CHAPTER 1

Business Management Review:

Appreciating the Groundwork in Strategic

Business Analysis
Business Management Review: Appreciating the Ground work in Strategic Business Analysis

Exploring Economic Principles: Rational Decision-Making

and Human Needs and Wants

Introduction

Economics is the study of how societies manage and use their resources effectively.
At its core, economics deals with the problem of scarcity, which is the limited availability
of resources compared to the endless wants of people, businesses, and governments.
This field looks at how decisions are made to distribute resources like time, money, labor,
and materials to meet different needs and wants. Understanding economics helps us see
how these choices affect our daily lives and the overall economy.

Economics is generally divided into two main branches: microeconomics and

macroeconomics. Microeconomics focuses on the decisions made by individuals,
families, and businesses. It examines how these choices influence things like supply and
demand, pricing, and competition in the market. For example, microeconomics looks at
how a family decides to budget their money among needs like food, housing, and
education, or how a company sets prices for its products to attract customers. By studying
microeconomics, we can better understand how personal choices can impact the
economy at a larger scale.

On the other hand, macroeconomics studies the economy as a whole. It considers

larger factors that affect everyone, such as inflation, unemployment rates, government
policies, and international trade. Macroeconomics helps us understand how national
policies can influence economic growth and stability. By examining these two branches
together, we can see how individual decisions connect to broader economic trends. For
instance, if many families decide to save money instead of spending, it can affect overall
consumer spending, which in turn impacts economic growth. By learning about
economics, we can make more informed choices that contribute to both our personal well-
being and the health of society as a whole.
Business Management Review: Appreciating the Ground work in Strategic Business Analysis

The Stock Market and Economic Indicators

The stock market is a crucial economic indicator that reflects the performance of
companies and the economy. When a company does well—launching popular products
or achieving high sales—its stock price typically rises as investors gain confidence and
buy shares. However, poor performance, like declining sales or product recalls, can lead
to a drop in stock prices, as investors lose confidence and sell shares.

Government policies also play a vital role in shaping economic health. For
example, when a country faces high unemployment, the government may initiate public
works projects (like building roads or schools) to create jobs. This approach, often called
a "fiscal stimulus," puts money into the hands of workers, enabling them to spend more
and boost the economy.

Commodity prices, including essentials like oil, metals, and food, fluctuate based
on global supply and demand. For instance, if there is an oil surplus, prices may drop,
making fuel more affordable and lowering costs for industries reliant on oil. However, a
drought affecting crop yields can drive up food prices, affecting the cost of living. Such
fluctuations impact businesses, consumers, and governments, underscoring the
interconnected nature of the economy.

Key Economic Concepts

1. Scarcity and the Economic Problem

Scarcity lies at the heart of economic theory, representing the gap between limited
resources and infinite desires. Because resources like land, labor, and capital are finite,
societies must decide how best to allocate them. This leads to three fundamental
economic questions:

• What to produce? This involves deciding which goods and services should be
made based on consumer demand, societal needs, and available resources.
• How to produce? This addresses the methods, labor, and resources used in
production. For instance, should a factory be automated or employ manual labor?
Business Management Review: Appreciating the Ground work in Strategic Business Analysis

• For whom to produce? Societies must determine who will have access to the
produced goods and services, considering factors like income distribution and
social priorities.

This decision-making process is essential for meeting society's needs and managing
resource allocation fairly and efficiently. Without addressing these questions, resources
could be wasted or misallocated, leading to unmet needs and economic inefficiencies.

2. Shortages vs. Scarcity

While scarcity is a constant challenge due to limited resources, shortages are temporary
and can result from sudden demand spikes, supply chain issues, or natural disasters. For
instance, if a factory experiences a supply chain disruption, there may be a temporary
shortage of goods until production resumes. Recognizing this distinction helps
policymakers develop solutions tailored to either chronic scarcity or short-term shortages.

Economic Decision-Making and Rational Choices

Economic decision-making involves evaluating the costs and benefits of choices,

a process guided by rationalization. In economic terms, rationalization is the careful
assessment of the value of goods or services relative to their price before making a
decision. This involves two aspects:

• Intrinsic value, which is the personal worth or utility of a product or service.

• Extrinsic value, or the market value or price.

