INTRODUCTION TO

ECONOMIC
ENVIRONMENT

UNIT 01
1
 What is
Economics?

2
 What is Economics – Quiz
Choose the correct answer
• Economics is the political science that deals with
unemployment, inflation, taxes, business cycles,
money, supply, and trade.
• Economics is the social science that studies
money and banking
• Economics is the social science that examines
the interaction of demand and supply
• Economics is the social science concerned with
the problem of scarcity
 What is
Economics?
• A social science that studies
and influences human behavior
• Economics is the study of what
constitutes rational human
behavior in the endeavor to
fulfill needs and wants.

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 The Foundation of
Economics
The
“Father”

Adam Smith (1723 - 1790)

– Author of the famous book "An Inquiry into the
Nature and Causes of the Wealth of Nations"
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 The Foundation of
Economics

- Robbins
• Scarcity
– Scarcity refers to our limited resources and
our unlimited wants and needs.
– For an individual, resources include time,
money and skill.
– For a country, limited resources include
natural resources, capital, labour force and
technology. 6
 Needs - Wants.
• Human wants are unlimited.
• We live in a world of limited
resources.
• The above leads to scarcity.
• People try to balance needs
and wants.
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 ECONOMICS

MICRO MACRO

8
 Micro Economics
• Micro Economics studies how the individual parts
of the economy make decisions to allocate
limited resources
• Microeconomics studies:
– how individuals use limited resources to meet
unlimited needs
– the consequences of their decisions
– the behaviour of individual components like
industries, firms and households.
– how individual prices are set
– what determines the price of land, labour and
capital
– inquire into the strengths and weaknesses of
the market mechanism. 9
 Macro Economics
• Macroeconomics studies about the functioning
of the economy as a whole
• It examines the economy through wide-lens.
• Macroeconomics studies about
• the total output of a nation
• the way the nation allocates its limited
resources of land, labor and capital
• the ways to maximize production levels
• the techniques to promote trade
• After observing the society as a whole, Adam
Smith noted that there was an "invisible hand"
turning the wheels of the economy: a market
force that keeps the economy functioning.
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The Factors of Production

Labour
Labour Capital
Capital
Land
Land Organization
Organization

Product
Product

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12
 ECONOM
Y

MARKET COMMAN MIXED

D

13
 Market
Economies

In a pure market
economy there is no
government
involvement in
economic decisions.
14
Contd
The Government lets the market answer
the following three basic economic
questions:
1. What ?
Consumers decide what should be produced
in a market economy through the
purchases they make.
2.How ?
Production is left entirely up to businesses.
Businesses must be competitive in such an
economy and produce quality products at
lower prices than their competitors.
3.For whom ?
In a market economy, the people who have
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 Command
Economies

In a command economy
the Government takes
economic decisions.

16
Contd….
 Command
Economies
In a command economy the
Government answers the three basic
economic questions.
1.What?
A central planning committee decides what
products are needed.
2.How?
Since the Government owns all means of
production in a command economy, it
decides how goods and services will be
produced.
3. For Whom ?
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The Government decides who will get what
 Mixed Economies

In the Mixed economies the

Government and the
Market work together in
decision making

Contd18
 The Economic
Problem

• Unlimited Wants
• Scarce Resources – Land, Labour,
Capital
• Many Uses of Resources
• Choices

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 The Economic
Problem
• What goods and services should an economy
produce?
– should the emphasis be on agriculture,
manufacturing or services, should it be on
sport and leisure or housing?
• How should goods and services be produced?
– labour intensive, capital intensive?
• Who should get the goods and services
produced? – Even distribution? More for
the rich? For those who work hard?

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 PESTLE analysis
• Is a useful tool for understanding the “big picture”
of the environment in which you are operating

• By understanding your environment, you can

take advantage of the opportunities and minimize
the threats.
 
• This provides the context within which more
detailed planning can take place to take full
advantage of the opportunities that present
themselves.
The factors in PESTLE analysis
• P – Political
– The current and potential influences from political pressures

• E - Economic
– The local, national and world economic impact

• S - Sociological
– The ways in which changes in society affect the project

• T - Technological
– How new and emerging technology affects our project / organization

• L - Legal
– How local, national and global legislation affects the project

• E - Environmental
– Local, national and global environmental issues
 PESTLE
• Political:
– Government type and stability
– Freedom of the press, rule of law and levels of bureaucracy and corruption
– Regulation and de-regulation trends
– Social and employment legislation
– Tax policy, and trade and tariff controls
– Environmental and consumer-protection legislation
– Likely changes in the political environment

• Economic:
– Stage of a business cycle
– Current and projected economic growth, inflation and interest rates
– Unemployment and supply of labor
– Labor costs
– Levels of disposable income and income distribution
– Impact of globalization
– Likely impact of technological or other changes on the economy
– Likely changes in the economic environment
 PESTLE
• Sociological:
– Cultural aspects, health consciousness, population growth rate, age distribution,
– Organizational culture, attitudes to work, management style, staff attitudes
– Education, occupations, earning capacity, living standards
– Ethical issues, diversity, immigration/emigration, ethnic/religious factors
– Media views, law changes affecting social factors, trends, advertisements,
publicity
– Demographics: age, gender, race, family size

