SOLUTION: Business Economics | My Assignment Tutor

LSMEBSc (Hons) Business Management Level 4Business EconomicsWeek 1 & 2Aim of the module The aim is to show understanding of how marketeconomies work as a key management skill. The moduleconsiders the two main branches of economics; howindividual markets operate (microeconomics), and howeconomies operate at the aggregate level(macroeconomics).Learning OutcomesBy the end of the module you will have: Understand how changes in the economy affect business decisions andthe behaviour of firms. Discuss the operation of a market and how market structure influences afirm’s production and strategic decisions. Explain how market imperfections and market failure, particularly in labourand financial products, affect entrepreneurial activity. Interpret how government economic policies shape business strategy anddecisions made by management.Assessment Method, Weight & Deadlines Assignment 1 – (Essay) 2000 words +/- 10% Total Weighting: 50% Intended Learning Outcomes: 1 and 2 Assignment 2 – (Case study) 2000 words +/- 10% Total Weighting: 50% Intended Learning Outcomes: 3 and 4Learning Outcome 1 Understand how changes in the economy affectbusiness decisions and the behaviour of firms.What is BusinessFor-ProfitMoney motiveNot-for-profitSocial serviceCategories of BusinessGoods-producingServicesWhat is Economics Economics is defined “as a social science which coversthe actions of individuals and groups of individuals in theprocess of producing, exchanging and consuming ofgoods and services to achieve optimization of resourceuse” Production Decisions Exchange Decisions Consumption DecisionsAccording to Lord Robins view economics as a sciencewhich studies human behaviour as a relationship betweenends and scarce means which have alternative uses”.Business Economics This subject deals with decision making and forward planning inuncertainty Also integrates economic theory with business practice forfacilitating decision-making and forward planning by management. Again, it deals with the application of various economic theories,principles, concepts and techniques to business management tosolve business and management problems. According to Spencer and Siegelman Business Economics is theintegration of economic theory with business practice for thepurpose of facilitating decision making and forward planning bymanagement”.ApplicationUse of optimum techniques to improveorganizational decisionsUnderstanding individual and market demanddecisions to forecast demandAnalyse cost and supply structure to understandsupply decisionsUnderstanding marketsUnderstanding external factors likeunemployment, inflationQuick CheckEconomics by Lord Robison said it is ascience which studies human behavior asa relationship between ends and scarcemeans which have alternative usesWhat is ends in economics?How does ends links with scarce means?Link alternative uses to scarce meansBusiness EnvironmentWhat do you understand by business environment The environment of any organization is “ the aggregateof all conditions, events and influences that surroundand affect it.”Characteristics of Business Environment: Complex Dynamic Multi-faceted Far- reaching impactTypes of Business EnvironmentInternal EnvironmentExternal EnvironmentMicro environmentMacro environmentExternal EnvironmentIncludes all factors outside the organizationwhich provide opportunities or pose threats tothe organizationUncontrollable factorsConsists of Micro and Macro environmentMicro EnvironmentThese are factors in a company’s immediateenvironment that affect the performance of thecompany.Micro EnvironmentSuppliers Customers Marketing Intermediaries Competitors Publics Financial CommunityQuick CheckThe micro environmental external factorinfluences business operationsWhat is your opinion of how competitors,suppliers, customers, financial institutionsand marketing intermediaries influencesbusiness operationsTypical Micro EnvironmentMacro EnvironmentIt comprises general trends and forces that maynot immediately affect the organization butsooner or later will alter the way organizationoperates.PESTEL analysis is used widely to structureanalysis of a company’s external environment.PESTEL is an acronym for the political, economic,sociocultural, technological, environmental,and legal context(s) in which a companyoperatesMacro EnvironmentPolitical Factor How stable is the political environment? What are local taxation policies and how do theseaffect your business? Is the government involved in trading agreements suchas EU, NAFTA, ASEAN, or others? What are the foreign-trade regulations? What are the social-welfare policies?Economic Factor What are current and projected interest rates? What is the level of inflation, what is it projected to be, and howdoes this projection reflect the growth of your market? What are local employment levels per capita and how are theychanging? What are the long-term prospects for gross domestic product (GDP)per capita and so on? What are exchange rates between critical markets and how willthey affect production and distribution of your goods?Economic FactorThe survival & success of a business enterprise is finally decidedby the economic environment & various market conditions.The important external factors that affect the economicenvironment of a business are as follows: Economic conditions Economic policies Economic growth Interest rates Currency exchange rates.Social Factor What are local lifestyle trends? What are the current demographics and how are theychanging? What is the level and distribution of education and income? What are the dominant local religions and what influencedo they have on consumer