Slide 01-Economic Concepts

BBM-ME-I
MODULE – A
Business & Economics
Economic Concepts
Economics and Business Decision
Making & Problem Solving
Prof. (Dr.) D N Panigrahi
PhD (Finance), MBA (Fin-FMS, DU), CFA & MS-Finance, CAIIB & DFS, M.Sc. (Physics)
Managerial Economics (ME) - I
Module A: Business & Economics: The Role of Economics in
Business
Introduction to Economics: Economic Concepts
This session forms an introduction to basic concepts in economics that are essential to
beginners.
What is Economics? Definition & Meaning of Economics.
Why Study Economics?
Basic/Fundamental Economic Problems: Scarcity, Choice & Trade-Off,
Opportunity Cost and Efficiency. Explain the Basic Problems faced by an
Economy.
What Economists/Business Economists Study?
Scope of Economics: Microeconomics & Macroeconomics
Managerial Economics (ME) - I
Module A: Business & Economics: The Role of Economics in Business
Types of Economies: Market, Command and Mixed Economies: Describe how

Different Economies Solve their Basic Economic Problems.
Explain the Role of Price Mechanism in Solving the Basic Problems of an
Economy.
Describe the four key economic concepts—scarcity, supply and demand, costs
and benefits, and incentives—that help explain many decisions that humans
and business firms make.
Demonstrate the four core principles of economics that provide the
foundation of all economic analysis, and use them to analyse choices and
make better decisions as individual consumers as well as producers
Describe 10 Principles/Ideas of Economics.
Fundamentals of Economics: Scarcity. Efficiency, Choice, Trade-Off
and Opportunity Cost
Economic Concepts
• What is Economics about? The term ‘Economics’ owes its origin to the Greek
word ‘Oikonomia’ which means ‘managing the household’. Over time, this
expression evolved to mean ‘one who is prudent in the use of resources’. By
extension, economics has come to refer to the careful management of society’s
scarce resources to avoid waste. Let’s examine this idea more carefully.
• Economics as a social science: Economics is a social science. The ‘social’ aspect
is because economics looks at human behaviour, particularly in relation to
satisfying human needs and wants. Economics is also a ‘science’. This is because
of the way that economists put forward and investigate theories in the same way
as scientists. Like scientists, economists put forward new ideas that seek to
explain the ever and rapidly changing global economy in which we all work and
live.
Fundamentals of Economics: Scarcity and Efficiency
• The theories put forward by economists are often referred to as models. Models are a
simplified representation of what has actually taken place and are usually explained
mathematically. The value of models is that they can be used over and over again to test a
theory in many different contexts.
• The fundamental facts:
• (i) ‘Human beings have unlimited wants or ends’; and
• (ii) ‘The means to satisfy these unlimited wants/ends are relatively scarce’ form
the subject matter of Economics.
• Thus, the central problem facing all individuals and societies is one of scarcity.
The definition & scope of economics: The scope of economics is neatly defined by
the following sentence/definition:
Economics is the study of Consumption, Production and Distribution of
goods and services.
Consumption is the act of using goods and services to satisfy wants. Human
beings consume various goods and services in order to obtain satisfaction or utility.
So, what is utility? This will normally involve purchasing the goods and services by
individuals and households.
Production is the transformation of inputs into outputs by firms in order to earn
profit (or meet some other objective).
Distribution is the arrangement by which goods and services are transported
from the production source (factory/plant) to the end consumers through
distributors, dealers and retailers using the services of host of logistic service
providers.
 The fundamental or central problem of an economy or society can be understood