• Technological:
– Maturity of technology, competing technological developments, research funding,
technology legislation, new discoveries
– Information technology, internet, global and local communications
– Technology access, licensing, patents, potential innovation, replacement
technology/solutions, inventions, research, intellectual property issues, advances
in manufacturing
– Transportation, energy uses/sources/fuels, associated/dependent technologies,
rates of obsolescence, waste removal/recycling
 PESTLE
• Legal:
– current home market legislation, future legislation
– European/international legislation
– regulatory bodies and processes
– environmental regulations, employment law, consumer protection
– industry-specific regulations, competitive regulations

• Environmental:
– Ecological
– environmental issues, environmental regulations
– customer values, market values, stakeholder/ investor values
– management style, staff attitudes, organizational culture, staff engagement
 Types of Economic
Evaluation
• Positive Economics
– In positive science facts are accepted as they are given
and no critical evaluation is needed. So these facts are
stated as they are. For Example, law of gravity in
physics, two plus two is always equal to four
• Normative Economics
– In normative science facts are critically analyzed, not just
the reasons but also the solution of an problem is
founded. In normative economics problems are discussed
as well as they are rectified.

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 What is Utility?

• Satisfaction
• Can not be measured
– Marshall – Utility can be measured in Utils

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What are kinds of
Utility?

Form Utility
Place Utility
Time Utility

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 Form Utility
• In what form is a product available
– Whole chicken
– Chicken parts
– Cooked chicken
• Value at each step is different

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 Place Utility

• The place where is a product available

• Convenience

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 Time Utility

• When is a product available

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 Rational Behavior

• People know what they want

• Their behaviors are consistent with what
they want
• Assume that the market information is
given.

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 Opportunity Cost

 Definition – the cost expressed in terms

of the next best alternative sacrificed
 The cost of anything in terms of other
things given up or sacrificed.

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Production Possibility Frontiers
• PPF Shows the different combinations of
goods and services that can be produced
with a given amount of resources
• No ‘ideal’ point on the curve
• Any point inside the curve – suggests
resources are not being utilised efficiently
• Any point outside the curve – not attainable
with the current level of resources
• Useful to demonstrate economic growth
and opportunity cost

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 Production Possibility Frontiers
If it devotes all
Capital Goods IfIf
it the
Assume country
a its is
reallocates
resources to
at point
country
resources
capital
A onitthe
can
(moving
goods
round the PPF from A
PPF
produce
could It cantwo
produce a
Ym to B) it can produce
produce
types
maximum
more consumerthe
of goods
of Ym.
goods
combination
with
but onlyits of Yo
at the expense
ofIf it devotes
fewer capital all its
goods.
capital
resources goods– and
Yo A resources
The
Xo
opportunity
consumer
capital
to cost of
goods
consumer
producing angoods
extra Xoit –
X1goods
and
could consumer
produce
consumer a is
goods
Yogoods
– Y1 capital
maximum of goods.
Xm

Y1
B

Xo X1 Xm Consumer Goods
35
 Production Possibility Frontiers
It can only produce
atProduction
points outside the
inside
PPF thea way
if it finds
Capital Goods ofPPF
expanding
– e.g.its
resources or
point Bthe
improves
means the
productivity of those

Y1
C resources
countryit is already
not
has. This will push
using all its
A the PPF further

.
Yo resources
outwards.

Xo X1 Consumer Goods
36
Principles of Economics

37
HOW DO PEOPLE MAKE DECISIONS?

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 1. People face trade-
off
• Every decision involves choices, and more of one
good means less of another good. Trade-off applies to
individuals, families, corporations and societies.
• Trade off between Efficiency and Equity
— Efficiency means the society is getting maximum
benefits from its scarce resources(Size of the
economic pie)
— Equity means the distribution of the benefits
among the members of the society equally (How the
pie is divided)
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2. Cost of something is what
you give up to get it

• When we make a decision we compare the

costs and benefits of our choices.
• Opportunity cost is whatever must be given up
to obtain something.
• People compare costs and benefits

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3. Rational people think at the
margin
• Basic economics assumes that people act
rationally
• They try to act so as to gain the most benefit
compared to the costs
• Microeconomics focuses on small or marginal
changes
• Economists use the term marginal changes to
describe small incremental adjustments to an
existing plan of action
• Rational people often make decisions by
comparing marginal benefits and marginal costs
41
4. People respond to
incentives
• If rational people compare costs and
benefits, then changes in either one may
change decisions.
• An incentive is something that induces a
person to act .
• An example of an incentive is that,
people respond to changes in prices. In
general, people are more likely to buy
something if it is cheaper. If an action
becomes more costly, then there is an
incentive to switch to other choices. Note
that all actions have substitutes. 42
HOW PEOPLE
INTERACT?

43
 Trade makes everyone better off
• Trade between two countries can make each
country better off
• Trade allows each person to specialize in
the activities he or she does best, whether it
is farming or home building
• Trade with others enables people to buy a
variety of goods at lower cost
• Countries as well as families benefit with
the ability to trade with one another
• Trade allows countries to specialize in what
they do best and to enjoy greater variety of
goods
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 Markets are usually a good way to
organize economic activity

• Firms decide whom to hire and what to make

• Households decides which firms to work for
and what to buy with their incomes
• These firms and households interact in the
market place, where prices and self interest
guide their decisions

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