chapter 1

Economic & Legal Impact

( ELI )

SLIM Professional Certificate in Marketing

Economic & Legal Impact

What is Economics?

…is a social science that studies,

how to allocate scarce resources

to satisfy the unlimited wants.

( i.e. Individuals, Governments, Firms and Nations )

Economics

Macroeconomics Microeconomics

Very small-scaleVery Large-scale

Economics

Macroeconomics Microeconomics

…study of

the effects of

Individual Economic Units

(Households & Firms)

…study of

aggregate effects of

Total Economic Units

(National & International)

1.1 Economics – As a Social Science

1. Fundamental

Economic Ideas

1.1 As a Social Science

1.2 Scarcity

1.3 PPC

1.4 Opportunity Cost

1.5 Money

1.6 National Income

2. Market Failure

2.1 Free Market

2.2 Market Failure

2.3 Social/ Private Cost

2.4 Social./ Priv. Benefits

2.5 Externalities

2.6 Public Goods

2.7 Merit Goods

Natural Sciences

study the Natural World.

Eg : Biology,

Chemistry,

Physics,

Astronomy

Geography

Sciences (Areas of study)

Social Sciences

study the Human Behaviour, Society and Social Patterns.

Eg : Archaeology

Criminology

Law

Political Science

International Relations

History

Human Geography

Sociology

Economics


1. Fundamental

Economic Ideas


1.2 Scarcity

1.3 PPC


1.5 Money

1.6 National Income

2. Market Failure

2.1 Free Market

2.2 Market Failure



2.5 Externalities

2.6 Public Goods

2.7 Merit Goods

People BEHAVE RATIONALLY at all times

and

Seek to IMPROVE their circumstances.

• Sellers/ Producers try to maximize the PROFIT

• Consumers try to maximize the UTILITY (Satisfaction)

• Governments try to maximize the WELFARE (of the people)

Economists assume :


1. Fundamental

Economic Ideas


1.2 Scarcity

1.3 PPC


1.5 Money

1.6 National Income

2. Market Failure

2.1 Free Market

2.2 Market Failure



2.5 Externalities

2.6 Public Goods

2.7 Merit Goods

Different Economic Systems :

1. Centrally Planned or Command EconomyAll economic decisions & choices are made by the Government.

What to produce, How much to pay, Prices for goods & Services.

Rationale : Only the government can make fair &

proper distribution for all members of society.

2. Market EconomyAll economic decisions & choices are controlled by Market forces of Demand & Supply.

Rationale : It is obvious that Market Economies generate more wealth in total, than the command economies. More Efficient !

3. Mixed EconomyThe economic decisions & choices are controlled partly by the Market forces of Demand & Supply AND partly by the Government.

Rationale : To combine the Efficiency AND Fair & Proper Distribution.


1. Fundamental

Economic Ideas


1.2 Scarcity

1.3 PPC


1.5 Money

1.6 National Income

2. Market Failure

2.1 Free Market

2.2 Market Failure



2.5 Externalities

2.6 Public Goods

2.7 Merit Goods

Different Economic Systems : Mixed Economy

Government is influencing to Market Forces (Demand & Supply)

1. Direct Controls (Tax, Interest Rate etc.)

2. Indirect Taxes & Subsidies affect to prices

3. Government Institutes supply Goods/ Services

4. Regulations to encourage/ discourage selected products.

5. Income taxes/ Welfare Programmes ets.

1.2 Scarcity

1. Fundamental

Economic Ideas


1.2 Scarcity

1.3 PPC


1.5 Money

1.6 National Income

2. Market Failure

2.1 Free Market

2.2 Market Failure



2.5 Externalities

2.6 Public Goods

2.7 Merit Goods

1. Scarcity of Resources

2. Choice

3. Opportunity Cost

1.2 Scarcity

1. Fundamental

Economic Ideas


1.2 Scarcity

1.3 PPC


1.5 Money

1.6 National Income

2. Market Failure

2.1 Free Market

2.2 Market Failure



2.5 Externalities

2.6 Public Goods

2.7 Merit Goods

1. Scarcity of Resources

There are limits to available resources !

The IMBALANCE betweenhuman WANTS and RESOURCES.

