Economics for Business

Chris Mulhearn, Howard R. Vane

• Publisher: Bloomsbury Academic
• Year: 2020
• Print ISBN: 9781352008210
• eBook ISBN: 9781350306189
• Edition: 4
• Topic: Business
• Subtopic: Business General
• Index: Business

Written specifically for non-specialists, this textbook provides a rigorous and engaging introduction to economics in the context of the business world. Striking the perfect balance between theory and practical application, it draws on interesting real-world examples and case studies – from tech companies to football clubs – to demonstrate the relevance of key economic concepts and theories to business. Clear and insightful, it is packed with current data and innovative features to bring the subject to life for students. This edition is thoroughly updated to include coverage of topics such as market failure, austerity, international trade and Brexit. The ideal textbook for undergraduate students studying economics on business and management degrees and for use on MBA courses. New to this Edition:
- Up-to-date coverage of important topics
- A new appendix on the Aggregate Demand-Aggregate Supply (AD-AS) model in Chapter 9
- A wealth of new case studies and examples, for example, on US trade policy, the challenges involved in the UK leaving the EU, and the money supply in India

KEY ISSUES What are the basic economic questions every society must face? Why must business concern itself with economics? What does economics have to say about the respective roles of firms, consumers and government in the allocation of resources? What is resource scarcity and what are its implications? What are microeconomics and macroeconomics and why are they important for business?

CONTENTS 1.1 Introduction: what is economics? 1.2 Why economics matters to business, indeed to everyone 1.3 Understanding the roles of firms, consumers and government in markets 1.4 Scarcity, choice and opportunity cost 1.5 Opportunity cost and incentives 1.6 Microeconomics, macroeconomics and business 1.7 Positive and normative economics

1.1 Introduction: what is economics?

Goods: tangible products.

Services: intangible products.

Most people can probably say what economics is about. It deals with issues such as inflation, unemployment, the profitability of firms, exchange rates, issues around Brexit and so on. But lists of this kind do not really tell us what the essence of the subject is. Economics is concerned with how societies organize the production and consumption of goods (physical commodities such as cars, books, food and housing) and services (such as those provided by banks, barbers, teachers and mobile phone network operators). More precisely it tries to explain and understand:

what goods and services societies produce, how they produce them and for whom they are produced

Consider the society or economy in which you live. What are its production priorities? What does it produce more of; what does it produce less of; what doesn’t it produce? Table 1.1 lists a small range of familiar goods and services. Are they all produced in your economy? If so, how are they produced – in a business setting by firms, or does the government assist or even take primary responsibility for the production of some of them? All of these goods and services are clearly available in the developed Western economies but to whom are they available – everyone, or just those who are able to pay for them?

Table 1.1 Produced in the society in which you live?

Produced in some Western economies	Produced in most Western economies but in uneven quantities	Produced in some Western economies in declining quantities	Produced in all Western economies in large quantities
• cars • computers • chocolate • mobile phones	• tourist services • books, magazines • feature films	• footwear and clothing • sports goods • toys	• education services • healthcare • mobile phone services • digital media services

CONCEPT

Resource allocation is the commitment of a society’s productive endowments, such as labour and machinery, to particular uses or patterns of use. For a society to produce a particular good or service it must allocate resources to the appropriate industry.

Table 1.1 categorizes our selected goods and services in terms of whether and in what relative quantities resources in the major Western economies are allocated to their production. The following ‘what, how and for whom’ patterns can be discerned:

What is produced?

• Certain goods and services are produced in only some Western economies: cars, for example. Cars are manufactured in countries such as the United States, Japan, Germany and the UK but not in Ireland or Switzerland. Similarly, in Finland and the UK there is heavy investment in mobile phone production but, for the moment, relatively little in Denmark. Together the US, Switzerland and Belgium account for more than 60 per cent of the world’s output of chocolate; Finland produces relatively little.

• For a second category of goods and services the production question is a matter of degree. As international travel has become increasingly easier and cheaper, many Western countries have become tourist destinations and now produce the kinds of services foreign tourists want. However, for some countries, the commitment to tourism is particularly evident: France and Spain are obvious examples. Similarly, though many major film productions are American in origin, other countries have their own but mostly more modest film industries.

