BFT101 BUSINESS

ECONOMICS

LESSON 1 - INTRODUCTION
TO ECONOMIC CONCEPTS

Why Study Economics

To

understand the world better

Youll begin to understand the cause of

many of the things that affect your life
To

gain self-confidence

Youll lose that feeling that mysterious,

inexplicable forces are shaping your life for
you

Why Study Economics

To achieve social change

Youll gain tools to understand origins of social
problems and design more effective solutions

To help prepare for other careers

Youll discover that a wide range of careers deal
with economic issues on many levels

To become an economist
Youll begin to develop a body of knowledge that
could lead you to become an economist in the
future
3

How to Study Economics

Following alone in class and learning are two

different things
Economics must be studied actively, not passively
What does active studying mean?
Closing the book periodically and reproducing what you

have learned
Reading with a pencil in your hand and a blank sheet of
paper in front of you
Listing the steps in each logical argument
Retracing the cause-and-effect steps in each model
Drawing the graphs that represent the model
Thinking about the basic principles of economics and
how they relate to what you are learning

Economics, Scarcity, and Choice

A good definition of economics

Study of choice under conditions of scarcity
Study of how society manages its scarce
resources
Study of choice under conditions of scarcity
Scarcity
Situation in which the amount of something
available is insufficient to satisfy the desire for
it
5

Scarcity and Individual Choice

There are an unlimited variety of scarcities,

however they are all based on two basic limitations
Scarce time
Scarce spending power
Limitations force each of us to make choices
Economists study choices we make as individuals,
and consequences of those choices
Economists also study more subtle and indirect
effects of individual choice on our society
6

Scarcity and Social Choice

The problem for society is a scarcity of resources

Scarcity of Labor
Time human beings spend producing goods and services

Scarcity of Capital

Something produced that is long-lasting, and used to make other things

that we value

Human capital
Capital stock

Scarcity of land

Physical space on which production occurs, and the natural resources

that come with it

Scarcity of entrepreneurship

Ability and willingness to combine the other resources into a productive

enterprise

As a society our resourcesland, labor, and capitalare

insufficient to produce all the goods and services we might
desire
In other words, society faces a scarcity of resources

Scarcity and Economics

The scarcity of resourcesand the choices it

forces us to makeis the source of all of the
problems studied in economics
Households allocate limited income among goods and

services
Business firms choices of what to produce and how
much are limited by costs of production
Government agencies work with limited budgets and
must carefully choose which goals to pursue

Economists study these decisions to

Explain how our economic system works
Forecast the future of our economy
Suggest ways to make that future even better
8

Microeconomics

Micro
Micro comes from Greek word mikros, meaning
small

Microeconomics
Study of behavior of individual households, firms,
and governments
Choices they make
Interaction in specific markets

Focuses on individual parts of an economy,

rather than the whole
9

Macroeconomics

Macro
Macro comes from Greek word, makros,
meaning large

Macroeconomics
Study of the economy as a whole
Focuses on big picture and ignores fine
details

10

Positive Economics
Study of how economy works
A positive statement is one that is objective
or specific and can be backed up by
evidence.
Statements about how the economy works
are positive statements, whether they are
true or not
Accuracy of positive statements can be
tested by looking at the factsand just the
facts

11

Normative Economics

Study of what should be

Used to make value judgments, identify
problems, and prescribe solutions
A normative statement is a value judgement and
states what someone thinks ought to be.
Normative statements are subjective and
influenced by personal biases, background,
personal politics
Normative statements suggest what we should
do about economic facts and they are based on
values, cannot be proved or disproved by the
12
facts alone

Examples of positive and normative

statements
An example of a positive statement:
If carbon emissions were cut by 25%, air quality would
improve and the number of people diagnosed with asthma
would decrease significantly.
An example of a normative statement:
To clean up air quality and cut down carbon emissions by
25%, 4 x 4 vehicles should only be sold to farmers and
those living in rough terrain areas.

