Course: ECON6017003 - ECONOMICS THEORY

Effective Period : even semester 2022

The economic environment

Targeted Learning Outcome :
LO1-Identify business and the economic environment.
Material References :
Sloman, John, Jones,Elizabeth, Essential Economics for
Business, 2019, pearson, Singapura
 Sub title

The economic environment

The external business environment

Markets, demand, and supply

What are the core economic concepts that are
necessary to understand the economic choices

The business environment has been somewhat uncertain over the past
decade, with many economic and political changes occurring.

The business environment has been somewhat uncertain over the past
decade, with many economic and political changes occurring.

What is more, the world economy has undergone many other changes in
recent decades, and these changes have had profound effects on
businesses across the world.
What are the core economic concepts that are necessary to
understand the economic choices (continued-1)

Privatisation of state industry has

occurred; until recently, trade
Most countries have embraced the barriers have been lowered;
‘market’ as the means of boosting governments have pursued policies
prosperity. to promote competition and attract
inward investment; global financial
markets have grown and developed.

A consequence has been the growth This has also contributed towards an
of multinational businesses seeking increasing interdependence
the best market opportunities and between nations, which has both
the cheapest sources of supply. good and bad consequences,
What are the core economic concepts that are necessary to
understand the economic choices (continued-2)

These technological advances have provided

Other important influences on
both opportunities and threats to Other
businesses around the world have
important influences on businesses around
included the development of faster and
the world have included the development of
smaller computers, easier access to and
faster and smaller computers, easier access
more widespread use of the Internet
to and more widespread use of the Internet
globally and improvements in trans-port
globally and improvements in trans-port
and communication systems.
and communication systems.

These technological advances

have provided both
opportunities and threats to
 The market environment
To be successful, it is important for the John Lewis Partnership to get its product right. This means
understanding the markets that it operates in and how consumer demand responds to changes in prices
and to the other services being offered. For example, in 2008, John Lewis responded to challenging
conditions by increasing the number of products available for national delivery, prioritizing customer
service and introducing free delivery across the UK.

Its investment in customer service clearly achieved its goal, helping John Lewis to rank as the best
company in the 2009 UK Customer Satisfaction Survey.

It has maintained good customer service since then, for example, winning awards for Customer
Satisfaction in 2014 and 2015.

In the Global Data Customer Satisfaction Awards 2018, it won Best Multichannel Retailer and the Best
Clothing and Furniture Retailer.
 Production and employment
Workers typically be involved
in decisions given the nature of
Being a profitable business the organizational structure,
This means choosing the most
depends not just on being able but these enforced job cuts
appropriate technology and
to sell a product, but on how came as a shock, especially
deploying the Labour force in
efficiently the product can be given the good Christmas
the best way.
produced. trading when sales were 13 per
cent up on the same period the
previous year.

However, it appears as though This is reinforced by the

much of these sales came from collapse of companies such as
its online trading, further HMV (twice), which are facing
suggesting a change in the way increased competition from
we shop and a need for online companies, including
companies to adapt. Amazon
KEY IDEA 1

The principal–agent problem. Where people (principals), as a result

of a lack of knowledge (asymmetric information), cannot ensure that
their best interests are served by their agents. Agents may take
advantage of this situation to the disadvantage of the principals.

Principals may attempt to reconcile the fact that

they have imperfect information, and are thus in an inherently weak

position, in the following ways. First, Monitoring the performance of
the agent. Second, Establishing a series of incentives to ensure that
agents act in the principals’ best interest.
 RECAP
• There are several types of legal organisation of firms: the
sole proprietorship, the partnership, the private limited
company, the public limited company and co-operatives. In
the first two cases, the owners have unlimited liability. With
companies, however, shareholders’ liability is limited to the
amount they have invested. This reduced risk encourages
people to invest in companies, providing scope for
expansion.
• As firms grow, so they tend to move from a U-form to an M-
form structure. In recent years, however, with the advance of
information technology, many firms have adopted a flatter
organisation – a return to U-form structure. Multinational
companies often adopt relatively complex forms of
organisation. Many multinationals adopt a holding company
(H-form) structure.
 RECAP

There are several types of legal organisation of firms: the sole

proprietorship, the partnership, the private limited company, the public
limited company and co-operatives. In the first two cases, the owners have
unlimited liability. With companies, however, shareholders’ liability is
limited to the amount they have invested. This reduced risk encourages
people to invest in companies, providing scope for expansion.

