1 Economics and the Business Environment
Jul 15, 2015
The 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
U-form business organisation
P r o d u c t i o n F i n a n c e S a l e s P u r c h a s i n g
C h i e f e x e c u t i v e
The Internal Organisation of the Firm
• 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 business organisation
P r o d u c t i o n F i n a n c e S a l e s P u r c h a s i n g
D i v i s i o n 1 D i v i s i o n 2 D i v i s i o n 3
H e a d O f f i c e
The Internal Organisation of the Firm
• 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 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
The 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 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
The External Business Environment
• Classifying industries
– Classifying production
• primary production
• secondary production
• tertiary production
Output of industrial sectors(as % of GDP)
1974
54.9%
2.8%
42.3%
Secondary
Primary
Tertiary
Output of industrial sectors(as % of GDP)
1974
54.9%
2.8%
42.3%
70.9%
5.8%
23.3%
2002
Secondary Secondary
Primary Primary
Tertiary Tertiary
Output of industrial sectors(as % of GDP)
1974
54.7%
3.4%
41.9%
Secondary
Primary
Tertiary
Employment by industrial sector(% of total employees)
1974
54.7%
3.4%
41.9%
79.8%
1.8%
18.4%
2002
Secondary Secondary
Primary Primary
Tertiary Tertiary
Employment by industrial sector(% of total employees)
• 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
The External Business Environment
• Changes in the structure of UK economy
– expanding and contracting sections
• by output
• by employment
The External Business Environment
The 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.
The 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
The Economist's Approach to Business
• 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