BUSINESS Delivered by: Sithari Herath BSc. Fin(sp) (USJP), ACCA, - PowerPoint PPT Presentation

ECONOMICS FOR BUSINESS Delivered by: Sithari Herath BSc. Fin(sp) (USJP), ACCA, CIMA Economics for Business - IFD -L1 1

Module Assessment 2 EXAMS AT THE END OF THE SEMESTER (CLOSED BOOK – 3 HOURS EACH) •ASSESSMENT 1 – 50% ( CONSISTS OF MULTIPLE CHOICE & STRUCTURED QUESTIONS) •ASSESSMENT 2 – 50% ( CONSISTS OF STRUCTURED & ESSAY TYPE QUESTIONS) Economics for Business - IFD -L1

Scope 1. Defining Economics 2. Understanding the Definitions 3. Opportunity Cost 4. Rational Economic Behaviour 5. Three Basic Economic Problems Economics for Business - IFD -L1 3

1. Defining economics Economy and Economics “Economy” -An Economy (or Economic system) is an entity (or a system) by which the production anddistribution of goods and services is done as well as allocation of resources is made in asociety . The Economy consists of households, Firms (businesses), Government and other institutions of agiven society . E.g. Sri Lankan Economy , USA Economy , UkraineEconomy . “Economics” -A social science that studies how individuals, governments, firms and nations make choiceson allocating scarce resources to satisfy their unlimitedwants. Economics for Business - IFD -L1 4

1. Defining economics The study of how society allocates scarce resources, which have alternative uses, between competing ends. Economics for Business - IFD -L1 5

1. Defining economics Economists Father of First book inEconomics AlfredMarshal Economics 1776 (1842 – 1924) John Maynard Keynes (1883 – 1946) Lionel Robbins An Inquiry into theNature Adam Smith (1898 – 1984) and causes of the 1723-1790 Wealth of Nations Economics for Business - IFD -L1 6

1. Defining economics Economic agents Economics agents take decisions (about resourceallocation) in an economy . Foreign Sector 1  Foreign house holds  Foreign firms 2 3  Foreign governments Government Firms House Holds Economics for Business - IFD -L1 7

2. Understanding thedefinitions Resources – In economics, resources means all the human, natural and manufactured or manmade recourses which are at our disposal and which we use to create wealth. Resources include land, labour , capital and enterprise. Wealth – the goods and services which a nation creates. Goods – Consumer goods like cars and food, capital goods like factories, tools, computers, lorries and roads. Services – entertainment, laundries, accounting and legal advice which are available for consumption. Economic Welfare – is the provision of a minimal level of well-being (wealth) and social support for all citizens. Higher the wealth higher thewelfare. Economics for Business - IFD -L1 8

2. Understanding thedefinitions T ypes of Resources Land – This includesall of the 1 natural resources that are available for exploitation; for example, oil, mineral deposits, cotton, wood,water , seeds, sea wind and sunlight (anything provided by nature which can be employed productively). Economics for Business - IFD -L1 9

2. Understanding thedefinitions T ypes of Resources Labour – This includes all 2 forms of human effort, PhysicalLabour both physical and mental, directed towards the production of goods and the provision of services, i.e. workers, lawyers, police officers, waiters, actors. Mental Labour Economics for Business - IFD -L1 10

2. Understanding thedefinitions T ypes of Resources Capital – This includes all manufactured or man- 3 made aids to production created by society , not as an end in themselves, but to improve the quality and quantity of the goods and serviceswe produce. i.e. tools, manufacturing machinery , warehouses, factories, the road and rail networks,computers. Fixed Capital – Fixed capital is defined as capital which is not consumed and does not change form during the process ofproduction. Working Capital – this includes partly processed raw material (i.e. steel), work in progress (i.e. car doors, body parts for cars) and unsold goods (i.e. unsold cars). Economics for Business - IFD -L1 11

2. Understanding thedefinitions T ypes of Resources Enterprise – An entrepreneur 4 or enterprise is a person or group who will organize production, bear risk taking decisions regarding what to produce, the location of production and the techniques of production to be employed, in the hope of making profit. Economics for Business - IFD -L1 12

2. Understanding thedefinitions Factors of production and theirrewards Production Factor Reward Land Rent 1 2 Labour Wage/ Salaries Capital Interest Enterprise Profit 3 4 Economics for Business - IFD -L1 13

