In the previous section, we identified economics as the means of understanding the environment in which we will deliver business. The environment is known as the Market.

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It is worth noting that economics is not unique to business. Rather, it is an approach to understanding one’s actions and decision. More specifically, it concerns how one allocates their scarce (or finite) resources.

While economics is not unique to business, there are many applications of economics to business practice. Notably, economics helps us understand how individuals act when they want to achieve the maximum gain or utility from a product or service.

Obtaining value is an incentive for activity that creates perceived value for the actor (subjective value). More on this later.

We’ve broken these sections down by the building blocks of economics. We then move into basic descriptions of how economic principals apply in many areas relevant to business.

Particularly, economics is useful in understanding aspects related to the production, distribution, and consumption of products and services.

So What is Economics?

Economics is a field of social science that seeks to understand how individuals make decisions or take actions concerning the allocation of finite or limited resources. We call these “scarce resources“.

• Note: A scarce resource does not mean that there is not a lot of that resource. It simply means that there is a fixed amount. The fixed amount of money I have may be $1 or $1 million. In either case, I have a finite amount of money that I can allocate.

The decision to allocate resources is generally a decision to make a trade off between two or more options. As such, you can think of any scenario where you have to make a decision of how to allocation your resources as a single market.

• Note: The common resource that everyone trades off is their time. I make the decision to do one thing at the expense of doing the other. This tradeoff is in essence a market in which I am trading one resource or another – but I’m trading with myself.

Economics also allows us to analyze the way government authorities, organizations, and countries choose to allocate resources so as to gain maximum satisfaction of their needs and wants.

• Note: The field of microeconomics addresses the decisions made by individuals in a given market. Macroeconomics combines all of the decisions made in all markets to understand the total productivity happening within a nation.

Macro-economists seek to understand how nations or countries should manage their scarce resource in their efforts to achieve the highest output levels (productivity).

Economic analysis usually develops through deductive procedures such as mathematical logic that takes into consideration the effects of particular activities in a specific means-ends framework.

For purposes of business practice, you will rarely if ever need to carry out this type of analysis. You simply need to have a fundamental understanding of the economic forces at play in a situation.

Now let’s look at the major areas in which economics is used in the understanding of business.

What are the Types of Economics?

Economics consists of two core areas:

• microeconomics
• macroeconomics

What is Microeconomics?

Microeconomics studies the decisions of individuals or businesses when making tradeoffs in specific markets. It places emphasis on the factors that influence producers and consumers in making decisions. This can be one individual, a household, an organization, or a public entity.

Remember, economics looks at every decision as a tradeoff. Any situation in which a tradeoff occurs is a market. For example, if I purchase a pair of shoes instead of going out to a nice dinner, I have made a tradeoff.

Individuals make decisions that maximize the value that they receive from the allocation of their scarce resources. This is known as the “utility” received from the decision. In the above example, I must have really wanted those shoes. My decision indicates that I received more value or utility from the shoes than I would from the nice meal.

Microeconomics breaks down the decision-making process and outcomes. It considers the way people exchange goods and services with one another, and how market forces ascertain the prices of products and services.

Looking specifically at the production side of business, microeconomics addresses the utility derived (such as the revenue generated) and costs involved in the manufacturing of goods and delivery or services.

Microeconomics helps us understand why and how producers divide the labor force, entertain risk and uncertainty, and make decisions given the effect of those decisions on other competitors in the market.

As such, micro-economics is highly useful for the individual firm providing value and competing in a given market.

What is Macroeconomics?

Macroeconomics observes the functioning of the whole economy in a given location, within a nation, on a continent, or maybe the entire world.

The core concept in macroeconomics is productivity. You may have heard the acronym GDP, which stands for Gross Domestic Product. This simply means the total value of everything produced locally.

Governments seek to encourage productivity. They do so through activities known as monetary policy and fiscal policy. Macroeconomists monitor things such as rates of unemployment, gross domestic and national product, and production and consumption cycles.

• Note: Recognized macroeconomics cycles are: expansion, boom, recession, and depression.

While macroeconomics is equally a topic of public policy and political science, it is useful for businesses as well.

It helps businesses to understand how the major factors affecting the well-being of society will affect the overall market in which the firm or business competes.

• For example, if unemployment rises or interest rates go up, this could affect the ability or willingness of consumers to purchase the goods or services provided by a business. This may affect the decision of whether to introduce a new product or service, hire more employees, invest in equipment or facilities, etc.

Before we proceed in examining the various factors of economic analysis, we should provide a little history or introduction of the overarching theories that influence macro-economic perspectives.

What are the Schools of Macroeconomics?

The most commonly known schools of economic thought are:

• Keynesian, and
• Neoclassical.

The neoclassical school of economics proposes that the production of goods (supply) is the driving force behind generating demand for the product. This involves minimal involvement by the government in the market.

The Keynesian school of economics focuses on the generation of demand for products. This often requires a greater degree of government intervention in the market.

In either case, the common objective of economic policy is to increase productivity in a stable manner.

As you can imagine, the belief that either demand or supply are more important factors in promoting productive activity can cause extensive variations in the approaches employed to effectuate this objective.

Regardless of the approach to which you ascribe, these foundations have similar goals and employ similar mechanisms in achieving those goals.

Though the specific measures of each goal and the methods of employing these mechanisms vary greatly.

Now that you understand why we are studying economics in a business course, let’s get into the elements.

In Summary

For the remainder of this section, we are going to explain the core concepts of microeconomics. First, we will relate these concepts to the supply and demand of goods. Will will also not the affect of scarcity on the price of goods.

Then, will will look at competition as a necessary component of markets.

• Note: Economics is a broad. topic. Hopefully, this introduction will spark your desire to undertake our economics course.