1

Economics and the

Business Environment

The sole proprietor

limited scope for expansion unlimited liability

The partnership Companies

limited liability public limited companies (plc)
public issues of shares shares traded on the Stock Exchange

private limited companies consortia public corporations

U-form

Chief executive

Production

Finance

Sales

Purchasing

U-form
advantages
direct control by central executive of the firm clear goals

problems of large U-form firms

co-ordination and communication costs distorted information decline in organisational efficiency

M-form

Head Office

Division 1

Division 2

Division 3

Production

Finance

Sales

Purchasing

M-form
advantages
reduced length of information flows enhanced level of control

problems
bureaucracy and communication problems conflicts between divisions

The flat organisation The holding company

role of parent company and subsidiaries

Goals of the firm The traditional theory of the firm Alternative theories
the divorce of ownership from control the development of the joint-stock company managerial objectives

The principal / agent relationship

the principal agent problem asymmetric information

dealing with imperfect information

monitoring incentives

The goal of staying in business

the willingness of firms to take risks problems of being over cautious

PEST analysis
Political / legal factors Economic factors
the microeconomic environment
the macroeconomic environment

Social / cultural factors

Technological factors

Using PEST analysis

relations between the four sets of factors

importance of the economic factors

Classifying industries
Classifying production
primary production secondary production tertiary production

Output of industrial sectors

(as % of GDP)
Primary 2.8% Secondary

42.3% 54.9%

Tertiary

1974

Output of industrial sectors

(as % of GDP)
Primary 2.8% Secondary Primary 5.8% Secondary 23.3% 42.3% 54.9% 70.9%

Tertiary

Tertiary

1974

2002

Primary 3.4% Secondary

41.9% 54.7%

Tertiary

1974

Primary 3.4% Secondary

Primary

1.8%

Secondary

18.4%
41.9% 54.7% 79.8%

Tertiary

Tertiary

1974

2002

Classifying firms into industries

nature of an industry industrial sectors why classify firms into industrial sectors?
helps in analysing trends identifying specific needs helps to understand relationships between firms

Standard industrial classification

nature of the system of classification sections, subsections
divisions, groups and classes

Standard industrial classification: 1992

Section A B C D E F G H I J K L M N O P Q Agriculture, hunting and forestry Fishing Mining and quarrying Manufacturing Electricity, gas and water supply Construction Wholesale and retail trade and repairs Hotels and restaurants Transport, storage and communication Financial intermediation Real estate, renting and business activities Public administration and defence; compulsory social security Education Health and social work Other community, social and personal service activities Private households with employed persons Extra-territorial organisations and bodies

Changes in the structure of UK economy

expanding and contracting sections
by output by employment

Structure conduct performance

relationship between business structure and business conduct (behaviour)
competitive markets and competitive behaviour limited competition and collusion

relationship between business conduct and business performance

indicators for measuring performance profitability, market share, growth, etc.

Tackling the problem of scarcity

meaning of scarcity production and consumption
role of the business economist
study of consumer behaviour study of firms

factors of production
labour land and raw materials capital

Demand and supply

actual and potential demand and supply the role of firms in satisfying demand business economists study of the supply process

Macroeconomics and microeconomics

macroeconomics
the balancing of aggregate demand and supply

microeconomics
the balancing of the demand and supply for particular products

Microeconomics and choice

What? How?

For whom?

Choice and opportunity cost

the meaning of opportunity cost

rational choices
marginal costs and benefits

Microeconomic choices and the firm