ECO558 GUIDED TUTORIAL

CHAPTER 1: Introduction to Economics for Business

1. 1 Define economics Science of scarcity and choice

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2 Why does scarcity arise? Because human wants unlimited, the more we have the
more want, whereas resources to satisfy our want limited.
3 Why do we have to make choices? Because of limited resources
4 What happens when we make choice? Forgone the other alternative
5 Define opportunity cost We have to make a choice and forgone the other
alternative
6 What are 2 categories of the study of Microeconomics and Macroeconomics
economics?
7 What does macroeconomics study? Examines the overall economy or aggregates such as
national income, unemployment, inflation, economic
policies and international trade with reference to an
economy.
8 What does microeconomics study? Examines specific economic units with respect to
behaviour of individual actors or small parts of the
economy such as demand and supply, production, cost of
a good, consumer’s preferences and the different types of
market structure in which a firm operates
9 What is an example of an area of a country can produce bananas at a lower cost than
specialization in economics? oranges, it can choose to specialize and dedicate all its
resources to the production of bananas, using some of
them to trade for oranges.
10 What are 2 elements of economic Normative and positive economics
methodology?
11 What is normative economics? Focuses on value judgement, providing or establishing
rules to assist in attaining specific objective for example
maximize and minimize profit.
12 What is positive economics? Incorporate facts and descriptions. It explains the way
economic forces operate such as the relationship
between price and quantity demanded.
13 Give an example of a current issue on The government should provide basic healthcare to all
"what should be" citizens.
14 Give an example of a current issue on Government-provided healthcare increases public
"what is" expenditures.
15 Why do economists use economic To reduce the complexity of economic behaviour
models?
16 What are 2 analytical tools that Mathematical and econometric
economists use to simplify economic
theories?

Sketch and simplify diagram 1.1 on the study of economics

1. 17 What does economics for business To the application of economic theories and methodology
1 relate to? to business activities in the decision making process.
18 What is the main objective of a To maximize profits
business?
19 How would a business maximize Maximizing total revenue and minimizing cost
profit?
20 Apart from maximizing profit, name 4 Maximizing total revenue, minimizing cost, maximizing
other objectives of a business consumer’s satisfaction or welfare and maximizing market
share.
 21 Define business economics Is a discipline that combine both economic theory and
business practices

1. 22 What is the emphasis of a business Emphases on issue problem and strategies of business
2 study? organization such as sole proprietor, partnership, company
and cooperative
23 What is the emphasis of an economics Focus on choices and management of scares resources to
study? maximize utility.
24 How can the 2 fields of study Linked through firm’s need to make goal orientated
(business & economics) be linked? decisions using scares resources that have other
alternative uses.
25 Give 3 examples of external factors Competition, prices of other goods and raw material,
that can influence a business decision state of economy
26 Give 3 examples of internal factors Knowledge on price, marketing and investment
that can infuence a business decision
27 Give 2 examples of microeconomics Business economics focuses on how business react when
aspect in business economics economic dynamics in which it operates changes and to
devise the best possible strategies to achieve the
objective of the firm
28 Give 2 examples of macroeconomics Respond of business when there are changes in the
aspect in business economics economy such as changes in balance of aggregate supply
and aggregate demand, economic growth, budget, policy
and international relationship

1. 29 What does business in microeconomic Choices made by individual firms and consumers
3 environment refer to?
30 What are the basic 3 choices that What to produce, how to produce and for whom to
firms make? produce to maximize their value
31 Why do firms make choices? Because resources are scarce and have alternative uses.
32 What does "how to produce" focuses The best method to produce a product
on?
33 What does "for whom to produce" The distribution of goods in an economy
refer to?
34 What are 2 important signals used by Price and profits
firms in answering the choice
questions?

1. 35 What does a simple circular flow of A simple circular flow of goods and income in an economy
4 goods and income model illustrate?
36 Name 2 sectors in the simple circular Household and firms
flow model
37 What are the 2 functions of business Buy resources and sell product
in the circular flow model?
38 What are the 2 functions of Sell resources and buy product
households in the circular flow
model?
39 Name 2 markets in the circular flow Resource and product market
model
40 What happens in the resource Household sell and business buy
market?
41 What happens in the product market? Business sell and household buy
42 Name the 4 types of resources 1. Land
(factors of production) that flow from 2. Labour
households to businesses 3. Capital
 4. Entrepreneurship
43 Name the 4 types of income 1. Wages for their labor
(payments for factors of production) 2. Rent for use of their land
that flow from businesses to 3. Interest for use of their capital
households 4. Profit for their entrepreneurial ability

