Introduction to Business Economics

1.1 The Role of Firms in the Economic Systems

1.2 Entrepreneurship

1.3 Different Frameworks to Study Business

Begoña
1.4 Business López
Objectives
blopez@uniovi.es
Business
 Begoña López
email blopez@uniovi.es

School of Computer Science

Office location Office D-2-04
Thursday and Friday from 10:00 to
Contact hours
13:00
Office phone +34 985 10 48 56 (School of
number Economics and Business)

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 Business
Begoña López

1. The organization of economic

activity
2. The firm
3. Environment and firm strategy
4. Management
5. Finance
6. Operations
7. Marketing
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 Weight in
Assessment Activities final
grade

Progress test (mid-term exam) of 30%

Controlled assessment
the first three lessons to be held
in week 9 approximately.
Three assignments that should 10%
be written in the seminars. They 10%
will be scheduled in weeks 5, 12 10%
and 14 approximately and they
will be announced in advance,
after finishing lessons 2, 5 and 7
respectively.
Multiple choice test of the four 40%
Final
last lessons at the end of the
exam
semester.

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The organization
of economic
activity

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At a glance

1.1. Economic activity and markets

1.2. Analysis of economic variables
***************************************************************
Lesson 1 is a short introduction to Economics, the
social science that studies how wealth is created and
distributed

• Macroeconomics (study of a country’s overall

economic dynamics)
• Gross domestic product, employment rate, …
• Microeconomics (the functioning of individual
markets or smaller economic units)
• Individual businesses, individual consumers, … 6
1.1. Economic activity and markets

•Economic systems
•How does a market work? Demand and supply
•How are markets organized? Market structures

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Economic systems

Robinson = self-sufficient person

Advantage: no need of coordination

Disadvantage: inefficiency

But we live in societies

Advantage: specialization (efficiency)

Disadvantage: need for coordination

Economic systems
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Economic systems

Market Planned
economy economy

Decentralised Decision making Centralised

Private Ownership of production factors Public
Prices Coordinating device Commands
Capitalism Socialism
Adam Smith Karl Marx

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Economic systems

Market Mixed Planned

economy economy economy

Market coordination + Government intervention by regulations

USA Western Europe China Cuba North Korea

How does a mixed economy work?

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Economic systems Market is an actual or nominal
place where buyers and sellers
(demand and supply) interact to
Circular flow of income in a mixed trade goods and services.
economy

Product Markets
Firms sell
Households buy

Expenditure
services
Goods
and
Services Services
Public
Firms Households
sector
Taxes Taxes
Expenditure
Resources

Factor Markets
Firms buy
Households sell
How does a market work?

• What we produce?
• How we produce?
• What price to charge?
• How much to produce?
• Whom to hire?

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How does a market work?

Scarcity
The essential economic problem
Wants are unlimited...
but
…resources are limited!
So
we all must make choices!

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How does a market
work?
The nature of economic choice
Example
The allocation of a truly scarce resource-
your time!
How do you allocate your daily 24 hours?
• Maintenance of self, family, household
• Learning
• Working
• Other
What might change your allocation?
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How does a market
work?

The nature of opportunity costs

• Choices involve trade-offs
• play a round of golf or study for an exam
• spend a vacation at the beach or in the
mountains
• The value of the foregone option is the
opportunity cost of the option selected

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How does a market
work?
The nature of opportunity costs
Example
Suppose you are a full-time student and
your favorite professor offers you a
research assistantship
• What do you gain?
• What do you lose?
• What are the opportunity costs?
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How does a market work?
Economic profit vs. Accounting profit
Source: http://www.eumed.net/cursecon/5/el_concepto_coste.htm
The nature of opportunity costs
Example
When Susan started her business, she had to invest all the family savings
(€500,000) in acquiring a commercial premise and adapting it with
appropriate furniture and machinery. She also hired a young girl to help
with sales, at a salary of €15,000. At the end of the year she computed
the profit as:

