1. BFT101 BUSINESS ECONOMICS
LESSON 1 - INTRODUCTION TO ECONOMIC CONCEPTS

2. Why Study Economics To understand the world better
You’ll begin to understand the cause of many of the things that affect your life
To gain self-confidence
You’ll lose that feeling that mysterious, inexplicable forces are shaping your life for you

3. Why Study Economics To achieve social change
You’ll gain tools to understand origins of social problems and design more effective solutions
To help prepare for other careers
You’ll discover that a wide range of careers deal with economic issues on many levels
To become an economist
You’ll begin to develop a body of knowledge that could lead you to become an economist in the future

4. How to Study Economics
Following alone in class and learning are two different things
Economics must be studied actively, not passively
What does active studying mean?
Closing the book periodically and reproducing what you have learned
Reading with a pencil in your hand and a blank sheet of paper in front of you
Listing the steps in each logical argument
Retracing the cause-and-effect steps in each model
Drawing the graphs that represent the model
Thinking about the basic principles of economics and how they relate to what you are learning

5. Economics, Scarcity, and Choice
A good definition of economics
Study of choice under conditions of scarcity
Study of how society manages its scarce resources
Scarcity
Situation in which the amount of something available is insufficient to satisfy the desire for it

6. Scarcity and Individual Choice
There are an unlimited variety of scarcities, however they are all based on two basic limitations
Scarce time
Scarce spending power
Limitations force each of us to make choices
Economists study choices we make as individuals, and consequences of those choices
Economists also study more subtle and indirect effects of individual choice on our society

7. Scarcity and Social Choice
The problem for society is a scarcity of resources
Scarcity of Labor
Time human beings spend producing goods and services
Scarcity of Capital
Something produced that is long-lasting, and used to make other things that we value
Human capital
Capital stock
Scarcity of land
Physical space on which production occurs, and the natural resources that come with it
Scarcity of entrepreneurship
Ability and willingness to combine the other resources into a productive enterprise
As a society our resources—land, labor, and capital—are insufficient to produce all the goods and services we might desire
In other words, society faces a scarcity of resources

8. Scarcity and Economics
The scarcity of resources—and the choices it forces us to make—is the source of all of the problems studied in economics
Households allocate limited income among goods and services
Business firms choices of what to produce and how much are limited by costs of production
Government agencies work with limited budgets and must carefully choose which goals to pursue
Economists study these decisions to
Explain how our economic system works
Forecast the future of our economy
Suggest ways to make that future even better

9. Microeconomics Micro Microeconomics
Micro comes from Greek word mikros, meaning “small”
Microeconomics
Study of behavior of individual households, firms, and governments
Choices they make
Interaction in specific markets
Focuses on individual parts of an economy, rather than the whole

10. Macroeconomics Macro Macroeconomics
Macro comes from Greek word, makros, meaning “large”
Macroeconomics
Study of the economy as a whole
Focuses on big picture and ignores fine details

11. Positive Economics Study of how economy works
A positive statement is one that is objective or specific and can be backed up by evidence.
Statements about how the economy works are positive statements, whether they are true or not
Accuracy of positive statements can be tested by looking at the facts—and just the facts

12. Normative Economics Study of what should be
Used to make value judgments, identify problems, and prescribe solutions
A normative statement is a value judgement and states what someone thinks ‘ought to be’.
Normative statements are subjective and influenced by personal biases, background, personal politics
Normative statements suggest what we should do about economic facts and they are based on values, cannot be proved or disproved by the facts alone

13. Examples of positive and normative statements
An example of a positive statement:
If carbon emissions were cut by 25%, air quality would improve and the number of people diagnosed with asthma would decrease significantly.
An example of a normative statement:
To clean up air quality and cut down carbon emissions by 25%, 4 x 4 vehicles should only be sold to farmers and those living in rough terrain areas. 13

14. Positive Statements
Positive statements are objective statements that can be tested, amended or rejected by referring to the available evidence. Positive economics deals with objective explanation and the testing and rejection of theories.
For example:
A fall in incomes will lead to a rise in demand for own-label supermarket foods
The rising price of crude oil on world markets will lead to an increase in cycling to work
A reduction in income tax will improve the incentives of the unemployed to find work.
A rise in average temperatures will increase the demand for sun screen products.
Higher interest rates will reduce house prices