2. Understanding thedefinitions Money – Money is anything used to exchange goods and services (wealth created by using resources). In economics money does not qualify as a productive resource, having no value in itself. Economics for Business - IFD -L1 14

2. Understanding thedefinitions The fundamental economicproblem Scarcity Inadequacy of Resources when L L compared with C E Unlimited Human Wantsis, < < Human Wants Resources Human Wants “SCARCITY”. Resources are Resources are Adequate Inadequate No Scarcity Scarcity Economics for Business - IFD -L1 15

2. Understanding thedefinitions The fundamental economic problem Scarcity is common to everyone Developing Economies Eg:Somalia Developed Economies Eg:USA Experience “Scarcity", Experience “Scarcity”, when fulfilling their luxury wants. when fulfilling their basic wants. Economics for Business - IFD -L1 16

2. Understanding thedefinitions Wants /Alternatives Scarcity and Choice Select 1 Selecting an Alternative 2 from a set of available 3 alternative is, 'Choice’ . Scarce 4 Resources Reject 5 Scarcity Choice OpportunityCost What and how much to produce? How to produce? Whom to produce? Economics for Business - IFD -L1 17

3. Opportunitycost Wants /Alternatives Opportunity cost measures thecost Select 1 of using resources in term of forgone NextBest 2 opportunities. Alternative 3 In other words,cost Scarce of a decision in 4 Resources terms of the next Reject best alternative 5 forgone. Scarcity Choice OpportunityCost Economics for Business - IFD -L1 18

3. Opportunitycost Inefficient Production Impossible to Production PossibilityCurve produce due to Product2 Scarcity The production possibility curve illustratesthe B potential outputof an economy , and the Efficient opportunity cost of resource allocation Production decisions, under following assumptions. A C • Existence of only two goods D • Fixed technology • Fixed resources PPC • Technical efficiency- resources are used in a technically efficient manner . 0 Product1 Economics for Business - IFD -L1 19

3. Opportunitycost Units of capital (000) Production PossibilityCurve Raising the output of food by 2 million units will have an opportunity cost of 3,000 units of 20 capital. Units ofCapital Units offood A 15 (000) (million) -3 B 20 0 12 15 15 PPC 12 17 0 20 0 15 17 20 +2 Units of Food (million) Economics for Business - IFD -L1 20

3. Opportunitycost Opportunity Cost Vs FinancialCost Financial accounts do not usually reflect opportunitycost. Accountant’s Profit Economist’s Profit Turnover 100,000 Turnover 100,000 Cost of sales 30,000 Cost ofsales 30,000 Gross Profit 70,000 Gross Profit 70,000 Depreciation 5,000 Depreciation 0 Opportunity cost of owner’s time 40,000 Other costs 30,000 Other costs 30,000 Net profit 35,000 Net profit Nil Economics for Business - IFD -L1 21

4. The nature ofprofit Normal profit is the opportunity cost of The firm makes enterprise. supernormal profit by generating revenues which exceeds allcosts, Super Normal Normal Loss including the Profit Profit opportunity cost ofthe entrepreneur. Budget 1 Budget 2 Budget 3 £000 £000 £000 Sales 500 250 240 (-)Cost 350 200 195 Accounting Profit 150 50 45 (-) Opportunity cost to Entrepreneur 50 50 50 Economic Profit/Loss 100 0 (5) Economics for Business - IFD -L1 22

5. Rational Economic Behaviour Rational economic behaviour is making economic decisions by carefully weighing up or measuringthe costs and benefits of different courses ofaction. Economic agents (consumers, firms and government) make their decisions when, Economics for Business - IFD -L1 23

6. Three basic economicproblems What to produce and in what quantities ? 1 What goods and services should be produced, and in what quantities, using the scarce resources at their disposal. How andwhere to produce ? 2 Decide upon the methods of production and combination of resources to be used (labour intensive or capital intensive) and the locations in which production isto be sited. Whom toproduce? 3 Decide how to distribute or share the output of goods and services we have produced among the population. Economics for Business - IFD -L1 24

ECONOMICS FOR BUSINESS Economics for Business - IFD -L1 24

Scope 1. Alternative Economic Systems 2. The Free Market Economic System 3. The Planned Economic System 4. The Mixed Economic System 5. Economic Growth 6. Welfare Economics Economics for Business - IFD -L1