EMBA-614 Economics for Managers

Reflective Note 4

Nissanka Ruwan Pushpakumara Silva

2015/EMBA/WE/02

Executive Master of Business Administration (EMBA)

Postgraduate & Mid-Career Development Unit
Faculty of Management & Finance
University of Colombo

10 January 2016

Key Idea
Simply, and perhaps surprisingly put, economics is the study of scarcity. Resources are limited,
and every society wants to figure out how to allocate its resources for maximum benefit. I
believe that the field of economics serves in large part to help answer this resource allocation
question, or at least to describe how players in the economy solve the resource allocation
problem for themselves. Therefore, as theory says "Economics is the study of how individuals
and groups make decisions with limited resources as to best satisfy their wants, needs, and
desires. From this standpoint, economics is very much the study of choices.
Though many are lead to believe that economics is driven purely by money or capital, in reality,
it is much more expansive. If the study of economics is the study of how people choose to use
their resource. In practice, resources can encompass everything from time to knowledge and
property to tools. It's also helpful to keep in mind that there are many subfields within
economics. Regardless of specific field, however, economists generally examine various ways
in which firms and individuals manage the problem of scarcity in order to maximize their
wellbeing.
Beyond defining what these resources are, we must also consider the concept of scarcity. These
resources, no matter how broad the category, are limited. This is the source of tension in the
choices people and society make. Therefore, our decisions are a result of the constant tug of
war between unlimited wants/desires and limited resources.
Economics provides an understanding of how the world works
We all learn about how the world works and also the impact decisions have on the firm,
industry, and national level. We learn about the impact of international trade, both good and
bad and will discover the effect government policies have on the economy and on employment.
Learning these factors will help me make more informed decisions as both consumer and
supplier. Furthermore, I personally believe that having a more economically literate set of
bureaucrats, politicians, and journalists would be great for society as long as they always keep
an open mind about what they've been exposed to. Economics, when done properly, shouldn't
so much tell people what to think, rather it should give them tools about how to think of things
more clearly and realizing the assumptions they may be making. Understanding difference
between microeconomics and macroeconomics will help me to deals with economic decisions.

What is Microeconomics? We see that microeconomics deals with economic decisions made
at a low or micro level. Microeconomics looks at questions that relate to individual people or
firms within the economy and analyzing aspects of human behavior. This includes raising and
answering questions like, "how does the change of a price of good influence a family's
purchasing decisions?"
What is Macroeconomics? In contrast to microeconomics, macroeconomics considers similar
questions but at a larger level. Its deals with the sum total of the decisions made by individuals
in a society or nation such as "how does a change in interest rates influence national savings?"
It looks the way nations allocate its resources like labor, land, and capital. Economics for
managers presents the fundamental ideas of microeconomics and macroeconomics and
integrates them from a managerial decision-making perspective.
Economic factors affecting our business environment
To be competitive in todays business environment, I as a manager must understand how
economic forces affect our business and the factors that must be considered when making
business decisions. Economics as a science is concerned with the problem of allocation of
scarce resources among competing ends. Economics provide us with a number of concepts and
analytical tools helping to understand and analyze such problems. There are many strategic
analysis tools that we can use and one of more commonly used analysis of the environment is
known as PESTLE analysis.
An increase in the capacity of an economy to produce goods and services compared from one
period of time to another period is the growth of economic. The main drivers of economic
growth are increase in the capital market, advances in technology and improvement in the
quality and level of literacy (human capital). This is usually measured by comparing gross
domestic product (GDP) in a year with the GDP in the previous year. We must monitor the
GDP performances on regular basis as it will impact on our day to day business decision. GDP
at current prices is useful for computing some economic indicators e.g. per capita income,
government debt to GDP ratio, government revenue GDP ratio etc.
We can predict the business cycles looking at leading, lagging and coincident indicators such
as manufacturing activity, stock market, changes in GDP, interest rates, inflation income and
wages. However we must keep in mind that most economic indicators work best in corporation
with other indicators. By considering the entire picture, I can make better decisions regarding
our overall plans and investments. A rise in interest rates for any reason tends to dampen