15. Pollution is the most serious economic problem
Normative Statements
Normative statements are subjective statements rather than objective statements – i.e. they carry value judgments. For example:
Pollution is the most serious economic problem
Unemployment is more harmful than inflation
The congestion charge for drivers of petrol-guzzling cars should increase to £25
The government should increase the minimum wage to £6 per hour to reduce poverty.
The government is right to introduce a ban on smoking in public places.
The retirement age should be raised to 70 to combat the effects of our ageing population.
Resources are best allocated by allowing the market mechanism to work freely
The government should enforce minimum prices for beers and lagers sold in supermarkets and off-licences in a bid to control alcohol consumption
Normative Statements
Normative statements are subjective statements rather than objective statements – i.e. they carry value judgments. For example:
Pollution is the most serious economic problem
Unemployment is more harmful than inflation
The government is right to introduce a ban on smoking in public places.
The retirement age should be raised to 70 to combat the effects of our ageing population.
Resources are best allocated by allowing the market mechanism to work freely

16. The Methods of Economics
Economics relies heavily on modeling
Economic theories must have a well-constructed model
While most models are physical constructs
Economists use words, diagrams, and mathematical statements
What is a model?
Abstract representation of reality

17. The Art of Building Economic Models
Guiding principle of economic model building
Should be as simple as possible to accomplish its purpose
Level of detail that would be just right for one purpose will usually be too much or too little for another
Even complex models are built around a simple framework

18. How Does An Economy Work?.
Economic Systems
Economic Systems
How Does An Economy Work?.

19. Quick Review:
Take out a sheet of paper and answer the following questions:
What are Goods?
What are Services?
What are Resources?
What is Scarcity?
Nations must answer 3 basic Economic question:
What goods and services should be produced?
How should the goods and services be produced?
For who should the goods and services be produced?
The way a nation answers these questions defines their economy.

20. Economic Systems
Definition: The method used by a society to produce and distribute goods and services.
Or, How the government tells us what we can get and how to get it!
All economic systems fall into one of two broad categories:
Market (or Capitalist) System
Command (or Planned) System
No economy can be purely market or purely command
Elements of both economies are found in all systems this makes all economies mixed

21. All Economic Systems Must Consider the Following Questions:
What goods and services to produce?
How will they produce them?
Who will get them?
How much will they produce now, and how much later?
Each economic system answers these questions in a DIFFERENT WAY.

22. Types of Economic Systems
There are 4 basic types of economic systems:
1. Traditional Economy
Command (Planned/Socialist) Economy
Free Market (Capitalist) Economy
Mixed Economy

23. 1. Traditional Economy
Economic questions are answered by habits and customs (the way it has always been done)
Children work the same jobs parents worked, often farming or hunter/gatherer
Fear Change!
Ex. Eskimos, the Amish,
Pigmies, Bush People

24. 2. Command Economy The government answers the basic economic questions
Advantages: able to act quickly in emergencies, provide for all people equally
Disadvantages: Inefficient, no incentive to work hard or be creative
Ex. Communist Countries (China, Vietnam, North Korea, former
Soviet Union, Cuba)

25. 3. Free Market Economy
Economic questions are answered by individual buyers and sellers.
Supply and demand influence economy
People act out of self interest; motive for profit (money) drives the economy
Also known as FREE ENTERPRISE or CAPITALISM
Ex. The United States, Western
Europe, Japan

26. 4. Mixed Economy
Mixed Economy: No economy is pure market, pure command or pure traditional, elements of each appear in all economies, some have more elements of one economy than another.

27. Features of Free Market Economy
Economic Freedom: individuals have the right to choose
Competition: more than one producer of good/services insures choice
Private Property: individuals have the right to own their own property, including business

28. Features of Free Market Economy (cont)
Self-Interest: individuals make
decisions based on what is best for them
Voluntary Exchange: individuals may freely buy and sell goods
Profit Motive: individuals are driven by a desire to profit (make money)

29. Features of Command Economy
Government regulation of some business practices
Ex. Monopoly of electricity services (TNB)
Government limits certain choices
Ex. Cannot buy or produce certain goods/services
Government provides aid to the needy
Ex. Medicare, Medicaid, welfare

30. “Business School Pizza” in Malaysia
How would “Business School Pizza” function under different economic systems?

31. Business School Pizza in a Free Market
The owner answers the basic economic questions!
The owner determines how much cheese and pepperoni goes on the pizza
The owner determines the quality of the cheese and pepperoni
The owner sets his/her employees wages
The owner sets his/her business hours

32. “Business School Pizza” in a Command Economy
The government answers the basic economic questions
The government sets the amount of cheese and pepperoni on each pizza
The government determines quality of cheese and pepperoni
The government sets employees wages
The government sets business hours
Problem: What does the government know about pizza?

33. “Business School Pizza” in a Mixed Economy
The Government and the owner both answer the basic economic questions
The owner determines the amount of cheese and pepperoni on the pizzas; government determines the quality of cheese and pizza
The owner sets employee wages; government sets minimum wage for employees
The owner determine business hours; government determines whether the business is safe to be open or not

34. To be continued….