from the following definition of economics.
Economics is the study of the efficient allocation of scarce resources (which
have alternative uses and which are competing in nature).
• In economics the words “resources”, “scarce”, “efficient” and “allocation”
have very specific meanings as set out below.
• Resources: In economics the term “resources” embraces many things: resources are
means or factors of production to satisfy human needs and wants. It includes all things that
can be used to satisfy human needs (providing utility) either directly or indirectly. For
example, an apple can be eaten to satisfy directly a need for food. A computer can, in
combination with other resources (such as electricity, paper and an economist), be used to
produce an economics course which satisfies a need for education.
Economists often categorise resources into four broad types. Firms use these four
categories of inputs, resources or factors of production to produce outputs, namely
goods and services. These are:
“Land & Raw Materials” - All natural resources. e.g., coal, oil and cotton
“Labour” - All forms of human input (both mental and physical) into production
“Capital” – All manufactured/man-made resources used in production, e.g., factories,
computers.
“Entrepreneurship or Enterprise (management) or Organisation” - A special human
skill possessed by some people, involving the ability to innovate by developing new ways
of doing things, to take business risks and to seek new opportunities for opening and
running a business. Entrepreneurship organises the other three factors of production and
takes on the risks of success or failure of a business. Hence, the meaning of
entrepreneurship is “risk taking and uncertainty bearing”.
Sometimes labour is split into “employed labour” (i.e. people who work for someone else)
and “entrepreneurs” (i.e. people who own businesses).
“Land” includes minerals, water and the atmosphere.
Note that the economist’s definition of “capital” refers to real productive resources such as
machines and buildings (physical capital). It does not refer to things such as money and share
certificates, which are just a paper claim on resources (financial capital).
Other meanings of the term ‘capital’
• The term ‘capital’, in a most general sense, refers to resources that can produce a future stream
of benefits. Thinking of capital along these lines, we can understand why this term has a variety
of different uses, which although are seemingly unrelated, in fact all stem from this basic
meaning.
• Physical capital, defined above, is one of the four factors of production consisting of man-
made inputs that provide a stream of future benefits in the form of the ability to produce greater
quantities of output: physical capital is used to produce more goods and services in the future.
Fundamentals of Economics: Scarcity and
Efficiency
• Human capital refers to the skills, abilities and knowledge acquired by people, as well as
good levels of health, all of which make them more productive. Human capital provides a
stream of future benefits because it increases the amount of output that can be produced in
the future by people who embody skills, education and good health.
• Natural capital, also known as environmental capital, refers to an expanded meaning of
the factor of production ‘land’ (defined above). It includes everything that is included in
land, plus additional natural resources that occur naturally in the environment such as the
air, biodiversity, soil quality, the ozone layer, and the global climate. Natural capital
provides a stream of future benefits because it is necessary to humankind’s ability to live,
survive and produce in the future.
• Financial capital refers to investments in financial instruments, like stocks and bonds, or
the funds (money) that are used to buy financial instruments like stocks and bonds.
Financial capital also provides a stream of future benefits, which take the form of an
income for the holders, or owners, of the financial instruments.
Economic Concepts
Scarcity: A resource is “scarce” if there would not be enough of it to satisfy
all the people who would want to make use of it if it had a zero price.
•This means that almost all resources are scarce. Economists do not study the
allocation of non-scarce resources. For example, air is generally a non-scarce
resource. Economists are unlikely to study the allocation of air. Economists
could, however, study the allocation of clean air.
•Thus, Scarcity is the excess of human wants over what can be produced to
fulfil those wants.
•Since resources are scarce, Choices have to be made between different
alternatives, e.g., consumers must choose which goods and services to
consume, whilst firms must choose which goods and services to produce.
Wants are unlimited because there is always likely to be something else that a person wants
whatever their income. For an individual on a low income, a want may be a car; for a
millionaire a want may be a personal jet aircraft. Both wants are unobtainable on each
individual’s current amount of income.
Efficiency: Efficiency is measured as the ratio of (Unit of Outputs/Unit of Inputs) with quality
considered. A method of production or an entity is more efficient than another if it produces
more outputs per unit of input or alternatively, it uses less units of inputs to produce 1 unit of
output.
Allocation: Allocation means deployment of scarce resources (having alternative uses and that
are competing in nature) among different unlimited ends (needs and wants).
It is important not to confuse wants and needs. Needs are things like food, shelter and clothing
that are needed for survival. Wants are higher order needs.
• Scarcity and Choice: The fundamental economic problem means that individuals, firms and
governments have to make choices due to the scarcity of resources. Making a choice involves
taking decisions on how to allocate scarce resources between many competing uses.
Allocation Problems - Economics and Choice: As resources are scarce, society needs to
make three key choices or allocation decisions, i.e., there are three main allocation
problems that have to be solved by any economic system:
1. What to Produce? (What goods and services should be produced (and in what
quantities)?)
2. How to Produce? [How should these goods and services be produced, i.e., what
resources and production methods are going to be used? (Which Methods or Means of
Production: e.g. Manually or by use of Machines)?)]
3. For Whom to Produce? (Who should consume the goods and services that have been
produced? i.e., how is the total national income or output going to be distributed?)
The issues raised by these allocation questions define the scope of economics. You can
remember the three questions as “the three w’s”: what, how and who/whom.
The first two of these questions, what to produce and how to produce, are about resource
allocation, while the third, for whom to produce, is about the distribution of output and
income.
And there is another 4th question as under: What provisions (if any) are to be made for
economic growth?
A society would not like to use all its scarce resources for current consumption only. This is
because, if it uses all the resources for current consumption and no provision is made for
future production, the society’s productive capacity would not increase. This implies that
incomes or standards of living of the people would remain stagnant, and in future, the levels
of living may actually decline. Therefore, a society has to decide how much saving and
investment (i.e. how much sacrifice of current consumption) should be made for future
progress or growth. This is called Capital Formation. What is Capital Formation?
Capital formation is addition to physical (productive) capital stocks of a country in order
augment the productive capacity of the economy so that it can meet the growing needs of
the current population as well as the future generations.
Three Main Resource Allocation Problems
Economic Concepts
Each allocation question requires choices to be made between competing uses for resources. For
example:
1. If an economy decides to produce lots of fighter aircraft, it may be able to build fewer hospitals.
2. If an economy uses a diamond to make an engagement ring it can’t use the same diamond to make
a cutting tool.
3. If an economy allows lots of rich people to drive fast sports cars, the rest of the population may
have to make do with less glamorous forms of transport.
Choice and Opportunity Cost
Since resources are scarce, choices have to be made between different alternatives, e.g. consumers
must choose which goods and services to consume, whilst firms must choose which goods and
services to produce and governments must decide whether to build roads, hospitals or fighter jets.
Choices have to be made in order to satisfy more urgent wants first, i.e., be it individuals, business
firms or government, everybody has to prioritise their needs and wants because of short/limited
supply or availability of resources to satisfy those wants.
Economic Concepts

Opportunity cost: Economists sometimes measure the cost of using a resource for a particular purpose in
terms of the value of that resource in its next best alternative use. In other words, the opportunity cost of an
activity is the cost of the activity measured in terms of the best alternative foregone. This measure of cost is
called the “opportunity cost”. Using the second example above, the opportunity cost of using the diamond to
make an engagement ring would be the amount that the diamond would be worth if used as a cutting tool.

Opportunity cost is the amount that is sacrificed when a decision is made which precludes
alternative course(s) of action. When there is more than one alternative, it is the value of the
next best alternative. In other words: Opportunity cost is the cost of the opportunity
foregone, or, alternatively, cost of the next best alternative. Example: If you have 2 investment
alternatives: Equity Share and Bank FD. You decide to invest in equity share, opportunity cost of
investing in equity share will be the return you are foregoing in Bank FD: say 6% or X%. If you take
a Sabbatical and go to pursue MBA, the opportunity cost of MBA course will be the salary you are
foregoing during your study apart from the cost of MBA course.

Opportunity cost can also be measured in terms of “utility”, which might broadly be defined as “happiness”
or “pleasure”.
Economic Concepts
Choice & Trade-Off: You may have heard the old saying, “There is no such thing as a
free lunch.” To get something that we like, we usually have to give up something else that
we also like. Making decisions requires trading off one goal against another.
• In the absence of scarcity and alternative uses of available resources (which are competing
in nature), there is no economic problem.
• Thus economics involves the study of choices, for consumers, business firms and
governments, as they are affected by incentives and resources.
• The essence of economics is to understand and appreciate the reality of scarcity and then
strategise how to organise society in a way which produces the most efficient use of
resources.
• This is where economics makes it unique contribution to the society: allocative efficiency
(efficient allocation of scarce resources among competing alternative uses).
Some More Definitions of Economics
Robbins Definition: (Known as Scarcity Definition)
“Economics is the science which studies human behaviour as a relationship
between end and scarce means which have alternative uses.”
Another Definition: Economics is the study of choices leading to the best possible
use of scarce resources in order to best satisfy unlimited human needs and wants.
Analysis of Definition :
Man has unlimited wants or ends.

