WELCOME to the MN 304 - Business Economics Part

1. WELCOME to the MN 304 - Business Economics Part

2. AIMS OF THE ECONOMICS COURSE: • To give a basic knowledge on micro and macro economic theories, standards, frameworks and norms. • To give a basic knowledge on application of these theoretical knowledge for business administration, investment decision and business policies in public, private and NGOs. • To give basic knowledge to appreciate the links between technology and economic development and growth.

3. LEARNING OUTCOMES: On successful completion of this module, it is expected that the participants will be able to: 1) Understand the economic concepts and techniques of analysis which are most useful in analyzing the internal and external operation of the business, its choice of competitive and cooperative strategies and tactics, and its industrial, national and international environment. 2) Knowledge on application of economics for business administration, investment decision and business policies. 3) Develop the basic ability to judge the importance of technology for economic development.

4. MODULE OUTLINE: • Session 1(03 hours) – Introduction to Business Economic and Market Mechanism q Introduction to Economics • Basic Economics concepts and tools • q Demand, supply and equilibrium in managerial perspective • Elasticity and market segmentation and price controls Session 2(03 hours) - Business organization and its behaviour • Production and cost analysis • Profit maximization and revenue • Economies of scale, scope/synergies and learning curve • Short and long-run output, input and pricing decisions Session 3(03 hour) - Structure, Conduct and Performance (SCP) framework and Market Structures • SCP framework and Porter’s Five Forces analysis • Perfect competition and Monopoly/Monopsony • Monopolistic competition and Oligopoly/duopoly • Price discrimination

5. Session 04(03 hours) - Introduction to Macro Economics and Determination of National Income Accounts, Technology and Economic Development • Basic concepts in macro economics and important Macro economic variables and their behavior • Determination of national output and Sri Lankan National accounting data • Usage of various national accounting concepts for business • Importance of Technology for Economic Development.

6. ASSIGNMENTS: (e.g) • Let’s assume that your firm wants to introduce a new software product or e-service to the market. Explain the procedure for estimation and forecasting of demand, and pricing of product/service. • Select any industry or firm you like and identify economies of scale and scopes. Explain your suggestions for higher management to further utilize these economies of scales and scopes. • Identify the industry structure your firm or industry belong. Use SCP framework to analyze overall aspects of your firm or industry. • Select any Sri Lankan industry you like and use Porter’s Five Forces framework to analyze that industry. Do think this framework reasonably explain the overall aspects of the industry you select? If not what is your alternative? • Explain why macro economic variables are so important for business. • Explain why National accounting data are not reliable to assess living standards in developing countries.

7. The Business Environment and Firm Environmental factors Human factors International Economic Forces National Economic Forces Internal Economic Forces SCP of Business Firm Technology factors Other factors

8. Potential entrants Changing Technological Environment Changing Economic Environment T Threat of new entrants Bargaining power of suppliers O Industry competitors Buyers Suppliers Bargaining power of buyers Rivalry among existing firms S Changing Political Environment Changing Social Environment Threat of substitute products and services W Substitutes Forces shaping the competitive environment of the firm Industry competitors

9. BUSINESS SUCCESS - The Wheel of Fortune Understanding the external environment Understanding the business objectives Understanding the employment decision Understanding the competitive market BUSINESS SUCCESS Understanding the investment decision Understanding Consumer behavior Understanding the cost of production

10. Understanding the Business Objectives • Overall business objective/s of the firm • Sectoral business objectives • Product-wise business objectives • Setting right strategies and means to achieve these objectives • Finding resources to achieve these objectives • Identifying obstacles to achieve these objectives • Motivation of stakeholders to achieve these objectives

11. Understanding the Competitive Market • Nature of the market and its competitiveness • Its implications for price, cost and revenue • Understanding competitors, existers and new entrants • Understanding market regulatory framework • How to use marketing mix (product, place, promotion and price) for competitors practices • How the local and international economic and technological changes affect for my market structure • estimation of market share and power

12. Understanding the Consumer Behaviour • Estimation of consumer demand for my products • Estimation of elasticities (price, income and cross) for my products • Determination of various pricing strategies to achieve business objectives and to capture bigger market share • Design strategies to increase market share for my products (advertising, promotions….) • Design procedure for customer caring