INCOME STATEMENT
Revenue €100.000
Cost
Goods sold €70,000
Salaries €15,000

PROFIT €15,000
How does a market work?
Economic profit vs. Accounting profit
Source: http://www.eumed.net/cursecon/5/el_concepto_coste.htm
Susan has not accounted for the
opportunity costs. Instead of INCOME STATEMENT
starting the business, she could Revenue €100,000
have invested the savings in Current costs
Treasury Bonds at a 5% interest
rate, making €25,000. Goods sold €70,000
Furthermore, she is working and Salaries €15,000
does not compute her own
salary. Susan earned €20,000 in Opportunity costs
her previous job. Capital €25,000
investment
Susan’s salary €20,000
Total costs €130,000

PROFIT (LOSS) (€30,000)

How does a market work? Demand and supply

Quantity of products that consumers are willing and

DEMAND able to buy at different market prices

Factors affecting the demand of a particular good:

good’s own price; prices of related goods; income; tastes...

Qx = f ( Px ; P1 ... Px-1 ; I ; T ...)

ceteris paribus = remain constant

Demand curve:
Graphed relationship between
price and quantity
from a demand standpoint

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How does a market work? Demand and supply

Quantity of products that producers are willing and able to

SUPPLY offer for sale at different market prices

Factors affecting the supply of a particular good:

good’s own price; prices of inputs; technology...

Qx = f ( Px ; F1 ... Fz ; Tech ...)

ceteris paribus = remain constant

Supply curve:
Graphed relationship between
price and quantity
from a supplier standpoint

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How does a market work? Demand and supply

DEMAND AND SUPPLY

The interaction of demand
and supply (“invisible
hand”) establishes the
market equilibrium price

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How does a market work? Demand and supply

DEMAND AND SUPPLY

The interaction of demand and supply (“invisible hand”)
establishes the market equilibrium price

What happens if the price changes? Movement along the curve

What happens if any other factor changes? Movement of the curve

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How does a market work? Demand and supply

Supply and demand in the PC industry

What happens if the price changes? Movement along the curve

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How does a market work? Demand and supply

Effects of demand shifts

What happens if any other factor changes? Movement of the curve

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How does a market work? Demand and supply

Effects of supply shifts

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Determinants of demand shifts to the right
(increase)

More fashionable good

Income increase (normal goods) or income decrease
(inferior goods)
Price increase of subtitute goods
Price decrease of complementary goods

Determinants of supply shifts to the right

(increase)

Technology innovation
Inputs price decrease
Inputs surplus

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How are markets organized? Market structures

Important features of the structure of a market:

 The degree of concentration: number of buyers

and sellers

 The degree of product differentiation

 Information

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How are markets organized? Market structures

Pure competition Wheat, peanuts

Monopolistic competition Clothing, shoes

Oligopoly Automobiles

Monopoly Software protected by

copyright, many local
public utilities
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How are markets organized? Market structures

Pure competition
Assumptions:

 Large number of buyers and sellers

 No entry and exit barriers
 Perfect information
 Homogeneous products

Outcomes:

No long term abnormal profits

 A paradise for buyers, a hell for sellers

Pure competition serves as a benchmark against which to measure real-life

imperfectly competitive markets

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How are markets organized? Market structures
Monopoly
Assumptions:

 Single seller
 High entry barriers
 No close substitutes for the product

Outcomes:

Long term abnormal profits

 A paradise for the seller, a hell for consumers

Sources of monopoly power:

 Nature of that product makes a singles supplier more efficient

 Government sanctioned and regulated

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1.2. Analysis of economic variables
Macroeconomics studies aggregated indicators to
understand how the whole economy functions. These are
some of the major macroeconomics variables

1. GDP
2. Inflation
3. Public deficit
4. Public debt
5. Exchange rate / Foreign exchange rate
6. Interest rate
7. Trade deficit/surplus
8. Unemployment rate
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GDP
GDP is the nation’s expenditures on all FINAL goods and services produced
during the year
Multiple counting:
Only expenditures on final products – what consumers, businesses,
and government units buy for their own use belong in GDP
Intermediate goods are not counted
Used goods are not counted

Only the value

of the final
sale is
counted. So they are not
counted when
the manufacturer
buys them. 32
 This is confusing!

The tire that comes with the car is

not counted as a final good.

However, if you get a flat and buy

the same tire, it is counted as a final
good.