The means to satisfy human wants are limited.
Resources are not only limited but have competing alternative uses.
 Consumers, Business Firms and Government, all economic entities have to
make a choice.
Economic Concepts: Summary Points
Scarcity and choice: The fundamental problem in economics is that wants are unlimited, but
resources are scarce. This means a choice always has to be made between competing uses for
resources. There will be an opportunity cost each time a choice is made. Look out for the
theme of scarcity and choice in economics.
Choices of Consumers
Individuals consume goods and services in order to obtain satisfaction or utility. In doing so,
they make choices between the different available goods and services, based on factors such
as the prices of the goods available and the incomes they have to spend.
Choices of Firms or Producers
These goods and services are produced by firms using the available resources. In doing so,
they face key choices, such as which goods and services to produce and how to produce
them. Typically, the aim of a firm will be to produce and sell goods and services in order to
make a profit for its owner(s).
Efficient Allocation of Scarce Resources among Unlimited Wants: Economics of Choice
In broad terms, the needs and wants of individuals are unlimited and so cannot be satisfied
using the finite quantities of resources available. So, choices must be made as to how to best
use the available scarce resources to meet those needs and wants.
Economics can be defined as the study of the allocation of scarce resources between the
competing demands for them.
Firms and consumers come together in markets, where typically the allocation decisions
are driven by the interaction of supply and demand.
The concept of opportunity cost, or the value of the next best alternative that must be
sacrificed to obtain something else, is central to the economic perspective of the world, and
results from scarcity that forces choices to be made.
Types of Economies or Economic Systems:
Ways of Solving the 3 Allocation Questions
Market, Command and Mixed Economies

• Three fundamental problems faced by any economy: what commodities are
produced, how these goods are made, and for whom they are produced.
1. A society must determine which of the many possible goods and services it will make
and when they will be produced and in what quantities.
2. How are those goods produced?: A society must determine who will do the production,
with what resources, and what production techniques they will use.
3. For whom are goods produced? Who gets to eat the fruit of economic activity? Is the
distribution of income and wealth fair and equitable? How is the national product divided
among different households? Are many people poor and a few rich? Do high incomes go
to teachers or athletes or auto workers or venture capitalists? Will society provide
minimal consumption to the poor or must people work if they are to eat?
Ways of Solving the 3 Allocation Questions
Ways of solving the allocation questions: In this section we look at different types of
economic systems which a country might use to answer the allocation questions. They
illustrate how the three allocation questions (what? how? who?) can be dealt with in
different ways. First we look at the extreme cases of centrally planned economies (aka
command or socialist economies) and free market economies (aka capitalist economies).
We then consider economies which possess characteristics from both of the extremes (aka
mixed economies).
Centrally Planned (Controlled) Economy: In a centrally planned economy, a central
agency decides what is to be produced, how it is to be produced, and for whom it is
produced.
• In this context a central agency is a government department, staffed by economists and
administrators, who will try to make sure that the decisions they make produce a consistent
plan.
Ways of Solving the 3 Allocation Questions:
Centrally Planned Economy
• What goods and services should be produced? This is determined by a central agency.
• How should these goods and services be produced? In practice, some local control may
exist over the method of production, although in principle it is determined by a central
agency. Requests for resources usually have to be passed through, and agreed by, the
central agency well in advance of needing them. This allows the resources to be included
in a national economic plan.
• Who should consume these goods and services? Consumers retain some choice as to
which goods they consume in most centrally controlled economies, although in principle
the answer to this question is determined by a central agency. However, the overall level of
consumption (i.e. consumers’ level of income) may be limited centrally.
• Example: No economy has ever tried to control everything centrally. The Soviet Union in
the sixty years up to 1985 is, perhaps, the best example of something close to a centrally
controlled economy (particularly during World War II).
Free Market Economy
Free market economy: In a free market economy there is no government intervention.
The interaction of supply and demand, driven by individuals acting in their own self
interest, solves all the allocation questions.
• A free market economy is also called a ‘laissez-faire' economy: ‘laissez-faire’ means the
policy of non-interference in economic decisions practised by the government .
• There is no need for any form of central agency in a free market economy.
• Which goods and services should be produced? The goods produced are those for
which the amount that consumers are willing to pay exceeds the cost of production.
This happens because firms will choose to produce goods that will give them a profit.
Free Market Economy
• How should these goods and services be produced? The methods of production are the
ones that minimise the costs of production. This happens because firms will choose
those methods of production that will give them greatest profit. The costs that firms will be
trying to minimise will be the opportunity costs faced by the firm. Costs that are external to
the firm, such as the cost of pollution, are likely to be ignored. The fact that these external
effects are ignored is one reason why a free market may fail to produce the best possible
outcome.
• Who should consume these goods and services? Consumption patterns are determined
by which goods and services consumers are willing and able to pay for. People’s ability
to pay is limited by their income. The people with the highest income (in the form of rent,
wages, profit or interest) are those who supply the most productive resources used as
factors (land, employed labour, entrepreneurial labour, capital) in the production process.
• Example: Hong Kong (until June 1997) is possibly the closest example of a free market
economy.
Mixed Economy
Mixed economies: Mixed economies fall between the two extremes of centrally
controlled and free market economies. Some allocation decisions are made by the free
market, some by the government, and some by markets in which the government
intervenes to a limited extent.
 Which goods and services should be produced? This is answered in part by the
government, and in part by the free market. The government may:
decide that it wants certain goods produced (e.g. a fighter aircraft)
prevent the free market from producing some goods (e.g. by outlawing heroin)
encourage the free market to produce more of some goods (e.g. by subsidising opera)
encourage the free market to produce less of some goods (e.g. by taxing tobacco heavily)
Mixed Economy
 How should these goods and services be produced? Again this is answered in part by the
government, and in part by the free market. Often the government plays less of a role here
than in answering the first question. For example, it may allow the private sector to decide
how to produce a new fighter aircraft. The government may:
decide that it wants certain factors of production used (e.g. it might require all firms to
employ at least one disabled person)
prevent the free market from using some factors of production (e.g. children under 12)
encourage the free market to use more of some resources (e.g. by subsidising the use of
recycled paper)
encourage the free market to use less of some resources (e.g. by charging peak-time rail
users more than off-peak users)
Mixed Economy
 Who should consume these goods and services? This is partly determined by the
government, but mainly by the free market. The government may:
decide that it wants people who contribute nothing to the production process to be able to
consume goods and services (e.g., by giving unemployment benefit)
limit some people’s consumption (e.g. by imposing taxes on the rich)
encourage some people to consume certain goods (e.g. by providing free milk to school
children)
encourage some people to consume less of some goods (e.g. by taxing the carbon content
of fossil fuels)
• Example: Any country in the world. In practice, all countries lie somewhere on the
spectrum between the extremes of a centrally controlled and a free market economy.
What Economists/Business Economists Study?
1.1 Tacking the Problem of Scarcity
The business economist studies:
Consumer Behaviour – how sensitive consumer demand is to various factors (price,
advertising etc) and how the firm can try to persuade the consumer to buy its products
The role of the firm in production – what determines the type and quantities of goods
produced, what production techniques and resources are used etc.
1.2 Demand and Supply
• While the potential demand for goods and services is virtually unlimited, the supply is
limited by the availability of resources. Therefore, demand and supply need to be matched,
at both the aggregate level and at the level of individual goods and services.
Economics studies how actual demand is equated to actual supply and the business
economist studies the supply side of this process in particular.
Microeconomics Vs Macroeconomics
Microeconomics (MI) Macroeconomics (MA)