( i.e. For both Individuals AND Society / World )

Some Resources are NOT scarce !Air, Water, Sun Light, Sand (in a desert), Ice (in Antarctica)

1.2 Scarcity

1. Fundamental

Economic Ideas


1.2 Scarcity

1.3 PPC


1.5 Money

1.6 National Income

2. Market Failure

2.1 Free Market

2.2 Market Failure



2.5 Externalities

2.6 Public Goods

2.7 Merit Goods

Scarcity is….

The excess human wants over

what can actually be produced.

1.2 Scarcity

1. Fundamental

Economic Ideas


1.2 Scarcity

1.3 PPC


1.5 Money

1.6 National Income

2. Market Failure

2.1 Free Market

2.2 Market Failure



2.5 Externalities

2.6 Public Goods

2.7 Merit Goods

2. Choice

Choice is ;

the Selection of ‘optimum return-giving alternative’

out of available alternatives.

SUBJECTIVE !!

1.2 Scarcity

1. Fundamental

Economic Ideas


1.2 Scarcity

1.3 PPC


1.5 Money

1.6 National Income

2. Market Failure

2.1 Free Market

2.2 Market Failure



2.5 Externalities

2.6 Public Goods

2.7 Merit Goods

3. Opportunity Cost

Opportunity Cost is ;

the ‘cost’ of an item measured in terms of

alternatives forgone.

( the ‘Lost Benefit’ )

1.2 Scarcity

1. Fundamental

Economic Ideas


1.2 Scarcity

1.3 PPC


1.5 Money

1.6 National Income

2. Market Failure

2.1 Free Market

2.2 Market Failure



2.5 Externalities

2.6 Public Goods

2.7 Merit Goods

Example !

Selected Alternative (Choice)

Gunawathi

Karunawathi

Premawathi

Tikiri

Bindumathi

Sandawathi

1

2

3

5

4

6

Opportunity Cost

1.2 Scarcity

1. Fundamental

Economic Ideas


1.2 Scarcity

1.3 PPC


1.5 Money

1.6 National Income

2. Market Failure

2.1 Free Market

2.2 Market Failure



2.5 Externalities

2.6 Public Goods

2.7 Merit Goods

Example - 2

Job - A

Job - C

Job - B

1

Rs. 22,000 , “a field Job”

Rs. 16,000 + Training Opportunities

Rs. 18,500 + Commissions (based on sales)

1.2 Scarcity

1. Fundamental

Economic Ideas


1.2 Scarcity

1.3 PPC


1.5 Money

1.6 National Income

2. Market Failure

2.1 Free Market

2.2 Market Failure



2.5 Externalities

2.6 Public Goods

2.7 Merit Goods

Example - 3

Rs. 100,000/-

Fixed Deposit in a bank

Invest for a business

Lending to a friend (1 year)

Interest 10% p.a.

Rate of return 45% p.a.

Pay back with Rs.10,000/-

1.2 Scarcity

1. Fundamental

Economic Ideas


1.2 Scarcity

1.3 PPC


1.5 Money

1.6 National Income

2. Market Failure

2.1 Free Market

2.2 Market Failure



2.5 Externalities

2.6 Public Goods

2.7 Merit Goods

Factors of Production(4 Types of Resources)

Factor

1. Land

2. Labour

3. Capital

4. Enterprise

Factor payment/ income

Rent

Wages (Salaries)

Interest

Profits

1.3 Production Possibility Curve – (PPC / PPF)

1. Fundamental

Economic Ideas


1.2 Scarcity

1.3 PPC


1.5 Money

1.6 National Income

2. Market Failure

2.1 Free Market

2.2 Market Failure



2.5 Externalities

2.6 Public Goods

2.7 Merit Goods

…a curve showing

all maximum output possibilities

of producing 2 products/ services,

using the available resources.

PPC is….


1. Fundamental

Economic Ideas


1.2 Scarcity

1.3 PPC


1.5 Money

1.6 National Income

2. Market Failure

2.1 Free Market

2.2 Market Failure



2.5 Externalities

2.6 Public Goods

2.7 Merit Goods

Assumptions….

• The economy produces only 2 Commodities.

• The BEST technologies are used.

• The HIGHEST efficiency standards are being met.

• ALL AVAILABLE resources have been utilized.