13. Understanding the Cost Structure • Estimation of supply functions and elasticities • Understanding the various cost concepts and their shapes in short and long run • Identifying dis/economies of scales and scope with sources • Understanding the industry and competitors cost structures. • Find strategies to minimize cost of production

14. Understanding the Investment Decisions • Finding right investment proposals • Evaluating them through right methods • Selecting the right investment projects with right sources of finance • Knowledge about the government and regional financial incentives

15. Understanding Employment Decision • Understanding the nature of labour market • Selection of right labour • Giving them right task • Training and keeping them • Design labour policy

16. Understanding the External Environment • Economic changes and its implications for business (Interest rate, Exchange rate and devaluation, Inflation, Cost of living, Government budget, Events in regional and world economy) • Political changes • Socio changes • Technological changes

17. (revamping Keynesian economics by giving micro background.) Historical Development of Economics • (general equilibrium). (revamping of Keynesian and classical economics to suit with the contemporary economic scenes.) New Keynesian: market never clear fully and try to explains why market fails. Walrasian • (Mainly religious economic ideas: private property, price of a good, price of the capital). Ancient and medieval economic thinking (importance of non- economic factors). German and US based evolutionary • (Traders: importance of trade and industry for the development). Mercantalism (importance of institutions, property rights and capacity building). Institutional • (Importance of agriculture to the economic development). New classical economics Physiocrats (problems in American economy). American institutional (importance of fiscal policy). • (free market, price theory and freedom). Classical Keynesian New Keynesian economics (importance of monetary policy). Monetary • (development of micro economics through marginal revolution). Neo-classical (rational behaviour and accumulated knowledge). Rational and adaptive expectation • (labour exploitation, capital accumulation, falling of profits ratio, reserve labour army, end of capitalism and socialist and communist society). Marxian (methodology and financial economics). Austrian Kallskian and structural economics (structural features in the economy).

18. What is Economics Generally economics teach basic rules and principles of business: core of the business. Economics is an approach to decision making and it helps to draw correct conclusions. All the business subjects origin from Economics and therefore oldest business subject is the Economics. In some markets, highly paid professionals are the Economists (Ex. USA). Three types of Economists: Business Economists, Public Economists and Academic Economists.

19. Definition for Economics Wealth related definitions Welfare related definitions Scarcity and wants related definitions Modern definitions

20. Wealth related definitions Adam Smith – An inquiry into nature and causes of the wealth of nations. David Ricardo – To determine the laws which regulates distribution of the wealth generated. J.B. Say – Economics is a science which treats of wealth. F.A. Walker – Economics is the name of that part of the knowledge which relates to wealth. In overall these classical economists consider the problems of production, distribution and exchange of wealth as the main issue in economics.

21. Welfare related definitions A. Marshall – Economics is the study of mankind in the ordinary business of life and it examines that how he acquires and spends wealth for material welfare of whole nation. E. Cannon – Economics is an explanation of the general causes on which material welfare of human beings depends.

22. Scarcity and wants related definitions L. Robbinson – Economics study problems arise due to scarcity of resources. Scarcity emerge due to limited resources and unlimited wants. Therefore, economics is the study of how people choose to allocate limited resources to satisfy their unlimited wants. Wicksteed – Economics is about study of without wastage how resources should be utilized by community through proper regulation and administration. Stiglar.J - Economics study principles of governance of allocation of scare resources among the competing ends. Scitovosky – Economics is a social science which consider administration of scare resources. Enrich Roll – Main issue in economics is choice related ones and it occurs due to limited resources and their alternative uses.

23. Modern definitions H. Smith – Economics is the study of how in a civilized society obtains the share of what other people have produced (distribution) and how the total product of society changes (growth) and determined (factors behind determination of growth). Jacob Viner – Economics is all about what economists do.

24. Main Types of Economics Positive Economics (Explain what is actually happening in a economy) Normative Economics (Explain what should happen in a economy based on value judgments) Micro Economics (Study of small economic units such as individuals, house holds, firms and industry) Macro Economics (Study of board aggregates of the overall economy) Sub disciplines and branches (development, history, managerial, business, agricultural, health, financial, transport, technology, education, information….etc)

25. Methodology in Economics Deductive method Identify the problem Define technical terms and relevant variables Making assumptions Process of logical deduction to derive implications Formulation of hypothesis Making predictions and testing them Check predictions are in agreements/conflict with facts Modify assumptions and again follow the procedure or theory is discarded in favor of superior alternative

26. Inductive method Identify the problem Data collection and some preliminary thinking Data processing to find out how they are related Develop a theory and refine it through statistical methods Make predictions and test them Check predictions are in agreements/conflict with facts Collect more data and again follow the procedure or theory is discarded in favor of superior alternative

27. Types of Economic Analysis Partial Economic Analysis (keeping all other factors constant except one factor). General Economic Analysis (all the factors are changing together). Static analysis (analysis based on one point in time). Dynamic analysis (analysis based on different point in time in continuous manner). Comparative static analysis (analysis based on comparing various static points).

