): Economics studies relationships between ends (needs) and scarce means (resources).

    • Growth Definition - Paul Samuelson (1948): Economics studies the use of resources over time for consumption.

  • Basic Concepts in Economics

    • Circular Flow of Economic Activity: Interaction between households, businesses, government, and foreign sectors that outlines how resources and payments flow in an economy.

    • Factors of Production: Inputs transformed into usable products (land, labor, capital, entrepreneurship).

    • Economic Activities: Include consumption (direct), production (indirect), and exchange.

  • Positive vs. Normative Economics

    • Positive Economics: Objective analysis of economic phenomena (what is).

    • Normative Economics: Subjective assessments and value judgments (what ought to be).

  • Demand and Supply

    • Demand: Willingness and ability to purchase a good. Influenced by price, income, tastes, etc.

    • Law of Demand: As price falls, demand increases (inverse relationship).

    • Demand Schedule and Curve: Representation of quantity demanded at different price levels.

    • Determinants of Demand: Include price of the commodity, consumer income, tastes, expectations, etc.

  • Supply Concepts

    • Supply: Quantity of a good offered for sale at a given price.

    • Growth in Supply: Higher prices result in larger supply.

    • Law of Supply: Supply rises as price rises; direct relationship.

  • Market Equilibrium

    • Equilibrium Price: Point where quantity demanded equals quantity supplied, illustrating balance in the market.

  • Elasticity of Demand

    • Price Elasticity: Sensitivity of demand to price changes.

    • Types of elasticity include perfectly inelastic, elastic, unitary elastic, relatively elastic, and inelastic.

    • Factors affecting elasticity include availability of substitutes, nature of the good, proportion of income spent, etc.

  • Decision Making Approach

    • Use a cost-benefit approach: If the benefit of an activity exceeds the cost, it should be undertaken.

  • Scope of Business Economics

    • Covers demand analysis, production, pricing, cost analysis, profit determination, and market structures.

  • Characteristics of a Business Economist

    • Clear reasoning, analytical thinking, adaptability to information, and decision-making under varying circumstances are key traits.