Presentation on theme: "economics for business"— Presentation transcript:
1 economics for business chris mulhearn and howard r. vane
2 Lecture 1: What is economics? Not done economics before?Don’t worry, it’s all here & you’ll probably do better than those that haveSo what’s it about?Inflation, profit, markets, fiscal policy, quantitative easing?Well, yes, these are part of itBut economics is really about how societies organize the production and consumption of goods and services – like mobile phones, insurance, education, medicine & health services and so on.
3 The basic economic questions We can distil the essence of this task into three memorable phrases:What goods and services should a society produce?How should it produce them?For whom should they be produced?Every society, rich or poor, has to answer these questions in deciding how to use – allocate – the scarce resources it has at its disposal. We’ll come back to scarcity later.Let’s start with the what? question– how does this work for industrial economies like our own and the rest of the G7?G7 = US, Japan, Germany, UK, France, Italy, Canada
4 Fewer goods More services What do industrial countries produce?Produced in some industrial countriesProduced in most industrial countries but in uneven quantitiesProduced in industrial countries in declining quantitiesProduced in all industrial countries in large quantitiesCarsTourist servicesFootwear and clothingEducation servicesComputersBooks, magazinesSports goodsHealth careMobile phonesFeature filmsToysMobile phone servicesFewer goodsMore servicesCountries like China and India produce more of almost everything; they’re developing, maturing…working out what they’re good at
5 How are goods & services produced? There are two main issues here:1. First the technicalities of production } technology changesIn 2002 there were 44 million physical singles sold in the UK & no digital salesIn 2009 there were 1.5 million physical singles & 116 million downloaded salesOther examples of threats & opportunities in production – newspapers, communication, shoppingAs technology changes, markets change
6 How are goods & services produced? (cont.) 2. The extent to which governments involve themselves in productionWhen UK citizens fall ill most use the NHSHow are health services in the UK predominantly organized?Via the state – collective provisionThe US spends a bigger proportion of GDP on health care than we do & may offer the most cutting edge treatments for those that can afford itBut 15 per cent of Americans have no health insurance to cover the cost of care should they fall ill – some undoubtedly suffer and even die as a consequenceSo – where should the boundaries between the market and the state lie in health care, education, banking, car making, etc.?
7 For whom are goods & services produced? This is often closely linked to the How questionIn the US, President Obama is controversially trying to change the How question in US healthcare; he’s trying to partly collectivize healthcare to make it fairerBut in changing the How question he’s really after the For whom questionWhere the free market provides goods & services, access depends on ability to payWhen the state gets involved, access is decided by other criteria such as, in the case of medicine, clinical need
8 Positive & normative economics So which is better, private health care or collective provision? This is a normative issueYou may think fairness is important so argue for equality of accessThis is a positive response (positive meaning factually-based) to your normative preferenceOr, you might think that maximising incentives in medicine is more important because it raises efficiency, so the positive solution to your normative preference might be private health careIf you think fairness & incentives are important your positive solution might be a mixed system
9 What, how, for whom: understanding roles of firms, consumers & government Firms, consumers and government interact through marketsA market is simply a nexus for these three groupsVirtually everything we produce and consume is delivered through some kind of market process.
10 What, how, for whom: understanding the role of firms The firm’s purpose is to generate profitFirms need to ask themselves, what, how & for whom in the market they serveEXAMPLE: Until about 10 years ago Tesco was a large traditional UK grocerWhat – foodHow – in large UK superstores (just 2 abroad)For whom – British consumersBut to an extent this was a saturated & over-competitive market; what could Tesco do to better its medium-term prospects?
11 Tesco’s planSell clothing, computers & electrical goods, not just foodReview its UK retail outletsBecome much more internationally-orientatedDevelop a new online businessIts answers to our three questions began to look radically differentWhat – food & non-food itemsHow – in different kinds of store & location in the UK and overseas, & over the InternetFor whom – a wider & more differentiated UK market and an increasingly global customer base.
12 Did Tesco’s plan work out? Its 450 traditional superstores are complemented by 170 Tesco Metro city centre stores & 1,000 Tesco Express shops - Tesco has carved out an entirely new ‘local’ marketIt has 2,200 stores in Europe, North America & the Far EastMore than 1 million active online customers & has extended its online activities into financial services, insurance & mobile phone servicesTesco has made effective decisions about resource allocation in a competitive market environmentWhat happens when firms don’t do this? They go bust!
