18 Why It Matters: Economic Environment

Why explain fundamental economic principles and describe how they shape the business environment?

Economics is about choices: namely, how we choose to allocate scarce resources and how our choices impact others. Beyond that, it’s about the choices made by businesses, government, and other countries. Let’s begin with ice cream—something familiar and tasty to most people—and use it as a framework for thinking about economics.

Let’s say you live in Boise, Idaho, and decide to go out for ice cream with your friend Charlie, who has been reading about ice cream flavored with Persian saffron. That’s the kind he wants, but none of the five ice-cream shops you visit has it. Why not? Why can’t they meet his demand? Because Charlie is the only person in Boise who has ever asked for it, and none of the shops has decided to carry something so expensive (the saffron costs nearly $1,000 per ounce) and, frankly, strange. They have chosen to offer ice cream that is low-cost, high-demand, and easy to manufacture.

The next day, Charlie is still obsessed with saffron ice cream, and he’s discovered a shop in Dubai, where, for the mere price of $816 (per scoop, fancy toppings included), one can try this exotic treat. Now Charlie has some economic choices to make. Including the $1,800 airfare, plus the other travel expenses (hotel, cabs, etc.), the trip to Dubai will cost $2,600—at least. It will also cost Charlie time: the time it takes to plan the trip, the days off work, and travel time. Then, there’s the opportunity cost. While he is planning, traveling, and eating his ice cream, Charlie’s giving up the opportunity to do other things with his time and money. And there are unforeseen choices and expenses: What if he gets to Dubai and they’ve run out of saffron ice cream? Does he hang around in Dubai, investing more resources and waiting for them to restock? What if he tries Persian saffron ice cream and says, “Yuck!”—and wishes he’d bought banana ice cream back in Boise?

This is an extreme, unlikely situation, of course. However, the choices that ice-cream manufacturers, ice-cream shops, and people like Charlie make every day are all examples of economic decisions: at every turn, a choice has to be made about the allocation of limited resources. What economic decisions do you make in your life?

The purpose of this module is to give you an understanding of the fundamental principles of economics, some of the factors that drive economies, and how economics shapes the business environment. You will likely learn more about economics as you continue your education, but this section should serve as an excellent introduction and give you some tools to think about the impact of economics on your daily life.

Learning Outcomes

• Define economics and explain the difference between macroeconomics and microeconomics
• Identify the forces that drive supply and demand within an economic system
• Illustrate the relationship between supply and demand using supply and demand curves
• Compare and contrast different economic systems (capitalist, planned, and mixed)
• Describe the methods economists use to evaluate the health of an economy, such as GDP, unemployment rate, and CPI
• Explain the effect that the four stages of an economy (expansion, peak, contraction and trough) have on business operations