28. Basic Economic Concepts • Scarcity • The limitation of resources (relatively fixed in supply, alternative uses, technology, development stage, etc) and unlimitation of wants (human behaviour, age, culture, socio-economic situation, advertisement, openness of the economy, etc) are the main reasons for this scarcity. Scarcity leads to choice and systems of allocation (market, government and mixed). • Scarcity exists when people wants more of an items than is available. If there is enough of a good available at a zero price to satisfy wants, the good is said to be a free good. If there is not enough of a good available at a non-zero price to satisfy wants, the good is said to be a economic good.

29. Basic Economic Problems Unlimited Wants Limited Resources 1) What to produce: what goods and services and what quantity are to be produced.2) How to produced: Selection of production technique – capital or labour intensive. 3) For whom to produced: distribution among the different income groups, regions and social groups. Other economics problems (sustainable development, environmental protection, economic growth and development, corruption and clean government, democracy .. etc).

30. Economic Systems Economic systems differs according the ways in which they answered for these basic economic problems. 1) Free market or capitalist economy (price mechanism). 2) Socialist economy (government and central board). 3) Mixed economy (both government and price mechanism). 4) Command economy (Military or feudal mechanism).

31. Factors of Production (productive resources) • Primary factors (not the result of the economic process) • Land (free gifts of nature including space and natural resources. Rents are the earnings. Features: fixed in supply, no cost in production for society, earn different rents for different lands). • 2) Labour (physical labour and intellectual services, earn wages/salary).

32. Secondary factors (results of economic efforts) • 3)Capital (stock of physical wealth of nation, fixed or variable, earn interests). • Entrepreneurship (organize factors of production to produce final products and risk bearer of business, and earn profits). • Knowledge and technology. • Attitude, political, social and environmental • systems.

33. Opportunity Cost Opportunity cost occurs due to: limited resources and unlimited wants. This create scarcity which leads to choice. We can not have everything what we want. Therefore, if we want to have one more we have to sacrifice something. A sacrificed best opportunity is called an opportunity cost. A opportunity cost of a good is the quantity of other goods sacrificed to obtain another unit of that good. A opportunity cost of particular action or activity is the loss of the opportunity to pursue the most attractive alternative given the same time and resources A opportunity cost for free good is zero. A opportunity cost for economic good is positive.

34. Production Possibility Frontier Curve (Graphical representation of opportunity cost) • This shows maximum combinations of output that the economy can produce using all the available resources. This shows trade-offs: more of one commodity less of other. Points above the frontier are unattainable, below in-efficient and on maximum or full employment • This curve can use to show in technology progress (with various trends) and economic growth. • Opportunity cost can be explained by using different shape of curves such as increasing, decreasing and constant. • This country can • Produce by using • all the resources X 15 • Or Y 15. • X = 13, Y = 8, (sacrifice Y 7 to get X 13) • X = 8, Y = 12 (sacrifice X 7 to get Y 12) X 15 · Unattainable 13 · 8 Full employment point Inefficient · 0 8 12 15 Y

35. Marginal Principle This explains additional benefits derived from a particular decision and compares with them additional cost incurred. Widely used in production, revenue, profits maximization, investment decisions and so on. MPl = d(TP)/d(L), MPk = d(TP)/d(K) MR = d(TR)/d(q), MC = d (TC)/d(q)

36. Functions of Economists Analysis on production, exchange/distribution, consumption and investment. Supply, demand and elasticity estimation and forecast. Preparation of business plans and conduct and analysis of market surveys. Analysis of issues related to production, cost, revenues and profits. Analysis of competition and market structure analysis. Analysis of issues related to firm and industry. Investment appraisal and feasibility studies. Advising on pricing, marketing and distribution. Economic research and modeling. Briefing domestic and global economic issues. Economic Policy advising…etc.