1.3 Dividing Up the Subject
Microeconomics is concerned with the behaviours/decisions of individual parts of the
economy/individual entities/decision-makers in the economy (e.g., Consumers
(Households), Business Firms, Industries and, Markets) such as a firm’s decision as to
how many workers to employ and the way they interact to determine the pattern of
production and distribution of goods and services.
Macroeconomics is concerned with the economy as a whole and studies economic
aggregates, such as national income, unemployment and the general level of prices.
Macroeconomics is concerned with the overall performance of the economy. For
example, the level of total employment in a country is a macroeconomic issue. MA
explores the nature of the main macroeconomic policy objectives (such as low
unemployment and low inflation) and the instruments of policy which can be used to try
to achieve these objectives.
Microeconomics Vs Macroeconomics
MA considers:
• aggregate demand – the total level of spending in the economy, by consumers, firms
and the government
• aggregate supply – the total amount of output (i.e., goods and services) in the economy.
MI studies “how households and firms make decision to allocate limited resources,
typically in markets where goods or services are being bought and sold. MI examines
how these decisions and behaviours affect the supply and demand for goods and
services, which determines prices; and how prices, in turn, determine the supply and
demand for goods and services. Microeconomics analyses the market behaviour of
individual consumers and firms in an attempt to understand the decision making process
of firms and household.
• MA studies aggregated indicators such as GDP, Unemployment rates and Price indices
to understand “how the whole economy functions.” Macroeconomics deals with
performance, structure and behaviour of national or regional economy as whole.
What Economists/Business Economists Study?
Business or Managerial Economics is concerned with both:

 microeconomics issues [e.g., which goods a firm should produce, in what quantities, and
how to produce or the method of production like using more labour and less machines
(labour intensive) or alternatively using less labour and more machines (capital
intensive) and which technology etc.)
 and macroeconomics issues (e.g., how the economic climate will affect the firm).
Business Economics: Macro-Economic Issues
Background: Since resources are scarce, it makes sense that all of the available resources
should be fully employed and that national output or income should grow steadily over
time.
The main macroeconomics objectives relate to:
 national output (GDP or GNP) and its growth over time – all else being equal, we want
growth to be high and stable. [India’s GDP growth rate during FY2022-23 was 7.2%] In
particular, we wish to avoid recessions.
 unemployment – which we want to be low
 inflation – which we want to be low and stable
 the balance of payments – which largely reflects the balance of trade (see below) and
which we want to be sustainable.
Government macroeconomic policy therefore aims to meet these objectives.
A recession is a period where national output falls, i.e. actual economic growth is
negative, as occurred in many countries in 2009. The official definition is where output
declines for two or more quarters.
Business Economics: Macro-Economic Issues
Unemployment arises when people are currently without a job, but are actively looking
for work.
Inflation refers to a general rise in the level of prices throughout the economy. The rate
of inflation refers to a percentage increase in the level of prices over a 12-month period.
Also: balance of trade = exports of goods and services – imports of goods and services
• If:
 exports > imports, there is a balance of trade surplus
 exports < imports, there is a balance of trade deficit.
 If aggregate demand is too low relative to aggregate supply, then unemployment
and a recession may result.
 If aggregate demand is too high relative to aggregate supply, then inflation and a
balance of trade deficit may result.
Demand-Side Policy –Vs- Supply-Side Policy
Demand-side policy seeks to influence the level of spending and hence aggregate
demand. For example, the government might try to boost spending (or demand) by:
 cutting taxes
 increasing government spending
 reducing interest rates.
It will also indirectly affect output, employment and prices. These are called “fiscal and
monetary stimulus” to boost demand.
Supply-side policy seeks to influence the level of production directly and hence
aggregate supply. For example, the government might:
 introduce tax incentives for investment or for people to work harder
 introduce new training schemes
 build new motorways.
Macro-Ecoonmic Policy & Its Effect on Business
Businesses need to be aware of government policies and their likely effects on sales,
revenues and costs.
 Demand-side policies will influence firms’ sales and hence revenues;
 Supply-side policies will influence firms’ costs.
The Circular Flow of Income
• Circular-flow diagram
– Visual model of the economy
– Shows how money flows through markets among
households and firms
• Two decision makers
– Firms and Households
• Interacting in two markets
– Market for gods and services
– Market for factors of production (inputs)
Households own factors of production, which firms use to produce goods and services.
The circular flow of income summarises how:
 firms pay income to households (in the form of wages, rent, profits and interest) in
return for the use of factors of production (land, employed labour, entrepreneurial
labour, capital) owned by households
 households spend their incomes on goods and services produced by the firms – this
represents the incomes of the firms.
Figure 1 The circular flow
Households:
 Own the factors of production,
sell/rent them to firms for income
 Buy and consume goods & services
Households
Firms
Firms:
 Buy/hire factors of production,
use them to produce goods and
services
 Sell goods & services
40
Figure 1 The circular flow
Revenue Spending
Markets for
G&S Goods &
G&S
sold Services bought
Firms Households
Factors of Labor, land,

production Markets for capital
Factors of
Wages, rent, Production Income
profit
41
 Macroeconomics is concerned with the total size of the flow.

