Economics of the business environment

1. Economics of the business environment Lessons 1 and 2 March study group meeting

2. This document summarises lessons 1 and 2 of the economics module Things to note about this pack • A lot of the theory in this only works if you assume things • Ben knows more than all of us so expect him to tell us where this is wrong at any point. • Ignore the notes we were sent in the file. I have and have read the book which is so much more helpful although have read notes as well to make sure we do not miss anything. • The notes jump around all over the place so I have tried to make things appear in a more logical order although everything only belongs each lesson • Ask any bloody questions you can, no matter how stupid you think it is. I guarantee someone else is thinking the same thing. i.e. What hell is the person talking about? This is actually the kicker on our global template. How horrible is burgundy and yellow! Well don’t to the marketing team…

3. Contents TO BE DONE • Executive summary 4 • Background 5 • September 2008 intake results 6 • Assessment of the hosting process 7 • Information and support 9 • Passport forms 11 • Lessons learned 12 • CU SPoC results 13 • Roles in the hosting process 14 • Expectations of SPoCs 15 • Passport forms 16 • Interviews and information packs 18 • Summary and recommendations 20 • Appendices (Including survey questions) 24

4. Lesson 1 – Internal economics of business – The long and the short run • Reading: • Book - Chapter 3 – sections 3.1 to 3.4 • Book – Chapter 7 – pages 151 – 156 • Lesson 1 of the notes provided by WBS • In assessing productivity we need to distinguish between: • Total product – Total output produced by a firms workers • Marginal product – Addition to total product after employing one more unit of an input factor e.g. 1 more worker Short run Long run • A period of time where one factor is fixed. Assume capital is fixed and labour is a variable. • All factors of production are assumed to be variable The nature of productivity and costs in the short run Bear with me, there is a point to all of this!

5. The nature of productivity and costs in the short run • Below is a table to demonstrate a few key concepts: 1 – This is task specialisation – Where productionis split into components and assigned and the worker becomes an expert in a specific task. 2 – The refers to an economic concept – The law of diminishing returns – As more of a variable (e.g. labour) factor of production is added to a fixed factor then returns to the variable factor will diminish (i.e. people become inefficient) 1 2 When we begin to over resource the production process there is no more capital to utilise

6. Costs in the short run – Page 54 of the book Some formula for you Costs and formula What does it mean if you plot these on a graph • 1 = Fixed costs • 2 = Short run variable costs (SRVC) – Slows as output increases and variable costs • 3 Short run total costs (SRTC) Simply add 1 and 2 together. • Marginal cost – Since this is the cost of producing 1 more unit the change in output should be 1 otherwise why bother. • Three types of costs: • Variable • Fixed • Total – Simply fixed + variable • Average Variable Costs • = total variable costs / nos of units produced • Average fixed costs • = total fixed costs / nos of units produced • Average total costs • = total costs/ nos of units produced • Marginal cost • = change in total cost . Change in output This is based on a simplistic model. This is only to highlight the fundamentals of the theory

7. Costs in the short run – Page 54 of the book Background and Objectives What does this graph show • The key points are as follows: • The AVC and ATC will always be U - shaped. This represents the law of diminishing returns mentioned earlier • Towards the left output is low – small workers using fixed capital. • Employ more = increased output, however, as more workers productivity falls and cost per unit increases. • This makes the marginal cost curve increase. • As labour becomes less productive costs of additional units must increase. • Marginal cost curve must cut through AVC and ATC due to relationship. When marginal lower or higher than average then will move down accordingly. • Fixed costs will always go lower as you spread the overhead. As spread over larger output will reduce, Average Marginal costs Output What does this graph show • Simply put – the formula we mentioned previously plotted on a graph. The formula are not important but knowing what this show is. By knowing these you can make production decisions in the short run

8. Lesson 2 - Demand curves – Book page 4 and 25 Demand curves • Illustrates the relationship between price and quantity demanded of a particular product. Positive Negative This is mentioned a lot in the notes but not a lot in the book • Basically shows the maximum amount of a product that can be produced given a finite amount of resources. The decisions are based on knowing how the curves will move based on decisions. This is actually simple production rules of a business with some fancy names and a graph

9. Four reasons for movement in demand curves – Book page 26 Types of costs • Four types of costs: • Price of substitutes and complements • Price increase or decrease encourages a switch into/ out of other products • Income • Price rise/ falls reduce/ increase purchasing power and therefore shift the demand curves • Tastes and preferences • Demand increases as consumers are informed about nature and availability of product. E.g. Market creates strong brand so demand increases. • Price expectation • Beliefs about how prices in future will change e.g. new technology on the market • Normal goods – demanded more when consumer income increases and less when it falls e.g. expensive wine • Inferior goods – Demanded more when income levels fall and demanded less when they rise e.g. supermarket own label products We can now begin to produce the law of demand

10. Measuring demand responsiveness – Book page 32 Costs and formula • Law of demand says that as long as the four points remain constant, there must be a negative relationship between price and quantity. • Elasticity is a measure of responsiveness of demand to a change in price • This is determined by a number of factors: • Substitutes • Time • Definition of the market • There are two ways to measure: • 1 - % change in demand / % change in price • 2 – (change in demand / change in price) x (price x quantity demanded) Elasticity is how demand or quantity is affected by price movement or vice versa

11. Types of elasticity – Book page 34 Once elasticity is calculated there are four types • 1 – Where elasticity is less than 1 demand is described as inelastic. i.e. change in price = a small change in demand • 2 – When elasticity = 1 demand has unit elasticity or demand is equally responsive to change in price • 3 – where elasticity is greater than 1 demand is said to be elastic and therefore responsive to a change in price • 4 – When elasticity is 1 or infinity the market is perfectly elastic and therefore demand is very responsive to price. Elasticity decreases as you move decreases as you move down a negative demand curve

12. The product life cycle and elasticity – Book page 40 The product life cycle • 1 – Launch – Goods are unique and therefore inelastic • 2 – Growth – Competition increases and demand begins to increase and therefore elasticity increases. • 3 Maturity – Competition at its highest and therefore high price elasticity and therefore little control by firm over pricing. This is a market focus. • 4 – Decline – Prices begin to be more inelastic as consumers and producers begin to exit the market. Elasticity moves in conjunction with the product life cycle

13. That’s all folks What to remember • 1 – This is simplistic and high level • 2 – The book really helps this • 3 – Demand curves are based on price and output • 4 – They are affected by market forces and internal forces e.g. labour wages. • 5 – There are lots of formula in the book and notes which I have not mentioned but I have not mentioned here as I am not sure how much we need to memorise them or just apply the concepts behind them. In my opinion this is the worst module but it is not so bad when you read the book