For instance, when purchasing a new phone, you might weigh factors like its brand,
features, durability, and whether it meets your needs. If the features justify the cost, the
decision aligns with rationalization.

Another vital concept is opportunity cost—the value of the next best alternative
forgone when making a choice. For example, if you spend P1500 on concert tickets, the
opportunity cost might be a pair of shoes you can no longer afford. Opportunity costs
highlight that every decision involves trade-offs, helping us weigh the true cost of choices
beyond mere monetary value.
Business Management Review: Appreciating the Ground work in Strategic Business Analysis

Needs vs. Wants: Prioritizing Resources

Needs are essential for survival, including food, water, shelter, and clothing, while
wants are non-essential items that enhance comfort or pleasure, like luxury goods,
vacations, or entertainment. Understanding the difference between needs and wants is
key to effective budgeting and resource management.

Primary and Secondary Needs

• Primary needs are life-sustaining, such as food, water, and shelter.

• Secondary needs contribute to well-being and comfort, like education, health
services, or entertainment.

Distinguishing between these categories allows individuals and societies to

prioritize resources, ensuring that basic needs are met before allocating resources to
improve quality of life.

Production and Consumption: Inputs and Utility

In economics, goods and services are created using fixed and variable inputs:

• Fixed inputs, such as machinery or land, remain constant regardless of

production levels.
• Variable inputs, like labor or raw materials, vary with production volume.

The concept of utility describes the satisfaction gained from consuming goods or
services. For instance, enjoying a hot coffee on a cold day provides utility. Diminishing
marginal utility states that as consumption of a product increases, satisfaction from each
additional unit decreases. For example, while the first slice of pizza is highly satisfying,
the fourth or fifth slice provides less enjoyment. Eventually, one may reach a saturation
point—where consuming more of a product no longer increases satisfaction. This
concept is significant for both consumers and producers, as it helps prevent waste and
overproduction.
Business Management Review: Appreciating the Ground work in Strategic Business Analysis

Conclusion

In conclusion, economics is a crucial tool that helps individuals, businesses, and

governments make smart decisions about how to use their resources, manage trade-offs,
and set priorities. By learning about key economic concepts like scarcity, opportunity cost,
utility, and diminishing marginal utility, we can improve our daily choices, whether they
relate to personal spending or larger public policies that affect our communities.

Understanding scarcity is vital because it reminds us that resources—like money,

time, and materials—are limited. This limitation forces us to make choices about what we
really need versus what we want. For instance, when planning a budget, an individual
might decide to cut back on dining out in order to save for a more important expense,
such as education or healthcare.

The idea of opportunity cost is also important in decision-making. It refers to what

we give up when we choose one option over another. In our fast-paced consumer world,
it can be easy to make quick purchases without thinking. However, recognizing
opportunity costs helps us consider whether a purchase aligns with our long-term goals.
For example, if someone spends money on a new phone, they may need to consider that
this money could have been saved for a vacation or invested for future needs.

Utility refers to the satisfaction or happiness we get from consuming goods and
services. By understanding utility, we can make better choices about what to buy. For
example, if we know we will get more satisfaction from a quality product that lasts longer
rather than a cheaper, lower-quality option, we might choose to invest in the better
product.

The principle of diminishing marginal utility explains that as we consume more

of the same item, the additional satisfaction we get from each extra unit tends to decrease.
This is why the first slice of pizza is usually the most enjoyable, while the fifth slice might
not taste as good. Recognizing this can encourage us to enjoy a variety of experiences
rather than overindulging in one.
Business Management Review: Appreciating the Ground work in Strategic Business Analysis

On a broader scale, understanding these economic principles can help

governments create policies that lead to economic growth and stability. By being aware
of factors like inflation and unemployment, policymakers can develop strategies to
encourage job creation and support essential services for all citizens.

Ultimately, economics not only helps us make personal decisions but also guides
us in managing resources responsibly at a community and national level. By applying
these economic concepts, we can build a society that promotes thoughtful choices and
sustainable growth. This understanding of economics encourages us to see how our
decisions affect not just ourselves but also our families and communities, helping us work
towards a better future for everyone.

Submitted by: Sean Verly S. Rejano

PCBEA-01-902E