Economics & Business Environment

Economics and the

Business Environment

Economics and the

Business Environment

The Firm as a Legal EntityThe Firm as a Legal Entity

• The sole proprietor– limited scope for expansion– unlimited liability

• The partnership• Companies– limited liability– public limited companies (plc)• public issues of shares• shares traded on the Stock Exchange

– private limited companies– consortia– public corporations

• The sole proprietor– limited scope for expansion– unlimited liability

• The partnership• Companies– limited liability– public limited companies (plc)• public issues of shares• shares traded on the Stock Exchange

– private limited companies– consortia– public corporations

The Internal Organisation of the FirmThe Internal Organisation of the Firm

• U-form• U-form

U-form business organisationU-form business organisation

Production Fina nce Sa les Purcha sing

C hief executive


• U-form

– advantages

• direct control by central executive of the firm

• clear goals

– problems of large U-form firms

• co-ordination and communication costs

• distorted information

• decline in organisational efficiency

• U-form

– advantages

• direct control by central executive of the firm

• clear goals

– problems of large U-form firms

• co-ordination and communication costs

• distorted information

• decline in organisational efficiency

• M-form• M-form


M-form business organisationM-form business organisation

Production Fina nce Sa les Purcha sing

D ivision 1 D ivision 2 D ivision 3

H ea d O ffice


• M-form– advantages• reduced length of information flows

• enhanced level of control

– problems• bureaucracy and communication problems

• conflicts between divisions

• The flat organisation

• The holding company– role of parent company and subsidiaries

• M-form– advantages• reduced length of information flows

• enhanced level of control

– problems• bureaucracy and communication problems

• conflicts between divisions

• The flat organisation

• The holding company– role of parent company and subsidiaries

The Aims of the FirmThe Aims of the Firm

• Goals of the firm

• The traditional theory of the firm

• Alternative theories

– the divorce of ownership from control

– the development of the joint-stock company

–managerial objectives

• Goals of the firm

• The traditional theory of the firm

• Alternative theories

– the divorce of ownership from control

– the development of the joint-stock company

–managerial objectives

The Aims of the FirmThe Aims of the Firm

• The principal / agent relationship

– the principal – agent problem

– asymmetric information

– dealing with imperfect information

• monitoring

• incentives

• The goal of staying in business

– the willingness of firms to take risks

– problems of being over cautious

• The principal / agent relationship

– the principal – agent problem

– asymmetric information

– dealing with imperfect information

• monitoring

• incentives

• The goal of staying in business

– the willingness of firms to take risks

– problems of being over cautious

The External Business EnvironmentThe External Business Environment

• PEST analysis– Political / legal factors

– Economic factors• the microeconomic environment

• the macroeconomic environment

– Social / cultural factors

– Technological factors

• Using PEST analysis– relations between the four sets of factors

– importance of the economic factors

• PEST analysis– Political / legal factors

– Economic factors• the microeconomic environment

• the macroeconomic environment

– Social / cultural factors

– Technological factors

• Using PEST analysis– relations between the four sets of factors

– importance of the economic factors


• Classifying industries

– Classifying production

• primary production

• secondary production

• tertiary production

• Classifying industries

– Classifying production

• primary production

• secondary production

• tertiary production

Output of industrial sectors(as % of GDP)


19741974

54.9%

2.8%

42.3%

Secondary

Primary

Tertiary



19741974

54.9%

2.8%

42.3%

70.9%

5.8%

23.3%

20022002

Secondary Secondary

Primary Primary

Tertiary Tertiary



19741974

54.7%

3.4%

41.9%

Secondary

Primary

Tertiary

Employment by industrial sector(% of total employees)


19741974

54.7%

3.4%

41.9%

79.8%

1.8%

18.4%

20022002

Secondary Secondary

Primary Primary

Tertiary Tertiary



• Classifying firms into industries– nature of an industry

– industrial sectors

– why classify firms into industrial sectors?• helps in analysing trends

• identifying specific needs

• helps to understand relationships between firms

• Standard industrial classification– nature of the system of classification

– sections, subsections• divisions, groups and classes

• Classifying firms into industries– nature of an industry

– industrial sectors

– why classify firms into industrial sectors?• helps in analysing trends

• identifying specific needs

• helps to understand relationships between firms

• Standard industrial classification– nature of the system of classification

– sections, subsections• divisions, groups and classes


Standard industrial classification: 1992Standard industrial classification: 1992

• Changes in the structure of UK economy

– expanding and contracting sections

• by output

• by employment

• Changes in the structure of UK economy

– expanding and contracting sections

• by output

• by employment


The Determinants of Business PerformanceThe Determinants of Business Performance

• Structure conduct performance

– relationship between business structure and business conduct (behaviour)

• competitive markets and competitive behaviour

• limited competition and collusion

– relationship between business conduct and business performance

• indicators for measuring performance

• profitability, market share, growth, etc.

• Structure conduct performance

– relationship between business structure and business conduct (behaviour)

• competitive markets and competitive behaviour

• limited competition and collusion

– relationship between business conduct and business performance

• indicators for measuring performance

• profitability, market share, growth, etc.

The Economist's Approach to BusinessThe Economist's Approach to Business

• Tackling the problem of scarcity

–meaning of scarcity

– production and consumption

• role of the business economist– study of consumer behaviour

– study of firms

– factors of production

• labour

• land and raw materials

• capital

• Tackling the problem of scarcity

–meaning of scarcity

– production and consumption

• role of the business economist– study of consumer behaviour

– study of firms

– factors of production

• labour

• land and raw materials

• capital


• Demand and supply– actual and potential demand and supply

– the role of firms in satisfying demand

– business economists’ study of the supply process

• Macroeconomics and microeconomics–macroeconomics• the balancing of aggregate demand and supply

–microeconomics• the balancing of the demand and supply for

particular products

• Demand and supply– actual and potential demand and supply

– the role of firms in satisfying demand

– business economists’ study of the supply process

• Macroeconomics and microeconomics–macroeconomics• the balancing of aggregate demand and supply

–microeconomics• the balancing of the demand and supply for

particular products


• Microeconomics and choice–What?

– How?

– For whom?

• Choice and opportunity cost– the meaning of opportunity cost

– rational choices

–marginal costs and benefits

• Microeconomic choices and the firm

• Microeconomics and choice–What?

– How?

– For whom?

• Choice and opportunity cost– the meaning of opportunity cost

– rational choices

–marginal costs and benefits

• Microeconomic choices and the firm