37. Tools Used in Economics Variables and Attributes: Variable is a quantity or numerical characteristic of data which can be a discrete or continuous. Attributes are the qualitative characteristics of data. Exogenous and endogenous variables: Exogenous (autonomous) variables are taken from the outside the system and Indogenous variables are emerged within the system. Functions: Economic variables are interrelated and interdependent therefore we are using various functional forms: relationship between independent and dependent variable is a function. Models (statistical, mathematical, descriptive and econometrics, etc). These models are based on assumptions: Ceteris Paribus – other things being equal, Rational behavior – specific and well defined motivation, Structural and Institutional assumptions…etc.

38. Tools Used in Economics Nominal (market price) andReal (deflated) prices. Data (time series: a sequence of measurement of a variable at different point of time, cross section: a measurement of a variable at one point of time, panel: a measurement of same group in different point of time, pooled data: mixture). Statistics - Data collection, presentation, analysis and interpretation (descriptive - central tendency or disperse and inference – generalization of sample results to population).

39. Criticisms about Economics Economists do not agree each other on any single economic issue. Modeling/abstraction, assumptions and theory building are useless. Business or economy never behave according to economics explanations. Hard to apply micro economics concepts for business, etc

40. What is Business Economics “Purpose of studying economics by managers is to learn how not to be deceived by economists”. Two Definitions on Business Economics: Narrow (Micro) and board (Micro, macro, international and other related subjects). Generally, Business economics applies economic theory and methodology to business and administrative decision making. It provides a systematic and logical way of analyzing business decisions that focuses on the economic forces that shape both day to day decisions and long-term planning decisions. Especially, it helps managers to understand real-world business problems by using simplifying assumptions to abstract complex reality into manageable simplicity.

41. Text Books Definitions “Business Economics is the use of economic modes of thought to analyze business situation” “Business Economics is concerned with the application of economic principles and methodologies to the decision making process within the firm or organization under the conditions of uncertainty” “Business Economics is the integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by management” Business Economics is the application of economic theory and analysis to practices of business firms and other institutions”

42. The Nature of Business Economics • Business Management Decisions • Product, price and output • Make, buy, sell and investment • Production technique • Inventory level/technology • Advertising and financing • Labour decisions/State regulations • Decision Sciences • Econometrics • Statistics • Mathematics • Game theory • Forecasting • Programming • Economics • Micro Economics • Meso Economics • Macro Economics • International Economics Business Economics Use of economics, business management and decision sciences to solve managerial problems Solutions to the Business problems

43. Decision Science Business Economics Economics Business Management Business Economics

44. Case Study Method in Business Economics Lecture and discussion oriented classes are provided students with information about concepts, practices and theories. It is a listening and absorbing information. Cases oriented classes give students an opportunity to use concepts, practices and theories learnt in class. It is a participative and Learning by doing method. Your responsibility: Active participation, interaction, critical evaluation and effective communication.

45. Key Steps to Effective Case Analysis (No universal method) • Familiarization (grasp of the study) • Situation Study (Understanding the operational • circumstances of business and its environment) • Arriving at Core Problem (identification of main • problem) • Analysis and Inferences (Synthesis and interpretation) • List of Recommendation (theoretically sound and • justifiable policies) • Presentation of Case Report (Report should be in • professional setting)

46. Questions to discuss • Explain opportunity cost concept with an example. • Explain the basic economic problems. • Explain the concept of scarcity. • Distinguish primary and secondary factors of productions. • Explain how economics help to practicing engineers. • Explain the main functions of economists. • Give a definition for business economics. • Distinguish between capitalist and mixed economies.

47. Extra Readings First and Second Chapters McGuigan.R, Moyer.C and Harris.B (2002), Managerial Economics, Applications, Strategy and Tactics. First and Second Chapters Worthington.I, Britton.C and Reese. A (2001),Economics forBusiness:Blending Theory and Practice,ISBN: 0273632450, Publisher: Financial Times/Prentice Hall First and Second Chapters Begg. D, Fischer.A and Dornbush.R (1994), Economics, McGraw-Hill First Chapter Nellis.G and Parker.D (1997), The Essence of Business Economics, Prentice Hall First and Second Chapters Ferguson.R, Ferguson.J and Rothchild.R (1993), Business Economics, Macmillan