Issue 2: Week 1 - Business Economics and Accounting - Economics for Business
Week 1 — Business Economics and Accounting — Economics for Business
What is Business Economics and why is it important?
These are some of the questions we would be answering today.
Note: This is the first lecture of the Business Economics aspect of this course. Accounting will be considered later in the future.
Learning Objective
1. Explain the economic problem of Scarcity.
2. Explain what are the factors of production.
3. Understand the concept of opportunity cost.
4. Explain the difference between macro and microeconomics.
5. PESTEL Analysis
ECONOMICS 101
Economics helps us to recognize the difference between UNLIMITED wants and LIMITED resources. Scarcity simply refers to the gap between this UNLIMITED wants and LIMITED resources.
This is the fundamental problem of Economics.
A firm’s unlimited wants could be the desire to sell a larger product range and operate in more markets, but they are limited by the capital (shareholder’s fund) and labor(staff) they have.
Factors of Production
Factors of production are the resources people use to produce goods and services; and are the building block for every economy.
They are:
Land: This the land and any natural resource in it used to product goods and services.
Labor
Capital: This includes the machinery, tools and buildings used to produce goods and services.
Enterprise (Entrepreneurship): Is simply the combination of the other factors of production — land, labor, and capital — to earn a profit.
Opportunity Cost
When we decide to use scarce resources to produce a specific product, the forgone alternative to producing that result is the Opportunity Cost.
Microeconomics and Macroeconomics
Business economics is about how economics(theory) relates to business. This can be achieved by understanding the operation of the marketplace through the lens of both Microeconomics and Macroeconomics.
Microeconomics examines the various market influences on a firm’s revenue and costs. While Macroeconomics examines economic level issues which affect a firm’s revenue and costs.
Understanding how to respond to Micro and Macroeconomic factors, will make you an effective business manager.
PESTEL Analysis
A PESTEL analysis is an acronym for an analytical tool used to identify the macro(external) forces facing an organization.
PESTEL — Political, Economic, Social, Technological, Environmental and Legal.
Political Factors: This refers to the extent to which government policy may impact a company or a specific industry.
Economic Factors: These are factors that impact on the economy’s performance e.g. foreign exchange rate, interest rate, and inflation.
Social Factors: For example, family demographics, education levels, cultural trends, and changes in lifestyles.
Technological Factors: These factors consider the rate of technological innovation and development that can impact a market or industry.
Environmental Factors: This relates to the influence of the environment and ecological aspects.
Legal Factors: There is a need for organizations to understand the laws of the country they operate in, particularly legislations that affect their industry.
Example: PESTEL Analysis on Honda.
Summary
Today we have learnt about Economics, Scarcity, Business Economics, Opportunity Cost, and the Factors of Production. We have also learnt about Microeconomics, Macroeconomics, and PESTEL Analysis.
Next week — Understanding Markets.
Click here to join my newsletter
Reference
This summary is adapted from the MSc Business Economics and Accounting course at Durham University Business School.