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Economics for Business
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MSc in E&M: Joint Program of SUFE and
CUHK
Lecturer: Dr Hongjun Zhong
钟鸿钧博士
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上海财经大学经济学院助理教授
牛津大学纳菲尔德学院博士后研究员
Time: Tuesday 8:30-11:30
Avenue: Room ???
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OHT 0.1
Textbook
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Principles of Business Economics
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By Joseph G. Nellis and David Parker
Principles of Economics
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By Gregory Mankiw
中文版，曼昆
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Other Useful Resources
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English magazine
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The Economists
Business Week
Chinese magazine/newspaper
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《财经》
21 世纪经济报道
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OHT 0.2
Contents
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Business economics: an overview
The analysis of consumer demand
The analysis of production costs
Analysis of the firm’s supply decision
Demand, supply and price determination
Analysis of perfectly competitive markets
Analysis of monopoly markets
Analysis of monopolistically competitive markets
Oligopoly
Managerial objectives and the firm
Understanding competitive strategy
Understanding pricing strategies
Understanding the market for labour
Understanding the market for capital
Understanding the market for natural resources
Government and business
Business and economic forecasting
Business economics - a checklist for managers
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Lecture 1
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Business economics: an overview
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OHT 1.1
Ch1: Business economics: an overview
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Microeconomic Environment
 deals with the operation of the firm in its immediate market
 involves determination of prices, revenues, costs,
employment, etc
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Macroeconomic Environment
 deals with the general economic conditions of the larger
economy of which each firm forms a part.
 involves the impact of political, legal and economic
decisions, both nationally and internationally.
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OHT 1.2
Figure 1.1 The business environment
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Learning outcomes
OHT 1.3A
This chapter will help you to:
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Understand the core terms and concepts used in
business economics.
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Appreciate the nature of a firm’s production
decisions with respect to what to produce, how
to produce and for whom to produce.
•
Employ economic reasoning when making
choices in the use of resources and to recognise
the importance of diminishing returns.
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OHT 1.3B
•
Comprehend the nature of marginal analysis in the
context of business and consumer decisions.
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Recognise the different objectives which different firms
may pursue and the consequent impact on price and
output decisions.
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Distinguish between the short run and long run in
business economics.
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Understand the nature of different competitive structures
in market economies ranging from perfectly competitive
to monopoly situations.
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OHT 1.3C
•
Analyse the external environment and internal
capabilities of a firm using core techniques in business
economics and thereby understand the forces shaping
the firm’s competitive environment.
•
Appreciate the choice of generic strategies facing firms
in terms of cost leadership, differentiation and focus
options.
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OHT 1.4A
Basic concepts in business economics
There are a number of basic concepts which lie at the heart
of business economics and managerial decision-making.The
most important of these are the following:
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Resource allocation.
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Opportunity cost.
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Diminishing marginal returns.
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Marginal analysis.
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Business objectives.
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OHT 1.4B
Basic concepts in business economics
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Time dimension.
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Economic efficiency and equity.
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Risk and uncertainty.
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Externalities.
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Discounting.
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Property rights.
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Resource allocation
OHT 1.5
Economics is concerned with the efficient allocation of scarce
resources. When purchasing raw materials,employing labour
and undertaking investment decisions,the manager is involved
in resource allocation.Decisions need to be made at three
levels, namely:
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What goods and services to produce with the available
resources,
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How to combine the available resources to produce
different types of goods and services;and
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For whom the different goods and services are to be
supplied.
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OHT 1.6
Figure 1.2 The production decision
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OHT 1.7
The opportunity cost of any activity is what we give up
when we make a choice.In other words,it is the loss of the
opportunity to pursue the most attractive alternative given
the same time and resources.
A production possibility curve shows the maximum output
of two goods or services that can be produced given the
current level of resources available and assuming
maximum efficiency in production.
The concept of diminishing marginal returns refers to the
situation whereby as we apply more of one input
(e.g.labour) to another input (e.g.capital or land),then after
some point the resulting increase in output becomes
smaller and smaller.
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OHT 1.8
Figure 1.3 Production possibility curve
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OHT 1.9
Marginal Analysis
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Marginal utility is the amount by which consumer well-being
or total utility changes when the consumption of a good or
service changes by one unit.
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Marginal product is the amount by which total product
changes due to a one unit change in the amount of input
used.
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Marginal revenue is the change in total revenue which
results from increasing the quantity sold by one unit.
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Marginal cost is the change in total cost which results from
increasing the quantity produced by one unit.
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Business Objectives
OHT 1.10
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Profit maximisation
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The achievement of personal goals,involving personal
security and reward,status, degree of discretionary power,etc.
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Growth targets for the company in terms of scale of
output,market share,geographical market,annual extension of
physical capacity,size of departments or size of the labour
force,etc.