attitudes and opinions? What is the level of consumerism and what are popularattitudes toward it? What pending legislation affects corporate social policies(e.g., domestic-partner benefits or maternity/paternity What are the attitudes toward work and leisure?Socio-Cultural FactorIt is very comprehensive because it may include the totalsocial factors within which an organisation operates. Socio-cultural environment may include expectationsof the society from business, attitudes of societytowards business & its management, views towards achievement of work, views towards structure, responsibility & organisationalpositions, views towards customs, & labour mobility & level ofeducationTechnological Factor What is the level of research funding in government andindustry and are those levels changing? What is the government and industry’s level of interestand focus on technology? How mature is the technology? What is the status of intellectual-property issues in thelocal environment? Are potentially disruptive technologies in adjacentindustries creeping in at the edges of the focal industryTechnological factorBusiness has to adopt technological changes from time totime. Every business enterprise has two basic functionsi.e., Marketing & Innovation.Technological environment also includes research basedecisions.The fast changes in technology also create problems forenterprises as these render plants and productsobsolete quicklyEnvironmental Factor What are local environmental issues? Are there any pending ecological or environmentalissues relevant to your industry? How do the activities of international pressure groups(e.g., Greenpeace, Earth First, PETA) affect yourbusiness? Are there environmental-protection laws? What are the regulations regarding waste disposal andenergy consumption?Environmental factorIt includes geographical & ecological factors. Almost everyaspect of business depends upon natural environment. Manufacturing depends on physical inputs. Mining depends on nature Agriculture depends on nature. Trade between two regions depends on geographicalfactors. Topographical factors may affect the demand pattern.Legal FactorWhat are the regulations regarding monopoliesand private property?Does intellectual property have legalprotections?Are there relevant consumer laws?What is the status of employment, health andsafety, & product-safety laws?Quick CheckThe macro environmental external factorsis best explained with PESTLE toolIn your opinion how does the politicalfactor, economic factor, socio-culturalfactor technological factor andenvironmental affects business operationsThinking like an EconomistEconomists play two roles:a. Scientists: try to explain the world by usingscientific method encourage developmentand testing theories about how the worldworksb. Policy advisors: try to improve itAssumptions and Models Assumptions simplify the complex world, and make it easier tounderstand Example: To study international trade, assume there are only twocountries and two goods It is unrealistic, but simple, but simple to learn and gives usefulinsights about the real worldModel: This is a highly simplified representation of a more complicatedreality. Economist use models to study economic issuesSome Familiar models A road mapSome familiar modelsA model of humananatomy from highschool biology classSome familiar models A model airplaneSome familiar models The model teeth at the dentist’s officeOur First Model:The Circular-Flow DiagramThe Circular-Flow Diagram: a visual model ofthe economy, shows how pounds flow throughmarkets among households and firmsTwo types of “actors”:householdsfirmsTwo markets:the market for goods and servicesthe market for “factors of production”Factors of ProductionFactors of production: the resources theeconomy uses to produce goods & services,includinglaborlandcapital (buildings & machines used inproduction)FIGURE 1: The Circular-Flow DiagramHouseholds: Own the factors of production,sell/rent them to firms for income Buy and consume goods & serviceFirms: Buy/hire factors of production,use them to produce goods and services Sell goods & servicesThe Circular-Flow DiagramOur Second Model:The Production Possibilities Frontier The Production Possibilities Frontier (PPF):A graph that shows the combinations of two goodseconomy can possibly produce given the availableresources and available technology Example:Two goods: computers and wheatOne resource: labor (measured in hours)Economy has 50,000 labor hours per monthavailable for production.Microeconomics and MacroeconomicsMicroeconomicsIs the study of how households and firms makedecisions and how they interact in markets.MacroeconomicsIs the study of economy-wide phenomena,including inflation, unemployment, andeconomic growth.These two branches of economics are closelyintertwined, yet distinct – they address differentquestions.The Economist as Policy Advisor As scientists, economists make positive statements whichattempt to describe the world as it is Example: Prices rise when the government increases thequantity of money As policy advisors, economists make normative statementswhich attempt to prescribe how the world should be Example: The government should print less money. A tax cut isneeded to stimulate the economy An increase in the price of Aerial washing liquid will cause anincrease in consumer demand for Tesco washing liquid Positive statements can be confirmed or refuted, whilenormative statements cannot Gov’t employs many economists for policy advice. E.g., theU.K Prime Minister has a Council of Economic Advisors,Fundamental Economic Problem The fundamental economic problem is the issue ofscarcity and how best to produce and