44 Name the 4 types of flows between 1. Resource market

businesses and households in the 2. Household
simple circular flow diagram. 3. Product market
4. Businesses

45 From macroconomic view, the flow in Injection are less than withdrawal
the circular flow model is not
constant. What is the item that can
contract (reduce) the flow of income?
46 Define and give example of leakages Occur in the circular flow when part of the income it is
saved, taxed or spent on imports. This will contract the
flow
47 From macroconomic view, the flow in Injections are greater than the withdrawal and the
the circular flow model is not economy will experience expansion
constant. What is the item that can
increase the flow of income?
48 Define and give examples of injections Increases the flow when when there is investment,
government expenditure and exports.
49 What happens to the flow when increase
injections are greater than leakages?
50 What happens to the flow when reduce
leakages are lesser than injections?
51 What are the 2 macroeconomic Fiscal and monetary policy
policies used to balance the
economy's total demand and supply?
52 How will macroeconomic policies Cost and revenue and profitability
affect businesses?
53 How should business react to Business must reallocate resources, adjust pricing policies
macroeconomic policies? and restructure the composition of labour congruent.
54 If government reduces tax to By increasing their supply and employing more resources
stimulate economy, how would and labour to maximise their objective
businesses respond?

1.5 55 What is a firm? A single economic decision making unit.

1.5.1 56 Traditionally, based on the theory of Is to maximise current or short term profit.
the firm, what is the objective of a
firm?
57 Why would a firm want to maximize Since firms operate in the long term, often, short term
wealth or its value? profits must be sacrificed to achieve long term profits
1.5.3 58 List 5 other goals of a firm besides 1. Maximising sales, total revenue, employment,
profit maximization. and market share
2. Sales maximization
3. Maximising management utility
4. Satisfying behaviour
5. Non-economic goals
59 Why would a firm want to increase If it means less profit with the aim of increasing its
market share? monopoly power.
60 Why would a firm go for satisfying Business strive for some satisfying goals in term of sales,
behavior for sales, profit, growt and profits, growth and market share.
market share, and not go for
 maximizing them?
61 List 4 possible non-economic goals 1. to provide a conducive place for employees to work
of non-profit organizations. 2. to provide good products or services to customer
3. to act as a good citizen in our society.
4. to provide a public service or achieving other social
aims

1.6 6 Formula for profit in general Revenue minus cost

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6 Define opportunity cost Opportunity cost of using any resource is what the owner
3 of firms must give up using the resource
6 What are 2 categories of resources a 1. Market-supplied resources
4 firm can use. 2. Owner-supplied resources
6 Define explicit cost Owned by other and brought into the market to be sold
5 at a given price
6 List all examples of explicit cost labour services, raw material and equipment
6 (monetary opportunity cost)
6 Define implicit cost The cost of using the owner’s resources
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6 Suggest 3 common examples of 1. Commonly interest foregone
8 implicit cost (nonmonetary 2. Wages foregone
opportunity cost) 3. Rent forgone
6 What is interest foregone? Money provided by the owner of the firm
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7 What is wage forgone? Time and labour service
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7 What is rent forgone? Land building or tangible resources belonging to the
1 owner used by the firm
7 Write the formula for calculating Sum of explicit cost and implicit cost
2 opportunity cost
1.6.1 7 Formula for accounting (business) Total revenue – explicit cost
3 profit
1.6.2 7 Formula for economic profit Revenue – explicit cost – implicit cost
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1. 75 List 6 types of constraints faced by a 1. Legal

7 firm 2. Environmental
3. Moral
4. Contractual
5. Financial
6. Technological
76 Give an example of legal constraint Array of local, state and federal laws that must be obeyed
which can be affected both production and marketing
activities
77 Give an example of environmental Related to disposal of hazardous wastes, pollution, safety
constraint measures, wrongful termination and sexual harassment
matters
78 Give an example of moral constraint Apply to actions that are deem non-acceptable by the
society or contradicts with standard behaviour
79 Give an example of contractual Bind the company because of some prior agreement and
constraint contractual requirement
80 Give an example of financial Occur when a department is subjected to budget amount
constraint that restrain expansion
81 Give an example of technological Set physical limit on the quantity of output per unit of
constraint time that can be generated by specific machines or
 workers
82 Give an example of political constraint Affect the taxing system
83 Give an example of social constraint Influence the tastes and buying patterns