13

Positive Statements
Positive statements are objective statements that can be tested,
amended or rejected by referring to the available evidence. Positive
economics deals with objective explanation and the testing and
rejection of theories.
For example:
A fall in incomes will lead to a rise in demand for own-label
supermarket foods
The rising price of crude oil on world markets will lead to an
increase in cycling to work
A reduction in income tax will improve the incentives of the
unemployed to find work.
A rise in average temperatures will increase the demand for sun
screen products.
Higher interest rates will reduce house prices

14

Normative Statements
Normative statements are subjective statements rather
than objective statements i.e. they carry value
judgments. For example:

Pollution is the most serious economic problem

Unemployment is more harmful than inflation
The government is right to introduce a ban on smoking
in public places.
The retirement age should be raised to 70 to combat the
effects of our ageing population.
Resources are best allocated by allowing the market
mechanism to work freely
15

The Methods of Economics

Economics relies heavily on modeling

Economic theories must have a well-constructed
model

While most models are physical constructs

Economists use words, diagrams, and
mathematical statements

What is a model?
Abstract representation of reality
16

The Art of Building Economic Models

Guiding principle of economic model building

Should be as simple as possible to accomplish
its purpose

Level of detail that would be just right for one

purpose will usually be too much or too little
for another
Even complex models are built around a
simple framework

17

Economic Systems

Economic Systems
How Does An Economy Work?.

Quick Review:

Take out a sheet of paper and answer the following

questions:
What are Goods?
What are Services?
What are Resources?
What is Scarcity?
Nations must answer 3 basic Economic question:
What goods and services should be produced?
How should the goods and services be produced?
For who should the goods and services be produced?
The way a nation answers these questions defines their
economy.

Economic Systems

Definition: The method used by a society to produce and

distribute goods and services.
Or, How the government tells us what we can get and how
to get it!
All economic systems fall into one of two broad categories:
Market (or Capitalist) System
Command (or Planned) System
No economy can be purely market or purely command
Elements of both economies are found in all systems this
makes all economies mixed

All Economic Systems Must Consider

the Following Questions:
1.

2.
3.
4.

What goods and services to produce?

How will they produce them?
Who will get them?
How much will they produce now, and how
much later?

Each economic system answers these

questions in a DIFFERENT WAY.

Types of Economic Systems

There are 4 basic types of economic systems:
1. Traditional Economy
2. Command (Planned/Socialist) Economy
3. Free Market (Capitalist) Economy
4. Mixed Economy

1. Traditional Economy
Economic questions are answered by habits
and customs (the way it has always been
done)
Children work the same jobs parents worked,
often farming or hunter/gatherer
Fear Change!
Ex. Eskimos, the Amish,
Pigmies, Bush People

2. Command Economy
The government answers the basic
economic questions
Advantages: able to act quickly in
emergencies, provide for all people
equally
Disadvantages: Inefficient, no incentive to
work hard or be creative
Ex. Communist Countries (China,
Vietnam, North Korea, former
Soviet Union, Cuba)

3. Free Market Economy

Economic questions are answered by
individual buyers and sellers.
Supply and demand influence economy
People act out of self interest; motive for
profit (money) drives the economy
Also known as FREE ENTERPRISE or
CAPITALISM
Ex. The United States, Western
Europe, Japan

4. Mixed Economy

Mixed Economy: No economy is pure

market, pure command or pure traditional,
elements of each appear in all economies,
some have more elements of one
economy than another.

Features of Free Market Economy

1.

Economic Freedom: individuals have the

right to choose

2.

Competition: more than one producer of

good/services insures choice

3.

Private Property: individuals have the right

to own their own property, including
business

Features of Free Market Economy

(cont)
4.

Self-Interest: individuals make

decisions based on what is best for them

5.

Voluntary Exchange: individuals may freely

buy and sell goods

6.

Profit Motive: individuals are driven by a

desire to profit (make money)

Features of Command Economy

1.

2.

Government regulation of some business

practices

Ex. Monopoly of electricity services (TNB)

Government limits certain choices
Ex. Cannot buy or produce certain
goods/services

3.

Government provides aid to the needy

Ex. Medicare, Medicaid, welfare

Business School Pizza in

Malaysia

How would Business School Pizza function

under different economic systems?

Business School Pizza in a Free

Market
The owner answers the basic economic
questions!
The owner determines how much cheese
and pepperoni goes on the pizza
The owner determines the quality of the
cheese and pepperoni
The owner sets his/her employees wages
The owner sets his/her business hours

Business School Pizza in a Command

Economy
The government answers the basic
economic questions
The government sets the amount of
cheese and pepperoni on each pizza
The government determines quality of
cheese and pepperoni
The government sets employees wages
The government sets business hours
Problem: What does the government know
about pizza?

Business School Pizza in a Mixed

Economy

The Government and the owner both

answer the basic economic questions
The owner determines the amount of cheese
and pepperoni on the pizzas; government
determines the quality of cheese and pizza
The owner sets employee wages;
government sets minimum wage for
employees
The owner determine business hours;
government determines whether the
business is safe to be open or not

To be continued.

34