 Increased spending by households will increase firms’ incomes, so they will pay out
more income to workers, so that households will subsequently increase their spending
further etc.
Business Economics: Micro-Economic Choices
 It is worth repeating: As resources are scarce, society needs to make three key choices or
allocation decisions:
1. What goods and services will be produced and in what quantities?
2. How are the goods and services going to be produced, i.e. what resources and
production methods are going to be used?
3. For whom are goods and services going to be produced, i.e. how is the total national
income going to be distributed?
 Choice and Opportunity Cost: Firms and consumers both face choices between
different activities, e.g. producing or consuming different types of goods. The
opportunity cost of an activity is the cost of the activity measured in terms of the best
alternative foregone.
 Rational Choices: A rational choice is one that involves weighing up the benefit of an
activity against its opportunity cost.
 Rational decision making involves weighing up the marginal benefit of an activity and
the marginal cost.
 For consumers deciding what to buy, rational decision making involves choosing
those goods that provide the best value for money from those available,
 whereas for firms deciding what to produce, it involves weighing up the benefits of
extra revenues against the additional costs of production.
 Marginal Costs and Benefits

 For a firm, the marginal cost is the additional cost of producing one more unit of
output.
 For an individual, it is the additional cost of a little bit more of a particular activity.
 For a firm, the marginal benefit is the additional benefit of selling one more unit of
output.
 For an individual, it is the additional benefit of a little bit more of a particular activity.
 If the marginal benefit exceeds the marginal cost, then:
 the firm would increase profit by increasing output by one unit, or
 the individual would increase “net total benefit” by doing a little more of the particular
activity, e.g. consuming one more unit of the good.
 Microeconomic Choices and the Firm

 A firm must make many economic choices, for example:
 how much to produce
 what to charge for its output
 what type of inputs to use
 how many inputs to use
 what production techniques to use
 at what location to produce the output
 whether to invest in new capital
 whether to undertake research and development
 how to respond to changes in competition
 whether to merge with or take over another firm.
 A business will make choices that best meet its objectives. These choices will depend on a range of factors
affecting the microeconomic and macroeconomic environment.
What is Business Economics?
 Business studies and economics are invariably taught as separate subjects in many
schools prior to university. Business studies focuses on issues and problems related to
business organisations of different types and includes business objectives, marketing,
business organization, human resources management, accounting and finance, operations
management and the influence of external factors including management of change.
 Economics focuses on the workings of markets, firm behaviour, market structures, factor
markets (such as the market for labour and capital), international trade and the workings
of the economy as a whole including growth, unemployment, inflation and exchange
rates.
 There is one thing, however, which connects the two discipline areas and that is decision
making. People in businesses have to make decisions every day and the way in which
they make these decisions and the outcome of those decisions can be informed by using
the models, methods and tools of economics.
 So, business (managerial) economics deals with business decision making and problem-
solving using the models, methods and tools of economics.
What is Business?
• Business is an activity of using inputs, which are broadly described as land, labour and
capital, and turning them into some output which is then sold to customers. These outputs
could be goods such as TVs, food, books, clothes, furniture, bricks, cars, glass and so on
or services such as banking, insurance, accounting, tourism, repairs, medical care,
entertainment, transportation, hotels, restaurants, etc. The customers who buy these
outputs could be private individuals, other businesses or government bodies both from the
domestic economy and from overseas. In the process of exchange of outputs, buyers pay a
price to acquire the outputs and the money received by the seller represents the income of
the business.
• Business activity is carried out for different reasons. In some cases, the primary aim of a
business is to ensure that the money received from selling outputs is greater than the cost
of producing these outputs. In other words, the business is focused on making a profit and
profit is the reward for the risk taken in carrying out business activity. Some business
activity will be carried out with the primary intention of fulfilling a need, and while in
most cases it is expected that the costs of providing the output must at the very least be
covered by the income generated, any surplus that is generated is put back into the
business or used for a good cause.
What Businesses Do?
In most business activity, decisions might include any or all of the following:
 How many people to employ.
 What each of those people will do to contribute to the business.
 How much employees get in return for their labour.
 Who should receive a bonus scheme and who should not.
 How to increase output per worker.
 How best to manage costs.
 When to invest.
 How much to invest and where best to get the funds to invest from.
What Businesses Do?
 What products to produce.

 What products not to produce.
 When to stop producing products.
 When to expand.
 When to contract.
 How best to manage the sales process and customer relations.
 Whether to be environmentally friendly or whether to give the impression of being so.
 How to deal with competitors.
 Whether to charge a high price or a low price (or one in-between).
Ten Key Principles/Ideas in Economics
• People Make Decisions: Recall that the economy is the collective

interaction between producers and consumers making and carrying out decisions.
Ten Principles of Economics
• Economists study:
– How people decide what to buy,
how much to work, save, and spend
– How firms decide how much to produce,
how many workers to hire
– How society decides how to divide its
resources between national defense,
consumer goods, protecting the
environment, and other needs
53
How People Make Decisions
Principle 1: People face trade-offs

Principle 2: The cost of something is what you give up to
get it
Principle 3: Rational people think at the margin
Principle 4: People respond to incentives
54
Principle/Idea 1
People Face trade-offs. Decision making involves
trade-offs.
• To get something that we like, we have to give up (sacrifice)
something else that we also like. This is trade-off.
• Getting the most from scarce resources means facing different
trade-offs such as:
• How to use your time. Working longer hours, less time for leisure
• To decide as a business whether to employ more people or more
machines.
• As a country whether to have more capital or more consumer goods.
• Whether to have more goods or a cleaner environment.
For use with Business Economics 3e ISBN: 978-1-4737-6277-0