• Clothing and footwear provide an instance of reduced production by most if not all Western economies. If you check your wardrobe you will find that the labels on your clothes and shoes mostly indicate origins in the Far East and Eastern Europe. Thirty or forty years ago, Western economies produced much more of their own clothing and footwear.

• Finally, there is a fourth category of good or service which virtually all Western economies produce in very large quantities, for example: education, health, mobile phone services and digital media.

We will have more to say in this and other chapters (see Chapter 13, especially) about why patterns of country specialization in production arise, but for the moment let us proceed to the noted questions of how and for whom production takes place.

How is production organized?

The form taken by production – the how question – can actually be discussed at two levels.

• First, we might be interested in the particular technicalities of production. The last 20 years have witnessed amazing changes in the actual form of some goods and services and the ways in which they are consumed. For example, prior to the early 2000s buying music meant having to buy a physical commodity: a vinyl record or CD. Digital music was not available. Since then physical music has had to compete with downloading and with streaming services. The Internet has been commercially damaging to the music industry. Since 2000 the global market in recorded music has contracted sharply – by some 45 per cent – in overall revenue terms. This mostly reflects the fact that digital music can be easily obtained without paying for it.

Communication and news services have also been technologically transformed. WhatsApp, messaging, email, Facebook and Twitter are ubiquitous; the personal letter an endangered species. The print sales of the newspaper industry are also in decline. Print journalism’s lifeline may be a migration across to digital media, but can web-based news services that consumers formerly paid for in the shape of copies of the Daily Mail or The Guardian be provided profitably – monetized is the popular term – when so much online news is free? The Times and Sunday Times were the first of the non-specialist national newspapers in Britain to put their digital versions behind a pay wall; some other papers have since followed suit while the rest are watching nervously. The technicalities of the ‘how is production organized’ question are clearly changing fast. Wherever there are digital applications, the threats to traditional ways of doing business appear profound and the opportunities for entrepreneurial innovation immense.

Digital media: a seismic shift in the organization of production

iStockphoto/grinvalds

• Second, as noted, we might ask to what extent governments involve themselves in production decisions. Over the past 40 years, in countries such as the UK, concerted attempts have been made to reduce the influence of government over economic activity, for example through the privatization of state-owned firms and the introduction of market principles into local and central government service provision. Elsewhere, experience has been divided: in the US, to take the most obvious case, the economic impact of government has always been comparatively limited and there is consequently a greater role for the private sector in the allocation of resources. By contrast, in the Scandinavian countries the role of the state in the economy is traditionally more pervasive. As we will see, the balance between what the business sector does in an economy and what the state does is one of the key issues in economics.

One example concerns repeated and fiercely contested efforts in the US to reform the provision of healthcare, which is organized in the main by the private sector. Generally, Americans who can afford to do so take out insurance that will cover their medical bills should they fall ill, or insurance is provided by employers. The problem is that millions of Americans have no health insurance. The US devotes much more of its resources to healthcare compared to other advanced economies but the end result is that while most Americans have access to state-of-the-art medicine, millions of their fellow citizens are denied care because they are poor or unemployed. Some years ago President Clinton failed in an attempt to use government money to underwrite a universal insurance scheme. In 2010 President Obama’s Affordable Care Act – nicknamed ‘Obamacare’ – made better progress. As of 2018 a...

Table of contents

• Cover
• Halftitle
• Title
• Copyright
• About the authors
• Brief Contents
• Contents
• List of figures and tables
• Preface
• Guide to the book
• Online resources
• 1 Economics and business
• 2 The market
• 3 The firm
• 4 Firms’ costs and revenues
• 5 Market concentration and market power
• 6 Business and government
• 7 Factor markets
• 8 The macroeconomy, macroeconomic policy and business
• 9 Unemployment: causes and cures
• 10 Inflation: causes and cures
• 11 Economic growth and business cycles
• 12 Stabilizing the economy
• 13 International trade
• 14 The balance of payments and exchange rates
• 15 Globalization
• Glossary
• Index