No Problem! To correct for this problem economists have

created the Value Added approach.
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Value Added Approach Eliminates
Double Counting

Participants Cost of Value of Value Added

Materials Sales
Farmer $ 0 $ 100 $ 100
Cone factory 100 250 150
and ice
cream-maker
Middleperson 250 400 150
Vendor 400 500 100
Totals $ 750 $1,250 $500
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GDP can be calculated three ways:
 add up the value added of all producers;
 add up all spending on domestically produced final goods and
services;
 add up the all income paid to factors of production

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Calculating GDP

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GDP per capita 2013

GDP per capita is considered an indicator of a country's standard of living

GDP per capita in EU 37
http://epp.eurostat.ec.europa.eu/tgm/mapToolClosed.do?tab=map&init=1&plugin=1&language=en&pcode=tec00114&toolbox=types#
GDP growth 2017

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Inflation
Inflation is a rise in the general level of prices of goods and services in an
economy over a period of time

The inflation rate is the annualized percentage change in a general price Index .
It measures the change in the cost of a basket of retail goods and services. The
data are estimates obtained from expenditure surveys for a sample of
households
Graph CPI (consumer price index)
Spain historical

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CPI groups and weightings (Spain - 2016)
CPI Weighting
Group Sectors
(%)
1 Food and non-alcoholic beverages 18.74
2 Alcoholic beverages and tobacco 2.77
3 Clothing and footwear 7.60
4 Housing 12.51
5 Furniture and Household Equipment 6.14
6 Health 3.40
7 Transport 15.60
8 Communications 3.44
9 Recreation and culture 7.00
10 Education 1.59
11 Hotels, Cafes and Restaurants 11.60
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Public deficit
Public deficit, fiscal deficit or government budget deficit is the amount by
which government revenues falls short of government spending

If revenues are higher than government spending there will be a budget

surplus

4,00%
Public deficit in Spain
2,20% 2%
2,00%

0,00%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
-2,00%

-4,00% -3,10%
-4,40% -4,50%
-6,00% -5,10%
-5,90%
-6,90%
-8,00%

-10,00% -9,40% -9,60%

-10,40%
-12,00% -11% 41
Public debt
Public debt (also known as government debt) is money (or credit) owed by
a public administration (national, regional or local government)
National government debt is sometimes called sovereign debt
Public debt is the result of accumulating budget deficits year after year

Debt to GDP in Spain

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Exchange rate / Foreign exchange rate
An exchange rate (Foreign-exchange rate or FOREX rate) between two
currencies is the rate at which one currency will be exchanged for
another
It is also regarded as the value of one country’s currency in terms of
another currency
Currency appreciation (depreciation): An increase (decrease) in the value
of one currency in terms of another

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Interest rate
An interest rate is the rate at which interest is paid by a borrower
for the use of money that they borrow from a lender

Normally expressed as a percentage of the principal/capital for a

period of one year

There are many interest rates (risk-free, with a risk premium, short
term, long term…)

Everyday Saver Gross rate pa% AER%

Rates effective from:

1 August 2016 – 30
Current interest rates 0.25 0.25
November 2016
The interest rate on Children's Instant Saver Issue
will never fall below 1.50% gross pa (1.51% AER)
1 December 2016 0.05 0.05
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Trade deficit / surplus
The balance of trade is the difference between the monetary value of exports and
imports in an economy over a certain period

A negative balance is referred to as a trade deficit (exporting less than is imported)

A positive balance is known as a trade surplus (exporting more than is imported)

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Unemployment rate
Unemployment rate = Unemployed workers / Total labour force

Unemployed workers are individuals who are currently not working but are willing and
able to work for pay and have actively searched for work

Total labour force comprises all individuals that are currently working or can be
classified as unemployed

(Note that some people are not working and can not be classified as unemployed:
students, housekeepers,…)

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Key concepts
Economics, microeconomics and macroeconomics
Economic system
Market, planned and mixed economies
Demand and supply (curves)
Equilibrium price
Perfect competition
Monopoly
GDP
Inflation and Consumer (Retail) Price Index
Public deficit and Public debt
Exchange rate
Interest rate
Trade deficit
Unemployment rate

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