As firms grow, so they tend to move from a U-form to an M-form structure.

In recent years, however, with the advance of information technology,
many firms have adopted a flatter organisation – a return to U-form
structure. Multinational companies often adopt relatively complex forms
of organisation. Many multinationals adopt a holding company (H-form)
structure.
 RECAP (continued-1)

Typically, owners of firms will seek to maximize profits. With large companies,
however, there is a divorce of ownership from control. Control is by managers,
who might pursue goals other than profit.

The problem of managers not pursuing the same goals as the owners is an
example of the principal–agent problem. Agents (the managers) may not
always carry out the wishes of their principals (the owners). Because of
asymmetric information, managers can pursue their own aims, if they produce
results that satisfy the owners. The solution for owners is for there to be a
better means of monitoring the performance of managers, and incentives for
the managers to behave in the owners’ interests.
 KEY IDEA 2

• The behavior and performance of firms is affected by

the business environment. The business
environment includes social/cultural (S),
technological (T), economic (E), ethical (E), political (P),
legal (L) and environmental (E) factors. The
mnemonic STEEPLE can be used to remember these.
 The external business environment
• The external business environment is commonly divided into four
dimensions: political, economic, social and technological (PEST analysis); or
into seven dimensions, where the additional three are environmental, legal
and ethical (STEEPLE analysis).
• 2. The economic dimension of the business environment is divided into two:
the microeconomic environment and the macroeconomic environment. The
microenvironment refers to the market in which the firm operates. The macro
environment refers to the national and international economy in which all
firms operate.
• 3. The increasingly global marketplace means that many companies must
consider an international dimension within their external business
environment.
• 4. Production is divided into primary, secondary or tertiary sectors. The
contribution to output of these different sectors of production has changed
over time. Over the years the tertiary sector has grown, while the secondary
sector has contracted.
• 5. Firms are classified into industries and industries into sectors. Such
classification enables us to chart changes in industrial structure over time and
to assess changing patterns of industrial concentrate
 KEY IDEA 3

• Opportunity cost. The opportunity cost of something

is what you give up to get it/do it. In other words, it is
cost measured in terms of the best alternative
forgone
 Markets, demand and supply
• One of the key determinants of a business’s profitability is the price of
its products. Many firms have the option of changing their prices in
order to increase their profits.
• Sometimes, a cut in price might be in order, if the firm anticipates that
this will generate a lot more sales. At other times, a firm may prefer to
raise its prices, believing there will be little effect on sales – perhaps it
believes that its competitors will follow suit; or, perhaps, there are no
close competitors, making it easy for the firm to get away with raising
prices. For some firms, however, the prices of the products they sell are
determined not by them, but by the market.
• The ‘market’ is the coming together of buyers and sellers – whether in a
street market, a shop, an auction, a mail-order system, the Internet or
whatever.
• Thus, we talk about the market for apples, the market for oil, for cars,
for houses, for televisions and so on. As we shall see, market prices are
determined by the interaction of demand (buyers) and supply (sellers).
Markets, demand and supply
When the price is determined by the market, the firm is called a price taker.

It has to accept the market price as given. If the firm attempts to raise the price above the
market price, it will simply be unable to sell its product; it will lose all its sales to its
competitors.

Take the case of farmers selling wheat. They must accept the price as dictated by the
market. If individually they try to sell above the market price, no one will buy from them.

Competitive markets also imply that consumers are price takers. In fact, this is typically the
case when you buy things, whether the seller is operating in a competitive market.

For example, when you get to the checkout at a supermarket, you don’t start negotiating
with the member of staff over the price of the products in your trolley. Instead, you take the
prices as given.
ThAnKs YoU