distributethese scare resources. Scarcity means there is a finite supply of goods and rawmaterials. Finite resources mean they are limited and can run out. Unlimited wants means that there is no end to thequantity of goods and services people would like toconsume. Because of unlimited wants – People would like toconsume more than it is possible to produce (scarcity)Fundamental Economic ProblemEconomic Problem of ScarcityBecause of scarcity, economics is concerned with: What to produce? How to produce? For whom?Examples of Fundamental EconomicProblemConsumersHouseholds have limited income and they needto decide how to spend their finite income.For example, with an annual income of £20,000,a household may need to spend £10,000 a yearon rent, council tax and utility bills.This leaves £10,000 for deciding which otherfood, clothes, transport and other goods topurchase.Workers Householders will also face decisions on how much to work. For example, working overtime at the weekend will give themextra income to spend, but less leisure time to enjoy it. A worker may also wish to spend more time in learning newskills and qualifications. This may limit their earning power inthe short-term, but enable a greater earning power in thelong-term. For example, at 18 a student could go straight into work orthey could go to university where they will hope to gain adegree and more earning power in the long-term.Producers A producer needs to remain profitable (revenue higher than costs). So it will need to produce the goods which are in high demand andrespond to changing demands and buying habits of consumers for example, switching to online sales as the high street declines. Producers will need to constantly ask the best way of producinggoods. For example, purchasing new machines can increase productivityand enable the firms to produce the goods at a lower cost. This isimportant for fast-changing industries where new technology isfrequently reducing costs of production. Without firms adapting to how they produce, they can becomeunprofitable.Government The government has finite resources and its spendingpower is limited by the amount of tax that they cancollect. The government needs to decide how they collect taxand then they need to decide whom they spend moneyon. For example, the government may wish to cut benefitsto those on low income to increase incentives to work. However, cutting benefits will increase inequality andrelative poverty.Quick CheckWhat is fundamental economic problemIn your opinion discuss the fundamentaleconomic problem of scarcityOn WorkerFirms andGovernmentTheory of Firm BehaviorThe theory of the firm is the microeconomicconcept states that a firm exists and makedecisions to maximize profits.The theory holds that the overall nature ofcompanies is to maximize profitsThe firm’s goal is to determine pricing anddemand within the market and allocateresources to maximize net profits.Understanding the theory of the firm &Behavior In the theory of the firm, the behavior of any company issaid to be driven by profit maximization. The theory governs decision making in a variety of areasincluding resource allocation, production techniques,pricing adjustments, and the volume of production. Behavioral Theories of the Firm is an examination of theinner motives and direction of firms, using a range of models and different assumptionsabout those who work in a firm.Behavior of Firm In the real world managers and owners may behave quitedifferently. Behavioral Theories of the Firm includeSize of a firm/prestige. Some managers may simply aim for working in a big and seeminglysuccessful firm which gives more prestige and honor. Managers may be motivated to prove their projects are successful. This can cause firms to pursue goals which have a high profile. It may explain why firms persist with projects which may not bedesirable. There is a cost to letting go of past decisions.Profit Satisfying Owners wish to maximize profits, but, workers don’t. Because ownersdon’t have perfect information, workers and managers are able to get away with decisions thatdon’t maximize profits.Cooperative/ethical concern Some firms may be set up with very different objectives to thetraditional model of profit maximization. In co-operative firms, the goal is to maximize the welfare of allstakeholders. In this model, ideas of altruism, concern for theenvironment and workers welfare may explain many decisions. The firm may also be set up with specific charitable aims.Human Emotions/bias The economic model of a rational economicman assumes that individuals seek to maximize theireconomic welfare with rational choice. In the real world, we are influenced by human emotion.This could be discrimination based on bias andprejudice. Or it could be irrational exuberance and the perceivedwisdom of following the crowd. For example, in asset bubbles, mortgage companiescan get caught up in relaxing their lending criteria andlending mortgages to those at risk of default.References Babatunde, B.O., and Adebisi, A.O. (2012) Strategic Environmental Scanningand Organization Performance in a Competitive Business Environment:Economic Insights, Trends and Challenges, Vol. LXIV, (1): PP 24-34 BPP (2012) Essentials of Business Environment, BPP Learning Media BPP (2013) Essentials of Business Environment, Revised ed. BPP Learning Media Dess G.G, Lumpkin G.T, and Elsner A.B (2010) Strategic Management: text andcases, 5th ed. USA, McGraw-Hill Irwin Johnson, G., and Scholes, K., (1997), Exploring Corporate Strategy, 4th ed., NewYork, Prentice Hall CIMA (2007) Strategic Analysis Tools; Topic Gateway series No 34, Available atwww.cimaglobal.com. Retrieved 11/1/2020Thank You