By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
Chapter 1 Slide 55
Principle 1: People Face Trade-offs
• Society faces trade-offs:
– The more it spends on national defense (guns) to protect
its shores
• The less it can spend on consumer goods (butter) to raise the
standard of living at home
– Pollution regulations: cleaner environment and improved
health
• But at the cost of reducing the incomes of the firms’ owners,
workers, and customers
56
Principle 1: People Face Trade-offs
• Efficiency: society gets the most from its scarce resources
• Equality: prosperity is distributed uniformly among society’s members
• Tradeoff:
– To achieve greater equality, could redistribute income from wealthy
to poor. This is accomplished through the progressive tax system,
as well as social programmess like food safety and unemployment
insurance that provide a safety net for people at the low end of the
income distribution.
– But this types taxes/subsidies reduces incentive to work and
produce, shrinks the size of economic “pie”
57
Principle/Idea 2: The Cost of Something Is What
You Give Up to Get It
• Making decisions:
– Compare costs with benefits of alternatives
– Need to include opportunity costs
• Opportunity cost
– The opportunity cost is whatever must be given up to
obtain some item
– It measures the value of what is foregone.
58
Principle/Idea 2: The Cost of Something Is
What You Give Up to Get It
• The opportunity cost of:
– Going to college for a year
• Tuition fees, books, and other expenses
• PLUS foregone wages
• MINUS any scholarship you get
– Going to the movies
• The price of the movie ticket
• PLUS the value of the time you spend in the theater
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain 59
product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Principle/Idea 3: Rational People &
Businesses Think at the Margin
• Rational people
– Systematically and purposefully do the best they can to
achieve their objectives
– Given the available opportunities
– Make decisions by evaluating costs and benefits of
marginal changes
• Small incremental adjustments to a plan of action
 Firms are interested in the marginal costs (MC) and
marginal revenues (MR)
60
Principle/Idea 3: Rational People &
Businesses Think at the Margin
• Examples:
– Cell phone users with unlimited minutes (the minutes are
free at the margin)
• Are often prone to making long/frivolous calls
• Marginal benefit of the call > 0
– A manager considers whether to increase output
• Compares the cost of the needed labor and materials to the
extra revenue
61
Principle 4: People & Businesses Respond to
Incentives
• Incentive
– Something that induces a person to act
• People compare the costs and benefits when making decisions.
– If the price of a good rises, consumers buy less of that good and buy more of
alternative goods.
• Examples:
– When gas prices rise, consumers buy more hybrid cars
and fewer gas guzzling SUVs
– When cigarette taxes increase, teen smoking falls
62
Principle 4: People & Businesses Respond to
Incentives
• Decisions are made by:
– People as consumers
– Businesses as suppliers
– Governments as policymakers
• There can be unintended consequences from decisions.
63
Active Learning 1 Applying the principles
You are selling your 2007 Mustang. You have already spent
$1,000 on repairs. At the last minute, the transmission dies.
You can pay $900 to have it repaired, or sell the car “as is.”
In each of the following scenarios, should you have the
transmission repaired? Explain.
A. Blue book value (what you could get for the car) is $7,500 if
transmission works, $6,200 if it doesn’t.
B. Blue book value is $6,300 if transmission works, $5,500 if it
doesn’t.
64
Active Learning 1 Answers
Cost of fixing the transmission = $900
A. Blue book value is $7,500 if transmission works,
$6,200 if it doesn’t
– Benefit of fixing transmission = $1,300
(= 7500 – 6200)
– Get the transmission fixed
B. Blue book value is $6,300 if transmission works,
$5,500 if it doesn’t
– Benefit of fixing the transmission = $800
(= 6300 – 5500)
– Do not pay $900 to fix it
65
How People Interact
 U.S. economy or the Indian economy, the term “economy” simply
means a group of people interacting with each other.
 These interactions play a critical role in the allocation of society’s
scarce resources. For example, the interaction of buyers and
sellers determines the prices of goods and the amounts produced
and sold. These interactions are an important part of what
economists study.
Principle 5: Trade can make everyone better off

Principle 6: Markets are usually a good way to organize economic
activity
Principle 7: Governments can sometimes improve market outcomes
66
Principle/Idea 5: Trade Can Make Everyone
Better Off
• People benefit from trade:
– People can buy a greater variety of goods and services at
lower cost
• Countries benefit from trade and specialization
– Get a better price abroad for goods they produce
– Buy other goods more cheaply from abroad than could be
produced at home
67
Principle/Idea 5: Trade Can Make Everyone
Better Off
 Trade between two economies can make each economy better off.
 Countries as well as businesses benefit from the ability to trade with
one another.
 Trade allows countries to specialize in what they do best and to enjoy
a greater variety of goods and services.
68
Principle 6: Markets Are Usually a Good
Way to Organize Economic Activity
• Market
– A group of buyers and sellers (need not be in a single
location)
• “Organize economic activity” means determining
– What goods and services to produce
– How much of each to produce
– Who produced and consumed these
69
 Communist countries adopt central planning, but these have mainly
been abandoned in favour of markets.
 In a market economy, the decisions of a central planner are
replaced by the decisions of millions of firms and households.
 In general, markets have promoted economic well-being.
• A market economy allocates resources
70
• A market economy allocates resources
– Decentralized decisions of many firms and households –
as they interact in markets
• Famous insight by Adam Smith in
The Wealth of Nations (1776):
– Each of these households and firms acts as if “led by an
invisible hand” to promote general economic well-being
71
• Prices:
– Determined: interaction of buyers and sellers
– Reflect the good’s value to buyers
– Reflect the cost of producing the good
• Invisible hand:
– Prices guide self-interested households and firms to make
decisions that maximize society’s economic well-being
72
Principle 6: Markets Are Usually a Good Way to
Organize Economic Activity: Uber Story
• The case study ‘Adam Smith would have loved Uber’ is a great
example of the invisible hand at work.
• It starts by discussing the strict controls in the market for taxis
(limited number of taxi medallions or permits)
• May determine the prices that taxis are allowed to charge
• To keep unauthorized drivers off the streets and to prevent all
drivers from charging unauthorized prices
• Continues with information about Uber, launched in 2009
• App for smartphones that connects passengers and drivers
• Uber cars do not roam the streets looking for taxi-hailing
73
Principle 6: Markets Are Usually a Good Way to
Organize Economic Activity: Uber Story
• Not everyone is fond of Uber: Traditional taxi drivers
(dislike additional competition)
• Economists love Uber: Increase consumer well-being
• Surge pricing
• Increases the quantity of car services supplied when they
are most needed
• Allocate the services to those consumers who value them
most highly
74
Principle 7: Governments Can Sometimes
Improve Market Outcomes
 Markets are not without their problems. Market failure is when the
market on its own fails to produce an efficient allocation of resources.
• Property rights exist to provide protection over the ownership of
resources.
• Externalities are the uncompensated impact of a person or firm’s
action on the well-being of a third party.
• Market power is when an economic agent is able to influence
market prices.
 Governments can intervene to improve markets.
75
• Government - enforce property rights
– Enforce rules and maintain institutions that are key to a market
economy
• People are less inclined to work, produce, invest, or purchase if large
risk of their property being stolen
• Two examples of the idea in the second bullet point:
•A restaurant won’t serve meals if customers do not pay before they leave.
•A record company won’t produce CDs if too many people avoid paying by
making illegal copies.
• Many fledging market economies are struggling through the transition from
central planning because they have not developed institutions that protect
and enforce property rights.
76
• Government - promote efficiency
– Avoid market failures: market left on its own fails to
allocate resources efficiently
– Externality – source of market failure
• Production or consumption of a good affects bystanders (e.g.
pollution)
– Market power – source of market failure
• A single buyer or seller has substantial influence on market
price (e.g. monopoly)
77
• Government - promote equality
– Avoid disparities in economic wellbeing
– Use tax or welfare policies to change how the economic
“pie” is divided
78
Active Learning 2: Discussion
Questions
In each of the following situations, what is the
government’s role?
Does the government’s intervention improve the outcome?
a. Public (Govt.) schools
b. Workplace safety regulations
c. Public highways
d. Patent laws, which allow drug companies to charge high
prices for life-saving drugs
79
Active Learning 2: Tips for Discussion
The items in this list are meant to get students thinking about
Principles 6 and 7 in the context of specific examples, and to
generate discussion rather than arrive at definitive answers.
NOTE: Discussing the entire list would consume a lot of class
time (20-25 minutes). Two would suffice. Pick your favorite
two and delete the others. Of course, you can skip this slide
entirely if you wish to get through the chapter as quickly as
possible. Here are some notes that might help guide the
discussion:
80
a. Public schools. The alternative would be private schools. The
cost of education would be concentrated among those with school-
aged children, rather than spread over all taxpayers, so the price
per child would likely be high. Some families would not be able to
afford to enroll their children in schools, and would either home-
school the children or raise them without education. Is the benefit
to society of having an educated population large enough to justify
making people without children share in the cost? Could the
private sector provide education more efficiently (either at lower
cost or higher quality) than the public sector?
81
b. Workplace safety regulations. Without such regulations, would firms provide

