Business Economics In A Week

What Economics Teaches You About Business In Seven Simple Steps

Thomas Coskeran

• Publisher: Teach Yourself
• Year: 2016
• Print ISBN: 9781473609075
• eBook ISBN: 9781473609082
• Topic: Business
• Subtopic: Business General
• Index: Business

Understanding economics just got easier
The defining economic event of recent times - the global financial crisis of 2008 - was good for economists. That might sound crass but the truth is it stimulated interest in the subject by showing how important economic concerns are to our lives. Get the economy wrong and things we take for granted start to fall apart. It's a lesson that applies especially to those working in business, who, more than most, need to understand the subject. This book will help you by showing how economics can be useful for you in business, explaining economic ideas you might not have had time to explore previously and stimulating an interest in economics that encourages you to further study. Each of the seven chapters in Business Economics In A Week covers a different aspect of economics: - Sunday: Economics and your business
- Monday: The wonderful works of the market
- Tuesday: Businesses in the market
- Wednesday: Knowing your consumers
- Thursday: The limits of the market
- Friday: Business strategies and government macroeconomic policy
- Saturday: Surviving the international economy

On Sunday we saw that governments provide laws to ensure that everybody follows market rules. And yesterday we discussed how governments intervene in markets to correct market failures. Both are microeconomic reasons for government intervention.

Today we are going to examine how governments intervene for macroeconomic reasons – those concerned with the whole economy. The reasons for this intervention come from macroeconomic theory, which shows how and why they go about intervening. Agreement is not always universal on what to do, but economists, and politicians, generally agree the objectives for the whole economy to be:

• full employment of labour

• stable prices (no or low inflation)

• steady economic growth

• balance of payments equilibrium

• an appropriate income and wealth distribution.

As well as theory, we will consider policies to achieve these objectives (apart from the balance of payments problem, considered tomorrow). We will also refer to events in the economy following the 2008 financial crisis. They revealed much about how governments influence economies.

Lots to look forward to, then, as our economics goes large!

‘The modern economic system fails to provide employment continuously for all who desire to work. This is generally recognized as one of the major defects of the system, and remedies for the defect are constantly being propounded.’

Joan Robinson

The business cycle

Economists suggest that over time output in economies follows a pattern called the business cycle. It looks like this:

The business cycle

Output doesn’t follow the steady course of the line labelled ‘trend growth’ in the diagram. It seesaws around it along the line labelled ‘cyclical growth’. Output increases over time, but it’s not a smooth ride. When the economy booms, output grows, incomes of businesses and workers rise, prosperity reigns. In busts, output grows slowly or falls in a recession. Bad times bring lower sales, lower incomes and rising unemployment.

Recessions

A recession occurs when an economy’s output falls for two consecutive quarters of a year. The definition is arbitrary but it provides an agreed standard.

Businesses and the business cycle

Booms are usually considered good for businesses. Profits rise, businesses expand, and prospects of higher profits cause businesses to invest more. But booms can cause problems. Rising demand increases wages and raw material prices. Exporting becomes harder for businesses as higher prices cut overseas demand. In economics, every silver lining has its cloud.

During busts, profits fall, businesses fail and jobs disappear. The economist Joseph Schumpeter thought these effects benefit the economy. If inefficient businesses shut down, it releases resources for efficient businesses when the next boom comes. He called it ‘creative destruction’. He saw a silver lining.

And busts have other benefits. Prices and costs fall as demand falls, opportunities occur to capture sales of failed competitors, and, looking ahead, good times will return.

Managing the business cycle

Although optimism in a recession is not easy, the business cycle suggests that, if a business survives the downturn (as most do), good times return. Businesses should prepare for the inevitable recovery. That said, businesses, workers, consumers and governments would find life easier if the economy grew steadily. Not knowing when to expect booms or busts makes planning harder. With steady growth, people know where they stand.

Recognizing this, the economist John Maynard Keynes proposed that governments could use macroeconomic policy to ‘damp down’ the business cycle. Output still varies, but much less, and that helps everybody.

A Minsky moment

By the early 2000s many economists thought the business cycle was tamed. Hyman Minsky, an American economist, writing in 1992, disagreed. He thought economic crises remained likely. During booms, he argued, people become confident and borrow to buy assets such as property. But these assets eventually lose value as returns on them fall. Reduced wealth means demand falls drastically. The economic crisis follows. This is a ‘Minsky moment’. Many think the events of 2008 were such a moment.

A macroeconomic model of the economy

To understand how macroeconomic policy works in a ‘countercyclical’ manner, as economists say, we need our model of the economy from Sunday. That showed income circulating between firms and households. We will also add to it two other sectors, the government and overseas markets.

How the model works

As the model is circul...

Table of contents

• Cover 
• Title
• About the Author
• Dedication
• Contents 
• Introduction
• Sunday: Economics and your business
• Monday: The wonderful works of the market
• Tuesday: Businesses in the market
• Wednesday: Knowing your consumers
• Thursday: The limits of the market
• Friday: Business strategies and government macroeconomic policy
• Saturday: Surviving the international economy
• 7 × 7
• Answers
• Copyright