The Economic Environment of Business

Topics: Supply and demand, Price elasticity of demand, Economics Pages: 29 (9146 words) Published: September 8, 2014
Economics Terminology
Economics; It concerns
a)Allocation of society’s scarce resources among alternative uses & the distribution of society’s output among individuals & groups at a point in time. b)The way in which allocation & distribution change over time. c)The efficiencies & inefficiencies of economic systems.

Since the real world is so complex, when economists face a problem, where they have to make a decision, they first start by making simplifying assumptions where they build a model much simpler than the real world. If the model was done properly, then it should predict how the real world will behave. A basic assumption in economics, is that economic players behave rationally. It means that once they’ve selected their objectives, they will try to achieve them in a rational way. Therefore individuals believe in is “utility” maximization, which refers to any objective that leads to satisfaction of the economic player. Thus paying to charity may lead to utility maximization. What is managerial economics?

Managerial Economics is a marriage of economics & decision sciences in order to solve complex business problems. This applies for both private firms & public institutions. According to Keat & Young it is “the use of economic analysis to make business decisions involving the best use of an organization’s scarce resources”. It brings together economic concepts & tools, financial analysis, strategic planning, & the techniques of the decision sciences. Examples of questions that managerial economists are concerned with: a)In the private sector: What will be produced? How to produce it? What is the level of production? How much to charge for it?... b)In the public sector: What projects should we implement (e.g. infrastructure)? Should we impose a tax? How to prioritize our budgetary spending?... Goals of the firm - an economist’s perspective:

The firm in economic theory is expected to want to maximize profits (of course subject to constraints). This is known as the profit maximization hypothesis. How Economists Define?
Resources (factors of production):
a)Land (land, forests, minerals, etc)
b)Labor (physical + mental)
c)Capital (tools, machinery, factories)
Production: the act of making commodities (goods and services)

a)Tangible e.g. cars, chairs
b)Services: intangible e.g. education, health care
Efficiency of production: maximizing output using a given amount of resources Or minimizing resources used to achieve a given amount of output. Efficiency of distribution: the economy’s output is said to be efficiently distributed if no one could be made better off without making someone else worse off by redistributing it. Effectiveness: the extent to which an intervention does what it is intended to do Firm: A firm is an organization which takes resources & transforms them into products (goods & services) that are demanded by consumers. Industry: A group of firms that sells a well-defined product or closely related set of products. Market: An “area” over which buyers & sellers negotiate the exchange of a well–defined commodity. N.B.: Not necessarily physical, for example the NASDAQ stock exchange is an electronic market. Revenue & Profit:Revenue refers to all the proceeds (money) that a firm gains from selling its product or service. It depends on the quantity of units it sells and the price of each unit. Revenue = no. of units sold X price of unit

The difference between the revenue a firm receives and the costs of production it incurs is the “profit”. Micro vs. Macro Economics
a)Macro economics: the study of the determination of economic aggregates & averages, such as total output, total employment, the general price level & rate of economic growth. b)Micro economics: deals with firms, markets or sectors of the economy rather than aggregates. It studies the allocation of resources and the distribution of income as they are affected by the workings of the price system & by...
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