3a.
The Economic and Competitive Environment
3b. The National Economic Environment
ECONOMICS
1. Micro-economics: the economics of the firm, the interaction between a firm, buyers
and sellers.
2. Macro-economics: The workings of the national and international economy and the
consequences for business and consumers
Micro-economics
• Buyers and sellers come together in markets
• Buyers create demand for products and services, sellers create supply
• Microeconomics is concerned with the rules of supply and demand and their effects on
price and quantity.
Rules of demand
• Demand = quantity of a product consumers are willing and able to buy at a specific
price over a given period of time
• Demand refers to total demand from all consumers for all available output
• As price falls, demand will rise
• Rule assumes ceteris paribus
Demand curve for Cheddar cheese
Changes in demand
• What happens if:
o Consumers' available income decreases?
o Price of substitutes decreases?
o Consumer preferences change?
Shifts in demand
Rules of supply
• Supply= quantity of a product suppliers are willing and able to sell at a specific price
over a given period of time
• Supply refers to total supply from all firms for all available output
• As price rises, supply will rise
• Rule assumes ceteris paribus
Supply curve
Changes in supply
• What happens if:
o Firms' production costs rise?
o Bad weather reduces the harvest for goods?
o Production is interrupted by a strike?
Shifts in supply
Price determination
Changes in supply
Elasticity of demand
Price elasticity of demand: how does demand change when prices change?
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑑𝑒𝑚𝑎𝑛𝑑
𝑃𝑟𝑖𝑐𝑒 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑 =
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
Income elasticity of demand: how does demand change when incomes change?
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑑𝑒𝑚𝑎𝑛𝑑
Income elasticity of demand =
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑖𝑛𝑐𝑜𝑚𝑒
Elasticity of supply
Elasticity of supply: how does supply change when prices change?
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑠𝑢𝑝𝑝𝑙𝑦
Elasticity of supply =
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
Market structure
Forms of competition
• Perfect competition:
o Many buyers and sellers
o Products supplied are identical (commodities)
o No barriers to entry or exit
o Perfect market knowledge
• Monopoly
o One supplier controls the market
o Unique products
o Monopolist is price maker
• Imperfect competition
o Many suppliers and customers
o Dynamic markets, new market entrants
o Product differentiation
• Oligopoly
o Small number of sellers
o Interdependence of suppliers
o Typical of capital-insensive industries
Macro-economics
• The workings of the national economy
• The role of the government in managing the economy
• The flow of income and expenditure
• The balance of trad
The structure of the economy
Circular flow of income
The Multiplier effect
• Any increase in investment is spent many times over
• The indirect effects of such increases lead to further spending and creation of jobs
The Accelerator effect
• Changes in demand lead to more pronounced changes in the demand for capital good
Measuring the national economy - macroeconomic indicators
• Gross Domestic • Output levels
• Product • Disposable income
• Unemployment • Consumer spending
• Savings ratio • Interest rates
• Inflation • Trade balance
• Interest rates • Exchange rates
• Unemployment • Government borrowing
Macroeconomic tools
• Fiscal policy: taxation and government spending
• Monetary policy: control of the money supply through interest rates
Macroeconomic policy
• Multiple aims of government
o Maintaining employment
o Stable prices
o Economic growth
o Distribution of wealth
o Stable exchange rate
o Government borrowing
• Often these are in conflict with each other