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Maximisation of sales revenue.
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Pursuit of the interests of all stakeholders including
employees,customers,suppliers, etc.as well as shareholders.
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OHT 1.11
Time dimension
The short run represents the operating period of
the business in which at least one factor of
production is fixed in supply.
The long run represents the planning horizon for
the business in which all factors of production may
be varied.
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OHT 1.12
Discounting
The concept of discounting is concerned with the fact that
costs and benefits arising in future years are worth less to us
than costs and benefits arising today.
Discounting formula
St
NPV = 
1  r t
where NPV is the net present value of the cash flow over the
life of the project, S is the future sum, r is the rate of interest
or discount rate, and t the number of years elapsing before
the future sum is received.
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OHT 1.13
The competitive environment & market
structure
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Perfectly competitive markets.
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Monopolistically competitive markets.
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Oligopolistic competition.
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Monopoly.
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OHT 1.14
Defining the nature of the market
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The number and size distribution of the buyers
and sellers in the market.
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The degree of product differentiation that
exists.
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The severity of the barriers to entry and exit
that face potential new entrants to the market.
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OHT 1.15
Figure 1.4 Characteristics of markets
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OHT 1.16
Porter’s Five Forces Model
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The bargaining power of buyers: how much leverage buyers have
in determining the price.
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The bargaining power of (input) suppliers: the competition among
suppliers which determines the price of inputs to the firm.
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The threat from potential new entrants into the market: the degree
of ‘market contestability 弛or the extent to which firms are able to
enter the market and contest for consumers.
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The threat from substitute products or services e.g. mobile
telephones for fixed-line services.
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The degree of competition (rivalry)in the market.
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OHT 1.17
Figure 1.5 Forces shaping the competitive environment
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OHT 1.18
Cost positioning of the firm
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Cost leadership.
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Differentiation.
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Focus.
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OHT 1.19
Figure 1.6 Strategy and the competitive environment - an overview
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OHT 1.20A
Key learning points
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Microeconomics deals with the operation of the firm in
its immediate market, involving the determination of its
prices, revenues,costs and input employment levels.
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Macroeconomics is concerned with the interactions in
the economy as a whole of which each firm forms a part.
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Resource allocation is concerned with decisions
regarding what, how , and for whom to produce.In a
market economy the price mechanism is the major
determinant of these decisions.
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Key learning points
OHT 1.20B
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The opportunity cost of any activity is the loss of the
opportunity to pursue the most attractive alternative
given the same resources.
•
A production possibility curve shows the maximum
output that can be produced given the current level of
resources available and assuming maximum efficiency
in production.
•
Diminishing marginal returns refers to the situation
whereby,as we apply more of one input to a fixed
amount of another input,then after some point the
resulting increase in output becomes smaller and
smaller.
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OHT 1.20C
Key learning points
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Marginal analysis reminds us that most choices involve relatively
small (incremental)increases or decreases in production (or
consumption).
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The short run represents the operating period of the business in
which at least one factor of production is fixed in supply.
•
The long run represents the planning horizon of the business in
which all factors of production may be varied in order to alter the
scale of production.
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Externalities represent wider outcomes of the market mechanism
and arise when some of the benefits or costs of consuming a good
or service spill over to others.
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Key learning points
OHT 1.20D
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The concept of discounting is concerned with the fact that costs
and benefits arising in future years are worth less to us than costs
and benefits arising today.
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Property rights are the rights to own,benefit from and transfer
assets (tangible or intangible)in market economies
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Perfectly competitive markets are made up of numerous small
sellers each offering identical products with complete freedom of
entry and exit. Each firm is a price-taker rather than a pricemaker
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In monopolistically competitive markets there are many sellers
but there is also some degree of product differentiation.This form
of market structure is also sometimes referred to as imperfectly
competitive.
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Key learning points
OHT 1.20E
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Oligopolistic competition arises where there exists a small number of
relatively large firms which are constantly aware of each other’s actions
and reactions regarding price and non-price competition.
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A monopoly exists where the market is supplied by one firm producing a
product for which there is no close substitute. A monopolist, therefore,
tends to be a price-maker, in that the firm is able to set a price in the
face of little or no competition. In practice, the term monopoly is often
applied also to markets that are dominated by one firm.
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Porter’s Five Forces Model describes the competitive environment as
being determined by the power of buyers, the power of suppliers, the
threat from potential new entrants, the threat from substitutes and the
degree of rivalry in the market.
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OHT 1.20F
Key learning points
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The external environment of business is determined by
changes in political, economic, social and technological
factors, i.e.PEST influences.
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A SWOT analysis involves consideration of a firm’s internal
strengths and weaknesses in the context of the opportunities
and threats which it faces.
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Generic strategies refer to the choice between pursuing a
market strategy based on cost leadership, differentiation or
focus .
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