13 What, how, for whom: understanding the role of consumers A key concept here is consumer sovereigntyIt places consumers as the drivers of what, how & for whomConsumer sovereignty indicates that consumer preferences are dominant in marketsWhen consumers express a preference for a good or service by buying it in big quantities, more of it is produced, and firms deliver improvements to cement their place in the consumer’s mindPositive examples?Branded coffee shops; portable communications; green credentialsNegative examples?Newspapers; some traditional retailers
14 What, how, for whom: understanding the role of government Few markets are wholly free in that the government absences itself from them entirelyWe live in a mixed economyThere are 2 kinds of state intervention in markets:The state may directly produce goods & services itselfe.g. the UK’s NHS; social housing provision in the NetherlandsThe state may regulate markets in some way. e.g. subsidies paid to European farmers; fines imposed on firms that pollute; the provision of health inspectors to keep restaurants up to standard
15 The mixed economy: some examples Does the government have any say over your choice of shoes?Actually, yesSince 2006 the EU has protected European shoe producers by imposing tariffs on shoes imported from China and VietnamChinese shoes have a tax of 16.5%; those from Vietnam are taxed at 10%This pushes up the price of imported shoes & warps your freedom of choiceBut it saves shoe industry jobs in Italy, Portugal and Eastern Europe
16 The mixed economy: some examples (cont.) What about mobile phone services?More than 80 million prepay & contract mobile subscriptions in the UK – a quarter of these are 3GIn 2000 the government arranged the largest ever auction in the UKWhat was it selling? Air! Actually, licenses to operate 3G technology in the UKIt made £22.5 billion from the 5 successful biddersThe government got a ton of cash & put technology in the hands of firms that had a huge incentive to use it well
17 Scarcity, choice and opportunity cost Economics concerns itself with how societies allocate their scarce resources between competing usesWhat is scarcity?In poorest countries there are unmet needs for food, shelter, clean water, medical care & education. This sounds like scarcityBut in US, which has a quarter of the world’s income, there is under-provision of health care & acute poverty and even comparatively rich Americans want better houses or carsSo, all resources must be considered scarce – given the vast range of competing uses to which they can be putAll societies have to address the what, how & for whomquestions
18 Scarcity, choice and opportunity cost (cont.) Opportunity cost: cost of a resource commitment expressed in terms of the best foregone alternativeEnvironmental protection provides an exampleIn the West we’re increasingly focused on the environment but in poorer countries there is less regulation. Why; don’t they care?We could increase our GDP by allowing firms to pollute – they could produce things more cheaply. Result – a little more output but a lot more pollutionIn poorer societies more pollution may mean more output which is very highly valued as it provides the dollars to pay for food, medicine and technology; the decision to pollute can be understood in opportunity cost terms
19 Microeconomics Macroeconomics Microeconomics, macroeconomics & businessMicroeconomicsMacroeconomicsEconomic issues as they apply to individualsIndividual firms, consumers, industries, workers & marketsWhy are there multinational car firms but no multinational barbers?Why are teachers paid a lot less than X Factor judges?Micro questionsConsiders the behaviour & performance of the economy as a wholeWhy does inflation matter?What causes unemployment?Why are interest rates presently set at their lowest ever level?Macro questions
20 Interest ratesInterest rates are a key tool of macroeconomic policyPresently they’re set at a record low of 0.5 per centWhy?As a response to the worst recession since the Great Depression of the 1930sLower interest rates are intended to encourage economic activity – how?In the past rates have been much higher – 17 per cent in the early 1980s
22 Interest rates (cont.)Why set interest rates higher?Wouldn’t this discourage firms from borrowing to invest & encourage consumers to save rather than spend?Well, yes, but rates may need to be set higher to confront the problem of high and rising inflationMarkets are coordinated by price signals; inflation makes them less reliableInflation in UK – recently far above government’s target of 2%Raising rates might be necessary to curb inflationary pressures but potentially disastrous for growth
24 Exchange ratesTwo simple points about exchange rates:1. Value of the pound is important to firms selling in foreign marketsIf the £ depreciates it’s easier for UK firms to sell abroadForeign residents give up less of their currency to buy pounds, so price of UK goods abroad fallsAt the rate £1 = $2 a British computer would cost $2,000 in New York. If the pound depreciates to £1 = $1.50 the computer’s price falls to $1,5002. This leads to our second point – why has the £ fallen in recent years?Lower interest rates – there’s a short-run connection here
25 Confronting the 08-09 recession What was the credit crunch?Failings in US housing marketBad debts in property & black holes in some banksAll financial institutions borrow heavily from each otherRaised concerns – were some banks insolvent?Banking essentially a micro concern BUT it posed systemic risk to the economyGovernments stepped in to shore up the banksWhat did the government do?Interest rate cutsA falling £VAT cutQuantitative easingCar scrappage schemeBank nationalizations & liquidity support
26 Confronting the 08-09 recession (cont.) Another issue…If we excuse bad behaviour what’s the likely consequence?More of the same: Moral hazardWhat’s since changed in the banking sector? Not much?Are banks too big to fail?Should we demand that they be allowed to fail?UK government provided cash & guarantees to the banks – worth a 1/3 of national incomeGovt. nationalised Northern Rock, Bradford & Bingley, etc.Why aid the banks which behaved recklessly & not least in development of a bonus culture that rewarded excessive risk-taking?Right, systemic risk.
27 ConclusionTo understand business issues and the environments in which business operates you need to know about micro and macroeconomics.