1. Fundamental

Economic Ideas


1.2 Scarcity

1.3 PPC


1.5 Money

1.6 National Income

2. Market Failure

2.1 Free Market

2.2 Market Failure



2.5 Externalities

2.6 Public Goods

2.7 Merit Goods

Cars

0

500

1,000

1,500

2,000

Rice

40,000

30,000

20,000

10,000

0

Alternative

A

B

C

D

E


1. Fundamental

Economic Ideas


1.2 Scarcity

1.3 PPC


1.5 Money

1.6 National Income

2. Market Failure

2.1 Free Market

2.2 Market Failure



2.5 Externalities

2.6 Public Goods

2.7 Merit Goods 10,000 20,000 30,000 40,000

2,000

1,500

1,000

500

00

Cars

Rice

Cars

0

500

1,000

1,500

2,000

Rice

40,000

30,000

20,000

10,000

0

Alternative

A

B

C

D

E

A

B

E

C

D PPC


1. Fundamental

Economic Ideas


1.2 Scarcity

1.3 PPC


1.5 Money

1.6 National Income

2. Market Failure

2.1 Free Market

2.2 Market Failure



2.5 Externalities

2.6 Public Goods

2.7 Merit Goods

In Practice !

10,000 20,000 30,000 40,000

2,000

1,500

1,000

500

00

Cars

Rice


1. Fundamental

Economic Ideas


1.2 Scarcity

1.3 PPC


1.5 Money

1.6 National Income

2. Market Failure

2.1 Free Market

2.2 Market Failure



2.5 Externalities

2.6 Public Goods

2.7 Merit Goods

Marketing Applications of PPC

A

B1. Advertising Budget Vs. Other Marketing Expenses

2. Producing Computers Vs. Printers (i.e. HP)

3. Marketing Research Cost Vs. Sales Commissions

4. Cost for Annual Awards Vs. Incentives/ Bonus

5. New Product Development Vs. Sales Staff Training Cost


1. Fundamental

Economic Ideas


1.2 Scarcity

1.3 PPC


1.5 Money

1.6 National Income

2. Market Failure

2.1 Free Market

2.2 Market Failure



2.5 Externalities

2.6 Public Goods

2.7 Merit Goods

10,000 20,000 30,000 40,000

2,000

1,500

1,000

500

00

PC’s

Printers

B

A

Inefficiency in a PPC


1. Fundamental

Economic Ideas


1.2 Scarcity

1.3 PPC


1.5 Money

1.6 National Income

2. Market Failure

2.1 Free Market

2.2 Market Failure



2.5 Externalities

2.6 Public Goods

2.7 Merit Goods

10,000 20,000 30,000 40,000

2,000

1,500

1,000

500

00

TVC’s

Sales Commissions

B

A

O/C

Opportunity Cost in a PPC

1.5 Money

1. Fundamental

Economic Ideas


1.2 Scarcity

1.3 PPC


1.5 Money

1.6 National Income

2. Market Failure

2.1 Free Market

2.2 Market Failure



2.5 Externalities

2.6 Public Goods

2.7 Merit Goods

In modern Economies,

MONEY is used as

a means of

paying for Goods & Services,

and

paying for Factors of Production (i.e. Land, Labour, Capital, Enterprise).

1.5 Money

1. Fundamental

Economic Ideas


1.2 Scarcity

1.3 PPC


1.5 Money

1.6 National Income

2. Market Failure

2.1 Free Market

2.2 Market Failure



2.5 Externalities

2.6 Public Goods

2.7 Merit Goods

Functions (Roles) of Money

1. a means of Exchange

2. a unit of Value

3. a standard for Differed Payment

4. a store of Value

1.6 National Income

1. Fundamental

Economic Ideas


1.2 Scarcity

1.3 PPC


1.5 Money

1.6 National Income

2. Market Failure

2.1 Free Market

2.2 Market Failure



2.5 Externalities

2.6 Public Goods

2.7 Merit Goods

The sum of all incomes

which arise as a result of

economic activities of the country.

Rs.

Total Rent earned for Land = 2,000,000

Total Wages earned for Labour = 500,000

Total Interest earned for Capital = 1,000,000

Total Profit earned for Entrepreneurship = 3,500,000

National Income (National Product)= 7,000,000

1.6 National Income

1. Fundamental

Economic Ideas


1.2 Scarcity

1.3 PPC


1.5 Money

1.6 National Income

2. Market Failure

2.1 Free Market

2.2 Market Failure



2.5 Externalities

2.6 Public Goods

2.7 Merit Goods

3 Production Sectors of an Economy

Rent = 2,000,000

Wages = 500,000

Interest = 1,000,000

Profit = 3,500,000

= 7,000,000

Industrial

1,000,000

500,000

200,000

800,000

2,500,000

35%

Agricul;

