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Session Outline
Defining Economics Why is Economics important? Classifying Economic Systems Economic Tools to Make Strategic Business Decisions Fundamental Concepts of Managerial Economics How the Principles of Economics Affect Decision Making
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Definition
Economics is the social science that examines the ways in which individuals and entire societies allocate scarce resources to meet their needs and wants. Resources are by nature limited. People do not have the time, money or materials to do or acquire all of the things they need and want. This means individuals, families, companies and entire nations have to prioritize their needs and wants, deploying their available resources accordingly.
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Benefits
People make economic decisions daily. Studying economics prepares you to be a more knowledgeable and informed participant in the modern economy. A basic understanding of economics can make you a smarter consumer, worker and investor This understanding allows the projection of future economic conditions based on current indications. News and Current Events
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Other Considerations
Life Decisions Household budgeting etc. Informed citizens A knowledge of economics helps a person become a more knowledgeable participant in the political process. Nation Building In building a nation, a national identity must be created to unify the citizens. Divide and Rule Symbols Cohesion
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Misconceptions
Economics is not solely about money. The discipline concerns itself with scarcity and allocation of resources, which have applications beyond monetary concerns. However, economic theory is not foolproof because it is a social science based on the interplay between culture and money. Economic effects change as cultural customs change.
Resource allocation
Type of resources Labour (wage) Land (rent) Capital (interest) Entrepreneur (profit)
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Different Ideologies
Social reformism & intervention Laissez-faire economics Marxist political economy
Classifying Economic Systems Completely Planned System All resources controlled by government Completely Free (Capitalist) system All resources controlled by private sector Mixed Market System Resources controlled by both private and public sectors in varying degrees
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UK France USA
Hong Kong
N. Korea
France
UK
USA
Hong Kong
N. Korea
Cuba
China
Poland
France UK
USA
Early 2000s
Microeconomics
What to Produce and where How to Produce How to Finance the Production Who will get what is produced Distribution Achieving the three Es Efficiency, Effectiveness and Equity
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Choice
Rationalise choices Making judgements about relative worth of alternative resources Scale of preference Utility-satisfaction from good or resource
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Opportunity cost
Opportunity costs Sacrifice of alternative use Sacrifice of next best Real cost measure
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Marginal Analysis
Total utility (TU) Marginal utility (MU) Diminishing Marginal Utility
TU & MU from consuming water
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No of Glasses TU 1 30 2 43 3 50 4 54 5 54 6 49
MU 30 13 7 4 0 -5
30 25 20
Utils
1 mile
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15
16
16.5
4.5
10
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1 mile 2 miles 3 miles 4 miles 5 miles 6 miles Total benefit (m) Total cost (m) Marginal benefit (m) Marginal cost (m) 5 3 8 4.5 3 1.5 11 6 3 1.5 15 8 4 2 16 16.5 10 12 1 0.5 2 2
Trade-off Choosing entails trading off a target against another and is a fundamental issue of the decision-making process. Marginal Benefits and Costs Adjustments to the existing status quo. e.g. changing jobs for higher wages Response to Incentives Indices of elasticity show changes in people's behaviour as a response to certain incentives. Opportunity Cost The decision-making process requires comparing the costs and benefits of alternative courses of action
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How the Principles of Economics Affect Decision Making Making Capital Investments Using the Laws of Supply and Demand Assessing a Companys Investment Potential Using Price Elasticity Determine Whether to Enter a New Market Using Marginal Analysis
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Seminar Questions
How to Make a Decision at the Margin in Economics Calculating marginal utility
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