T4-1 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Communication Skills for International Students in Business, by Bretag, Crossman and Bordia

Topic 4

Introduction to economics

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Topic overview Definition of the ‘economising problem’ Definitions of ‘resources’ and ‘economies’ Introduction to supply and demand Introduction to market equilibrium

T4-3 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Communication Skills for International Students in Business, by Bretag, Crossman and Bordia

Economising problem Human beings have unlimited wants for goods

and services. However, the resources available to satisfy these wants are limited (Jackson & McIver 2004).

This is called the ‘economising problem’. Two principles:

– Society’s material wants are virtually unlimited or insatiable.

– Economic resources are limited or scarce.

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Resources Resources are all the natural, human and

manufactured resources that go into the production of goods and services. – land, capital, labour and entrepreneurial ability.

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‘Economics’ Economics is concerned with the efficient use

of limited productive resources for the purpose of attaining the maximum satisfaction of our wants (Jackson & McIver 2004, p. 4).– provides the basis of government economic policy

– helps us to be better informed citizens

– assists in the making of business decisions

– provides the means to develop a social perspective on economic problems

T4-6 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Communication Skills for International Students in Business, by Bretag, Crossman and Bordia

Activity 11. In groups of two or three students, or by yourself,

write a list of the 10 most important goods and services that you want/need every day.

2. Of these 10 wants, which three are absolutely vital to your survival?

Can you imagine a situation where these vital wants/needs could not be satisfied?

What role do you think the government should play to ensure that your basic wants/needs are satisfied?

T4-7 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Communication Skills for International Students in Business, by Bretag, Crossman and Bordia

Economic perspective Resources are limited. Individuals operate on the basis of rational self-

interest. (We make decisions that will provide us with the greatest benefits.)

Choices are made on the basis of benefits exceeding costs (‘marginal analysis’).

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Demand and supply Demand is the amount of product that

consumers are willing and able to purchase at a specific price and at a specific time.

If the price falls, and all else remains constant, the quantity demanded increases.

That is, if the product is cheaper, consumers will buy more.

The law of demand is the inverse relationship between the price and the quantity demanded of a good or service during some period of time. (Jackson & McIver 2004, p. 73).

T4-9 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Communication Skills for International Students in Business, by Bretag, Crossman and Bordia

Demand Non-price determinants of demand include:

– consumer tastes/preferences

– number of consumers in the market

– incomes of consumers

– prices of related goods

– consumer expectations about future prices and incomes.

T4-10 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Communication Skills for International Students in Business, by Bretag, Crossman and Bordia

Activity 2 Consider a purchase of clothing you made

recently. On what basis did you make your decision to

purchase the item? Was it price alone or did any other

determinants have an impact on your demand for the product?

List the other determinants.

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Demand curve The inverse relationship between product price

and quantity demanded can be represented on a two-dimensional graph.

Quantity demanded is measured on the horizontal axis and price on the vertical axis.

‘An individual’s demand schedule graphs as a down sloping curve because price and quantity are inversely related.’

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Demand curve (cont.) See an example of a demand curve graph on

p. 274 of your textbook. Consumers will demand more of a product as

its price declines. Non-price determinants of demand shift the

demand curve either to the right (increase) or left (decrease).

T4-13 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Communication Skills for International Students in Business, by Bretag, Crossman and Bordia

Supply Supply is the varying amounts of a product that

producers are willing and able to produce and make available for sale in the market at a specific price and at a specific time.

As the price rises, the quantity supplied also rises; as the price falls, the quantity supplied also falls.

That is, producers are willing to supply more of their product at a high price than at a low price.

T4-14 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Communication Skills for International Students in Business, by Bretag, Crossman and Bordia

Law of supply This is the direct relationship between the price

and the quantity supplied of a good or service during some period of time (Jackson & McIver 2004, p. 81).

Non-price determinants of supply include:– resource prices

– technology

– prices of other goods

– expectations

– number of sellers in the market.

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Activity 3 Complete activity 3 on p. 275 of your textbook.

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Supply curve The concept of supply can also be represented

on a two-dimensional graph. A change in supply occurs when one of the non-

price determinants of supply changes. An increase in supply shifts the supply curve to

the right, and a decrease in supply shifts the supply curve to the left .

A change in the quantity supplied caused only by a change in the price of the product results in movement from one point to another on a fixed supply curve.

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Supply curve (cont.) See the supply curve graph on p. 276 of your

textbook.

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Market equilibrium Product surpluses result when the price of the

product is above the market-clearing price. This causes producers to reduce their prices to

sell their product. Product shortages result when the price of the

product is below the market-clearing price. This causes consumers to bid up the price of

the product.

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Market equilibrium (cont.) If all other factors are constant, an increase in

demand and a decrease in supply will tend to increase the equilibrium price.

On the other hand, a decrease in demand and an increase in supply will tend to decrease the equilibrium price.

T4-20 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Communication Skills for International Students in Business, by Bretag, Crossman and Bordia

Market equilibrium (cont.) When the supply decisions of producers and

the demand decisions of buyers are consistent, an equilibrium price occurs.

Equilibrium prices and outputs are determined through the interaction of demand and supply leading to a market-clearing situation, where the quantity supplied and quantity demanded are equal (Jackson & McIver 2004, p. 95).

T4-21 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Communication Skills for International Students in Business, by Bretag, Crossman and Bordia

Activity 4 Complete activity 4 on p. 277 of your textbook,

using the ‘real world example’: Coke warms to changing prices.

Complete the suggested assessment on p. 278: a research essay outlining the market situation of a product of your choice. Use the essay marking criteria provided in Appendix 3, p. 357.