Economics for Business B 2019/20

Banner Code: 32195

Available to students on:

BSc Accounting and Finance & BSc Business Management & BSc International
Business
Summary
Office hours: 15.00 – 16.30 Tuesday
14.00 – 16.00 Thursday every week
236, University House.
 Learning outcomes

 The students are expected to:

 In this last session we will review key concepts and models
seen during the module.
 Threshold concept 1: Opportunity cost

Opportunity Cost of any activity is the sacrifice

made to do it. It is the best thing that could have
been done as an alternative.

If the workers on a farm can produce either 1000

tones of wheat or 2000 tones of barley, the
opportunity cost of producing 1 tonne of wheat is
the 2 tonnes of barley forgone.
 Threshold concept 2: Law of demand

In microeconomics, there is a negative

relationship between price and the quantity
demanded. This happens because:

-Income effect: if price decreases consumers are

wealthier and can consume more of the good.
-Substitution effect: if price decreases,
consumers might consume less of the substitutes
and more of the good.
 Threshold concept 3: Arc elasticity

Measurement of elasticity: arc elasticity

 the formula for price elasticity of demand

Q/Q ÷ P/P

 using the average or ‘mid-point’ method

Q/mid Q ÷ P/mid P
 Threshold concept 4: Consumer surplus

Consumer surplus is the difference between

willingness to pay and price paid. We used
marginal utility theory to understand consumer
willingness to pay.

Under this theory, utility is maximized when

marginal utlity equals price.
 16

14 TU
12
Utility (utils)

10

2
MU
0
0 1 2 3 4 5 6
-2

Packets of crisps consumed (per day)

Threshold concept 5: Equi-marginal principle

 Optimum combination of goods when using

more than one good
 In the equilibrium the ratio of the marginal
utilities coming from the indifference curve
equals the ratio of prices coming from the
budget line

MRS = MUX/MUY = PX/PY

 r
s
Units of good Y

Y1 t

u I5
I4
v I3
I2
I1
O X1
Units of good X
Threshold concept 6: Law of diminishing returns

Short term production: 1 factor of production is

fixed.
The law of diminishing returns
When increasing amounts of a variable factor are
used with a given amount of a fixed factor, there will
come a point when each extra unit of the variable
factor will produce less extra output than the
previous unit.
Wheat production per year from a particular farm

Tonnes of wheat per year

40 TPP
30

20
b
10
Diminishing returns
set in here
0
0 1 2 3 4 5 6 7 8
Number of
farm workers (L)

14
b'
Tonnes of wheat per year

12

10

4
APP
2

-2
0 1 2 3 4 5 6 7 8 Number of
MPP farm workers (L)
 Threshold concept 7: Economies of scale

In the long term, all factors of production are variable.

We study how volume of production influence firm
productivity (average cost).

Economies of scale happen when average cost

descreases whith increasing volume of production.

It happens because the increase in output is more

than proportional than the increase of the inputs.

It explains the existence of natural monopolies.

 Threshold concept 8:
Structure  conduct  performance
 Threshold concept 9: Normal profits

is a situation where a firm makes sufficient revenue

to cover its total costs and remain competitive in an
industry. In measuring normal profit, we include the
opportunity cost of working elsewhere. When a firm
makes normal profit we say the economic profit is
zero.

In perfect competition and monopolistic competition

we also have normal profits in the long run, as there
is freedom of entry and exit.
Threshold concept 10: Profit maximization in monopoly

16 MC

12

8 AC

4
AR
0
1 2 3 4 5 6 7

-4 MR
Threshold concept 11: Collusive and non-collusive oligopolies

Oligopolies are complex and require a number of

assumptions to construct workable models.

In collusive oligopolies firms intend to work as

monopolies, though there are incentives to deviate.

In non-collusive oligopolies, firms compete in

quantities or prices. We have seen various examples
with different conclusions (e.g. Cournot, Bertrand,
Kinked).
Threshold concept 12: Backward bending supply curve of
labour

S
Above w1 the income
effect of a higher wage
rate is greater than the
Hourly wage

substitution effect.

WI

O
Hours
 Threshold concept 13: The role of unions

Unions distort the labour market.

If they operate in perfectly competitive markets, they

face a trade-off. High wages and high
unemployment, or low wages and low
unemployment.

If they operate against a monopsony, they might be

able to increase wages with the same level of
employment.
 Threshold concept 14: Restrictive practices

 Types of restrictive practice

 horizontal price fixing
 market sharing
 limit production – quotas
 bid rigging
 information sharing

 Regulator tends to be tougher than with other

aspects of competition policy.