business activity (because credit becomes more expensive) and the stock market (because
investors can get better returns from bank deposits or newly issued bonds than from investing
in shares). Therefore, I need to know not only whether rates are increasing or decreasing, but
what other economic indicators are saying. Understanding the behavior of exchange is
paramount important when we deal with import/export, airline business and other foreign
dealings.
As with any market, the forexmarket is driven by supply and demand. If buyers exceed seller
s, then prices go up and if sellers outnumber buyers, prices go down. The factors such as
national economic performance, central bank policy, interest rate and unforeseen events could
influence exchange rates in the market.
What is market, how it works and outcomes?
We must understand the market dynamics for appropriate decision in day to day dealing in our
business. Market is the first and ultimate in microeconomics is supposedly the outcome of
interactions between buyers and seller in means of price. Market is divided into two
components i.e. demand, the buyer behavior, and supply, the seller behavior. We study demand
and supply modeled via price as the key which determines the quantities we buy and sell. Price
is critical, but it is not the only factor. Many other factors come into play, we refer to them as
non-price factors such as income, tastes, preferences, etc.
A competitive market has many buyers and sellers, each of whom has little or no influence on
the market price. Economists use the supply and demand model to analyze competitive
markets. Besides price, demand depends on buyers incomes, tastes, expectations, the prices of
substitutes and complements, and number of buyers. If one of these factors changes, the
demand curve shifts. Other determinants of supply include input prices, technology,
expectations of sellers. Changes in these factors shift the supply curve.
The intersection of supply and demand curves determines the market equilibrium. At the
equilibrium price, quantity supplied equals quantity demanded. If the market price is above
equilibrium, a surplus results, which causes the price to fall. If the market price is below
equilibrium, a shortage results, causing the price to rise. We can use the supply-demand
diagram to analyze the effects of any event on a market. First, determine whether the event
shifts one or both curves and then determine the direction of the shifts and compare the new
equilibrium to the initial one. In market economies, prices are the signals that guide economic
decisions and allocate scarce resources.

How I am going to apply economics theories in decision making process?

Price elasticity of demand is a measure of percentage change in quantity demanded for
percentage change in price of the good. Thus:
Price elasticity of demand = (percentage change in quantity demanded)/(percentage change
in price)
Analysis of elasticity of demand will help me to take decisions on pricing of products. When
price elasticity is less than 1, any increase in price will reduce the total revenue, but the costs
will increase because of increased production. Therefore, the total profits will be reduced. In
such cases it is best for me to not to reduce the price. Rather I may consider increase in price.
When elasticity of demand is more than 1, a reduction in price will increase the total revenue.
At the same time, the costs will also increase because of increase in production volume. If this
increase in the total cost is less than the increase in total revenue then my company can increase
its profits by reducing the price. Besides price, demand depends on buyers incomes, tastes,
expectations, the prices of substitutes and complements. If one of these factors changes, the
demand curve shifts.
Conclusion
The external factors comprise of general economic condition of the economy, demand for the
product, input cost of the firm, market conditions of raw material and finished product, firms
share in the market, governments economic policies and central banks monetary policies,
annual budgets of the government etc. These external conditions are beyond the control of the
firm, hence the firm needs to adjust itself to the changes in these conditions to survive and
grow. Knowledge of economics will helps me in making wise choices. I continue to face the
problem of scarcity of resources and making suitable choices to allocate them appropriately in
order to achieve organizational goals and objectives. We as managers must obtain and process
information with regard to these changes which likely effects on the operations of the firm.
There is no doubt that in a competitive world, the main measure of business efficiency is the
profit made by a firm. In a dynamic society, profitability is essential for survival of the business.
Therefore, studying economics and understanding the market behavior would definitely help
me to take appropriate decision in very competitive market environment to maximize profit of
my organization.