Fiches Eco for Business PDF

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Felix Ehrlich-Adám EC1310 – Economics for Business Topic 1 - Business in a Competitive Market • Importance of a firm’s market environment o Internal environment: employees, finance o External environment: laws, culture, exchange rates • Influence on internal environment, 14/10/2015 but not external,...

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Felix&Ehrlich-Adám&

EC1310&–&Economics&for&Business& & Topic&1&-&Business&in&a&Competitive&Market& & • Importance&of&a&firm’s&market&environment& o Internal&environment:&employees,&finance& o External&environment:&laws,&culture,&exchange&rates& • Influence& on& internal& environment,& but& not& external,& because& they& are& unpredictable& à& ex:&England&out&of&Rugby&World&Cup&à&less&people&in&pubs&and& bars,&less&money&in&media&(advertising)& • Businesses&are&affected&by&general&changes&in&the&world&à&how&can&they&prepare& for&them?& • Central&economic&problem&and&its&relevance& • Two&sides&to&the&story&of&markets&=&free&market&economy&(theoretically)& o Demand& o Supply& • Price& mechanism& depends& upon& the& involvement& of& government& à& ex:& Milk& production&and&prices&are®ulated&in&EU&à&globalisation&created&a&new&world& market&=&local&milk&producers&now&compete&with&other&world&suppliers&& • In& some& branches& of&the&market& the& demand& does& not& grow& with& the& growth& of& wealth&(food&especially)&à&you&won’t&eat&more&after&a&wage&raise&(in&developed& countries)& & The&Demand&Curve& & • The& Demand& Curve& =& looking& at& the& relationship& of& two& variables& à& price& and& quantity&of&a&product&(downward&slope)& Market demand for potatoes (monthly)

The demand curve: The demand for potatoes (monthly)

(pence per kg)

(2) Tracey's demand

(3) Darren's demand

(4) Total market demand

(kg)

(kg)

(tonnes: 000s)

A

20

28

16

700

B

40

15

11

500

C

60

5

9

350

D

80

1

7

200

E

100

0

6

100

Price (pence per kg)

(1) Price

Point Price Market demand (pence per kg) (tonnes 000s)

E

100

D 80

C

60

A

20

700

B C

40 60

500 350

D

80

E

100

200 100

B 40

A 20

Demand 0 0

• • •

&

100

200

300 400 500 600 Quantity (tonnes: 000s)

700

800

Law&of&demand:&Low&price&à&higher&demand,&high&price&à&lower&demand& Real& income& =& depends& on& the& prices& à& when& prices& decrease& and& my& income& stays&the&same&I&can&buy&more&than&before&(increase&of&my&real&income)& Movements&along&and&shifts&in&the&demand&curve:& o Change&in&price&à&movement&along&the&D&curve& o Change&in&any&other&determinant&of&demand&à&shift&in&D&curve:&increase& in&demand&=&rightward&shift,&decrease&in&demand&=&leftward&shift& 1

Felix&Ehrlich-Adám& • •

Reasons&for&an&increase&in&demand:&tastes&shift&towards&this&product,&rise&in&price& of&substitute&goods,&fall&in&price&of&complimentary&goods,&rise&in&income& Reasons&for&a&decrease&in&demand:&fall&in&price&of&substitute&goods,&rise&in&price&of& a&complimentary&good&

& & & The& increase& of& demand& without& the& change& of& price& causes& the& curve& to& shift& to& the& right& =& the& quantity& demanded& is& higher& with&the&same&price& & & & & & & & & & Reasons&for&the&downward&sloping&of&the&demand&curve:& & • Marginal&utility&theory&(=&satisfaction/happiness&of&customers,&measured&by&the& price&you&would& be&ready&to& pay&for&it)& à& the&more&people&consume&a&product,& the&less&they&want&to&pay&for&it& • Income& effect& =& assume& income& is& fixed& –& if& a& price& falls,& real& income& goes& up,& therefore&peopl&can&buy&more&and&demand&goes&up& • Substitution&effect&=&when&the&price&an&alternative&(substitute&good)&rises,&then&it& becomes&relatively&more&expensive.&People&will&move&to&th&cheaper&product& & Normal&product&=&any&good&for&which&demand&increases&when&income&increases& Inferior&product&=&increases&in&demand&when&income&decreases& Giffen&good&=&a&good&people&consumer&more&as&the&price&rises&and&vice&versa& & • The&average&revenue&=&the&price& • The&marginal&revenue&=&the&difference&between&the&total&revenues&if&you&increase& the&quantity&you&sell&by&one&extra&unit.&It&is&the&revenue&generated&from&the&sale& of&this&extra&unit& & Demand&functions& & Qd&=&a&–&bP&+&eY&+&dPs&–&ePc& & a,b,c,d,e&à&factors&that&change&the&other&variables&(any&number)& P&=&Price,&Y&=&Income,&Ps&=&substitute&good,&Pc&=&complimentary&good…& +&means&that&if&this&number&goes&up,&Q&is&going&up;&-&means&that&if&this&number&goes&up,&Q& goes&down& & &

2

Felix&Ehrlich-Adám& • •

Substitute&good&=&(close)&alternative&of&the&product&à&risk&of&substitution& Complementary& good& =& a& good& that& is& interrelated& with& another& one& (cars& and& tyres).&Demand&for&one&generates&demand&for&the&other&

& Price&Elasticity&of&Demand& & • Price&elasticity&of&demand&=&the&responsiveness&of&demand&to&a&change&in&price& & Percentage change in market demand for a product & Percentage change in market price for a product & &

• • •

Elastic&demand&=&if&demand&is&(price)&elastic,&then&any&change&in&price&will&cause& the&quantity&demanded&to&change&proportionally&more&(>1)& Inelastic&demand&=&if&demand&is&(price)&inelastic,&then&any&change&will&cause&the& quantity&demanded&to&change&by&a&proportionally&smaller&amount&(1&that& makes&them&close&substitutes.&If&the&result&is&negative&they&are&complimentary,&if& it&is&...