a safe environment for their workers? Some students will say “no—look at how
bad working conditions are in poor countries that have no safety regulations.”
Another view is that dropping such regulations would make workers better off.
Workers may view the safety of their work environment as part of their wage:
the less safe the environment at a specific firm, the higher the wage the firm will
have to offer to make workers willing to work there. If workers vary with respect
to their tolerance for unsafe conditions, then workers with a high risk tolerance
would be better off if given the option to work for higher wages in factories that
aren’t as safe. Such workers would be worse off if the government required all
firms to provide equally safe conditions.
82
c. Public highways. The alternative would be toll highways operated by the

private sector. People who use highways more would pay more, and people who
use them less would pay less, which seems fairer than having everyone pay
equally for highways. (Actually, everyone does not pay equally - people who use
public roads more buy more gas, and therefore pay more gas tax.) If there are
external benefits to society of having a national highway system, then the private
sector would under-provide this good.
d. Patent laws. I’ve kind of loaded the question with the wording on the slide.
If you wish, change it to just “Patent laws.” Is it fair that drug companies charge
such high prices for drugs that some people need to stay alive? If drug prices are
regulated, how might pharmaceutical firms respond?
83
How the economy as a whole works
Principle 8: A country’s standard of living depends on its

ability to produce goods and services
Principle 9: Prices rise when the government prints too
much money
Principle 10: Society faces a short-run trade-off between
inflation and unemployment
84
Principle 8: Country’s Standard of Living Depends
on Its Ability to Produce Goods and Services
• Huge variation in living standards
– Across countries and over time
– Average income in rich countries
• Is more than ten times average income in poor countries
– The U.S. standard of living today
• Is about eight times larger than 100 years ago
85
 Economic growth is the increase in the amount of goods and services
produced in an economy over a period of time.
 Gross domestic product (GDP) per head is one useful indicator of measuring
living standards.
 The standard of living measures welfare based on the amount of goods and
services a person’s income can buy.
 Productivity is directly related to living standards.
• Boosting productivity raises living standards.
86
• Productivity: most important determinant of living
standards
– Quantity of goods and services produced from each unit of
labor input
– Depends on the equipment, skills, and technology
available to workers
• Other factors (e.g., labor unions, competition from abroad) have
far less impact on living standards
87
Principle 9: Prices Rise When the
Government Prints Too Much Money
• Inflation
– An increase in the overall level of prices in the economy
• In the long run
– Inflation is almost always caused by excessive growth in
the quantity of money, which causes the value of money to
fall
– The faster the government creates money,
the greater the inflation rate
88
Principle 10: Society Faces a Short-run Trade-
off between Inflation and Unemployment
• Short-run trade-off between unemployment and inflation
– Over a period of a year or two, many economic policies
push inflation and unemployment in opposite directions
– Other factors can make this tradeoff more or less
favourable, but the tradeoff is always present
89
Principle 10: Society Faces a Short-run Trade-off between
Inflation and Unemployment: Some Explanation
• While the long-run effect of increasing the quantity of money is
inflation, the short-run effects are more complicated—and
controversial.
• However, most mainstream economists believe the following: An
increase in the quantity of money causes spending to rise, which
causes prices to rise, which induces firms to produce more goods
and services, which requires that they hire more workers. Hence, in
the short-run, increasing the quantity of money causes inflation to
rise, but unemployment to fall.
• Of course, REDUCING the quantity of money would have the
opposite effects (inflation would fall, while unemployment would rise)
in the short run.
90
Principle 10: Society Faces a Short-run Trade-off between
Inflation and Unemployment: Some Explanation
• Keep in mind, though, the lesson from Principle 9: In the long run,
changing the quantity of money only affects inflation. We will learn in
a later chapter what determines the rate of unemployment in the long
run, and we will see that it has nothing to do with the quantity of
money.
• The second bullet addresses the following point: In some decades,
due to factors outside of the control of policymakers, inflation and
unemployment are both high (e.g. 1970s in the US) or both low (e.g.
1990s in the US). Yet, given these other factors, policymakers can
always reduce unemployment temporarily by creating more inflation,
or vice versa.
91
Summary - 4 Key Economic Concepts: Scarcity, Supply &
Demand, Costs & Benefits, and Incentives
 Four key economic concepts—scarcity, supply and demand, costs and benefits, and
incentives—that help explain many decisions that humans and business firms make.
 Scarcity: Scarcity explains the basic economic problem that the world has limited—or
scarce—resources to meet seemingly unlimited wants, and this reality forces people to
make decisions about how to allocate resources in the most efficient way.
 As a result of scarce resources, humans are constantly making choices that are
determined by their costs and benefits and the incentives offered by different courses of
action.
 Supply and Demand: A market system is driven by supply and demand. Taking the
example of beer, if many people want to buy beer, the demand for beer is considered
high. As a result, you can charge more for beer and make more money on average by
using wheat to make beer than by using wheat to make flour.
92
Costs & Benefits
• Hypothetically, this could lead to a situation where more people start making beer and,
after a few production cycles, there is so much beer on the market—the supply of beer
increases—that the price of beer drops.
• Although this is an extreme and overly simplified example, on a basic level, the concept
of supply and demand helps to explain why last year's popular product is half the price
the following year.
 Costs and Benefits: The concept of costs and benefits is related to the theory of rational
choice (and rational expectations) that economics is based on. When economists say that
people behave rationally, they mean that people try to maximize the ratio of benefits to
costs in their decisions.
93
Costs & Benefits
• If demand for beer is high, breweries will hire more employees to make more beer, but
only if the price of beer and the amount of beer they are selling justify the additional
costs of their salary and the materials needed to brew more beer. Similarly, the consumer
will buy the best beer they can afford to purchase, but not, perhaps, the best-tasting beer
in the store.
• Although economics assumes that people are generally rational, many of the decisions
that humans make are actually very emotional and do not maximize our own benefit. For
example, the field of advertising preys on the tendency of humans to act non-rationally.
Commercials try to activate the emotional centers of our brain and fool us into
overestimating the benefits of a given item.
94
Incentives
• Everything Is in the Incentives

