As a business owner, you will continually make decisions for your business in order to fulfill your needs and wants. These decisions are usually based on the limited resources of your business, as well as other factors, such as consumer’s perceptions of your business.
It is important that you understand the basics of economics, the business market and factors that drive economic activity, in order for you to make informed decisions for the ultimate success of your business. This course aims to give you a working knowledge of demand and supply and the effects of pricing, as well as competitive markets and factors that influence economic activity, such as inflation.
Economics is the study of human behaviour attempting to fulfill needs and wants. Economics assumes that humans aim to fulfill their self-interests and that they make rational decisions regarding these needs and wants. Due to this, economics can be thought of as a human behaviour study rather than a complicated form of statistics with complex tables, charts and difficult numbers. There are a few concepts of basic economics that you will need to understand before we move on to discuss economic activity and various economic markets.
Economics can be divided into two separate fields of study
- Micro economics
Focuses on individual sections of the economy and considers the decisions and actions of individuals, households, firms and other organisations, separate from the rest of the economy. This includes the study of demand and supply for products and services.
- Macro economics
Concentrates more on the economy as a whole and develops an overall view of total economic behaviour. Macro-economics explores factors such as economic growth, inflation, unemployment and production, Technology, Legislation, Culture and Politics to name a few.
As it was already mentioned in the introduction, people have needs and wants and thus make various decisions in order to fulfill these needs and wants. These decisions are made taking their limited resources into account. This is the main economic problem called scarcity, and forms the basis of economics in general. Scarcity is the conflict between limited resources and unlimited wants.
An individual’s resources are time, money and skills, while a country’s resources are the factors of production, such as capital, labour, technology and other resources. These are often limited and economics is the study of how these resources can be allocated more efficiently.
This chapter is based on demand and supply. This was briefly discussed in the costing and pricing module, so if you have completed that module, make sure you go back and understand it from an economic point of view.
Demand is usually graphed on a market demand curve, illustrating the amount of product or service demanded by consumers at the different prices. The relationship between price and quantity
demanded is called the demand relationship. Supply shows how much the market can offer or the amount of a product or service sellers are willing to offer for sale. This is the supply relationship. Demand and supply relationships illustrate the forces and factors that affect the allocation of resources.
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