100,000

150,000

250,000

500,000

1,000,000

15%

Services

500,000

1,500,000

500,000

1,000,000

3,500,000

50%

1.6 National Income

1. Fundamental

Economic Ideas


1.2 Scarcity

1.3 PPC


1.5 Money

1.6 National Income

2. Market Failure

2.1 Free Market

2.2 Market Failure



2.5 Externalities

2.6 Public Goods

2.7 Merit Goods

Different Concepts of National Income

1. Gross Domestic Product (GDP)

2. Gross National Product (GNP)

3. Net National Product (NNP)

4. Personal Income

5. Disposable Income

1.6 National Income

1. Fundamental

Economic Ideas


1.2 Scarcity

1.3 PPC


1.5 Money

1.6 National Income

2. Market Failure

2.1 Free Market

2.2 Market Failure



2.5 Externalities

2.6 Public Goods

2.7 Merit Goods


Gross Domestic Product (GDP)

Total production value of

the economic activities

within the country.

(i.e. Locals or Foreigners)

1.6 National Income

1. Fundamental

Economic Ideas


1.2 Scarcity

1.3 PPC


1.5 Money

1.6 National Income

2. Market Failure

2.1 Free Market

2.2 Market Failure



2.5 Externalities

2.6 Public Goods

2.7 Merit Goods


Gross National Product (GNP)

Total production value of

the economic activities

of Sri Lankans.

( i.e. where ever in the world )

1.6 National Income

1. Fundamental

Economic Ideas


1.2 Scarcity

1.3 PPC


1.5 Money

1.6 National Income

2. Market Failure

2.1 Free Market

2.2 Market Failure



2.5 Externalities

2.6 Public Goods

2.7 Merit Goods


GDP + (Net Foreign Factor Income) = GNP

GDP = 100,000

(+) Foreign Factor Income Receipts 25,000

(-) Foreign Factor Income Payments (10,000) (15,000)

GNP = 85,000

1.6 National Income

1. Fundamental

Economic Ideas


1.2 Scarcity

1.3 PPC


1.5 Money

1.6 National Income

2. Market Failure

2.1 Free Market

2.2 Market Failure



2.5 Externalities

2.6 Public Goods

2.7 Merit Goods


Net National Product (NNP)

GNP - Capital Assets Depreciation = NNP

1.6 National Income

1. Fundamental

Economic Ideas


1.2 Scarcity

1.3 PPC


1.5 Money

1.6 National Income

2. Market Failure

2.1 Free Market

2.2 Market Failure



2.5 Externalities

2.6 Public Goods

2.7 Merit Goods


Personal Income

National Income =

1,000,000

+ (Transfers + Net Interest + Dividends) =

50,000

- (Corporate Profits + Social Security Tax) = (30,000)

Personal Income =

1,020,000

1.6 National Income

1. Fundamental

Economic Ideas


1.2 Scarcity

1.3 PPC


1.5 Money

1.6 National Income

2. Market Failure

2.1 Free Market

2.2 Market Failure



2.5 Externalities

2.6 Public Goods

2.7 Merit Goods


Disposable Income

Personal Income =

1,020,000

- Income Tax =

(100,000)

Disposable Income =

920,000

For Consumption or Saving

Thank you.

Production Possibility Curve - Exercise 1

Shirts

0

50,000

100,000

………..

………..

PC’s

100,000

………

...........

25,000

0

Alternative

A

B

C

D

E

1. Fill in the blanks.2. Draw the PPC.

‘Sharukh’ is a cellular phone service providing company. Company’s

promotional budget is Rs. 50,000,000/- for the year 2012. This can be

used for airing the TVC or for the additional sales commissions.

Other details are as follows;

1. TVC cost (per airing) = Rs. 125,000/-

2. Additional commissions (per connection) = Rs.500/-

1. Calculate the Maximum No.of TVC’s or Maximum No.of unit sales commissions.

2. Draw the PPC. (Assume the PPC is a Straight Line)

3. If the company has decided to air only 200 TVC’s during 2012, what is the number of

additional connections that the company can promote more.

4. Calculate the opportunity cost of airing a TVC.

Production Possibility Curve - Exercise 2

chapter 1

Technology

market failure

social private cost

free market

market economy

social patterns

market economies

merit goods scarcity

public goods