• If you are a parent, a boss, a teacher, or anyone with the responsibility of oversight,
you've probably been in the situation of offering a reward—or inducements or incentives
—in order to increase the likelihood of a particular outcome.
• Economic incentives explain how the operation of supply and demand encourage
producers to supply the goods that consumers want, and consumers to conserve on
scarce resources. When consumer demand for a good increases, then the market price of
the good rises, and producers have an incentive to produce more of the good because
they can receive a higher price. On the other hand, when the increasing scarcity of raw
materials or inputs for a given good drive costs up and producers to cut back on supply,
then the price they charge for the good rises, and consumers have an incentive to
conserve on their consumption of that good and reserve its use for their most highly
valued uses.
95
Incentives
• In the example of a brewery, the owner wants to increase production so they decide to
offer an incentive–a bonus–to the shift that produces the most bottles of beer in a day.
The brewery has two sizes of bottles: one 500 ml bottle and a 1 ltr bottle. Within a
couple of days, they see production numbers shoot up from 10,000 to 15,000 bottles per
day.
• The problem is that the incentive they provided focused on the wrong thing—the
number of bottles rather than the volume of beer. They begin receiving calls from
suppliers wondering when orders of the 1 ltr bottles are going to come.
• By offering a bonus for the number of bottles produced, the owner made it beneficial for
the competing shifts to gain an advantage by only bottling the smaller bottles.
96
Incentives
• When incentives are correctly aligned with organisational goals the benefits can be
exceptional. These practices include profit sharing, performance bonuses, and employee
stock ownership.
• However, these incentives can go awry if the criteria for determining if an incentive has
been made that falls out of alignment with the original goal. For example, poorly
structured performance bonuses have driven some executives to take measures that
improve the financial results of the company in the short-time—just enough to get the
bonus.
• In the long-term, these measures have then proven detrimental to the health of the
company.
97
Foundation of All Economic Analysis: Four Core Principles of
Economics
 Demonstrate the four core principles of economics that provide the
foundation of all economic analysis, and use them to analyse choices and
make better decisions as individual consumers as well as producers.
1. The Marginal Principle: Ask “one more?” instead of “how many?”
2. The Cost-Benefit Principle: Compare the relevant costs and benefits
3. The Opportunity Cost Principle: Remember to consider the opportunity
costs
4. The Interdependence Principle: Take account of the broader effects of your
decisions
98
Economics
1. The Marginal Principle: Decisions about quantities are best made
incrementally. You should break “how many” decisions down
into a series of smaller, or marginal, decisions.
2. The Cost-Benefit Principle: Costs and benefits are the incentives
that shape decisions. You should evaluate the full set of costs and
benefits of any choice, and only pursue those whose benefits are
at least as large as their costs.
99
Economics
3. The Opportunity Cost Principle: The true cost of something is the
next best alternative you must give up to get it. Your decisions
should reflect this opportunity cost, rather than just the out-of-pocket
financial costs.
4. The Interdependence Principle: Your best choice depends on your
other choices, the choices others make, developments in other
markets, and expectations about the future. When any of these
factors change, your best choice might change.
100
KEY TERMS
• Economics, scarcity, consumption, production, distribution, consumer, firm.

choice, trade-off, opportunity cost, efficiency, effectiveness, productivity,
allocation, land, labour, capital, physical capital, human capital, natural
capital, financial capital, factors of production, resources, entrepreneurship,
macroeconomics, microeconomics, demand, supply, aggregate demand,
aggregate supply, GDP, GNP, short-run -Vs- long run, 2-sector economy, 3-
sector economy, 4-sector economy, rational choices, rational decision
making, circular flow of income, perfectly competitive market, market
mechanism, price mechanism,
101
KEY TERMS
• Inflation, unemployment, Philip’s curve, marginal cost, marginal revenue or

benefit, producer’s goods, consumer goods, capital formation, demand-side
policy (intervention), supply-side policy (intervention), incentives, market
failure, externalities, rational choice, market power/pricing power, recession,
unemployment, balance of trade, trade account surplus or deficit, current
account surplus or deficit, centrally planned economy, free market economy,
mixed economy, central agency, economic policy, fiscal policy, monetary
policy, consuming units, producing units, fiscal stimulus, monetary
stimulus, value migration,
102

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BBM-ME-I

Types of Economies: Market, Command and Mixed Economies: Describe how

 The fundamental or central problem of an economy or society can be understood

Man has unlimited wants or ends.

Market, Command and Mixed Economies

Microeconomics (MI) Macroeconomics (MA)

Business or Managerial Economics is concerned with both:

Factors of Labor, land,

 Macroeconomics is concerned with the total size of the flow.

 Marginal Costs and Benefits

 Microeconomic Choices and the Firm

 What products to produce.

• People Make Decisions: Recall that the economy is the collective

Principle 1: People face trade-offs

For use with Business Economics 3e ISBN: 978-1-4737-6277-0

Principle 5: Trade can make everyone better off

b. Workplace safety regulations. Without such regulations, would firms provide

c. Public highways. The alternative would be toll highways operated by the

Principle 8: A country’s standard of living depends on its

• Everything Is in the Incentives

• Economics, scarcity, consumption, production, distribution, consumer, firm.

• Inflation, unemployment, Philip’s curve, marginal cost, marginal revenue or

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