Transcript Teaching economics to non

Teaching economics to non-economists
Anthony Plumridge
University of the West of England, Bristol
First degree in economics, sociology and politics, second
degree in architecture, planning and environmental studies
Early career in marketing and strategic management, ran
three small businesses, entered academic life in 1989
A belief in the vocational value of the rigorous analytical
skills of economics
Necessary to demonstrate the potency of economic
analysis in a relevant context
Teaching economics to non-economists
Modules taught include
• The Market Environment to Business Systems students
• Construction Economics to Building Studies students
• Economics of the Legal System to LlB students
• Housing and Property Economics to Joint Honours
students
• Environmental economics to Environmental Management
students
• Economics of Tourism to Business and Tourism students
• European Economics to European Languages students
• Tourism in Local Economic Development to MA Sustainable
Tourism students
Outreach activities
• Delivered ESF funded programme of business economics
training to 90 SMEs 1999 – 2001
• Provided Professional Development training to
stockbrokers, solicitors and Trading Standards Officers
Teaching economics to non-economists - contexts
Various contexts exist in which economics is taught as a
subsidiary subject, each posing particular difficulties:
• as a half degree combined with a wide range of other half
degrees (42 at UWE) as part of a joint honours programme e.g. economics and media studies (some 200 students take
economics as a half degree at UWE).
problem: the two half degrees are taught in isolation,
interdisciplinary material is ignored, students often not
grouped according to discipline combination and can feel
isolated.
Teaching economics to non-economists - contexts
• as core component of a degree in another discipline
problem: a “critical mass” of basic economic theory needs
to be included and a number of key threshold concepts
fully understood; resource constraints mean there may be
insufficient time to explore relevant contexts, applications
or interdisciplinary material
Teaching economics to non-economists - contexts
• as an option on a degree in another discipline
problem: as above with added complication that often the
module is offered to students on a number of disparate
degree courses
Teaching economics to non-economists
THE LEAST DESIRABLE RESOURCE-DRIVEN SOLUTION:
Teach the same introductory economics module irrespective
of the context or other disciplines studied.
WAYS OFIMPROVING ON THIS:
Administrative solution
• Allocate students to seminar/tutorial groups according to
other discipline studied: appropriate contexts and
interdisciplinary material can then be covered.
Teaching economics to non-economists
Assessment solution
• Use mini-project style assignments allowing students to
choose appropriate interdisciplinary topics.
Resource economising solutions
• Support teaching of basic principles with self-directed
learning material such as interactive software.
Welcome to
"PROFITS AND COSTS"
an interactive introduction to the cost
structure of a typical business
organisation
To move around the programme, click on the
sheet tabs at the bottom of the page.
Some cells have hidden notes: look for a red
marker in the top right hand corner of the cell.
To read these select the cell with your cursor and
then select Note on the Insert menu.
Before selecting the Sheet 1 tab to move to the
next screen, select Full Screen on the View menu.
THE PROFIT AND LOSS ACCOUNT OF A SMALL MANUFACTURER
PERIOD
SALES £000 (Revenue)
OUTPUT (000units)
COST OF SALES (Variable costs)
Labour
Materials
Distribution
TOTAL VARIABLE COSTS (TVC)
GROSS PROFIT (Revenue - TVC)
EXPENSES (Fixed Costs)
Administrative Salaries
Directors' Fees
Communications
Information Technology
Premises
Advertising
Travel/Entertaining
Insurance
Professional Fees
Depreciation
Tax
TOTAL FIXED COSTS (TFC)
TOTAL COSTS (TVC+TFC))
NET PROFIT (Gross Profit - TFC)
PRICE £
YEAR 1
OUTPUT is the quantity of the product produced. SALES (also called
1000 REVENUE) is the value of output sold. In this example, all output produced in
100 the year is sold and SALES = OUTPUT X PRICE. This would not be so if
some output was not sold but held as stock
140
220
40
400
600
COST OF SALES comprise what are known as the VARIABLE or DIRECT
costs. These are costs which vary directly with Output. If production ceased,
no variable costs would be incurred - Labour could be layed off, materials and
components would not be used and there would be no product to distribute
GROSS PROFIT is calculated by subtracting the Variable Costs from
Revenue. In this case GROSS PROFIT is 60% of Revenue. This is the
80 GROSS PROFIT MARGIN.
90
20 EXPENSES comprise what are also known as the FIXED or INDIRECT
30 costs. Expenses are also known as OVERHEADS. These are costs which do
90 not vary directly with output. They are fixed in the SHORT TERM and only
50 change when the SIZE or SCALE of the business changes in the LONG
40 TERM.
15
15
100 NET PROFIT is calculated by subtracting Fixed Costs from Gross Profit. In
18 this case NET PROFIT is 5.2% of Revenue. This is the NET PROFIT
548 MARGIN.
948
NOW TRY CHANGING OUTPUT AND PRICE AND SEE WHAT HAPPENS
52
TO REVENUE, COSTS AND PROFIT
10.0
PERIOD
SALES £000 (Revenue)
OUTPUT (000units)
COST OF SALES (Variable costs)
Labour
Materials
Distribution
TOTAL VARIABLE COSTS (TVC)
GROSS PROFIT (Revenue - TVC)
EXPENSES (Fixed Costs)
Administrative Salaries
Directors Fees
Communications
Information Technology
Premises
Advertising
Travel/Entertaining
Insurance
Professional Fees
Depreciation
Tax
TOTAL FIXED COSTS (TFC)
TOTAL COSTS (TVC+TFC))
NET PROFIT (Gross Profit - TFC)
YEAR 1
1000
100
140
220
40
400
600
80
90
20
30
90
50
40
15
15
100
18
548
948
52
This simple Profit and Loss Account shows the
Revenue, Costs and Profits accumulating over a
year's trading.
It is more revealing to look at how this picture might
build up over time. What follows is the progress of
the same business over two years or eight quarters
(eight three month periods):
* The business is established with a
management and administrative team in
the first quarter. There is no production yet.
* Then production starts up and sales build up
over the following months and the business
moves into profit.
* But then costs begin to rise as it becomes
harder and harder to keep up with booming
sales.
* The period of time considered is known as
the short run
To see an extended picture of this go to Sheet 3
(Note: the colur of the lines in the chart
corresponds to the colours in the table)
TOTAL COSTS, REVENUE AND PROFIT OF
A GROWING BUSINESS IN THE SHORT RUN
EXPENSES
Administrative Salaries
Directors Fees
Communications
Information Technology
Premises
Advertising
Travel/Entertaining
Insurance
Professional Fees
Depreciation
Tax
TOTAL FIXED COSTS
TOTAL COSTS
NET PROFIT
YEAR Q0 Q1 Q2 Q3 Q4 Q5 Q6 Q7
1000
0 100 200 300 400 500 580 600
100
0 10 20 30 40 50 58 60
140
220
40
400
600
0
0
0
0
0
21
21
4
46
54
28
44
8
80
120
80 20 20 20
90 23 23 23
20
5 5 5
30
8 8 8
90 23 23 23
50 13 13 13
40 10 10 10
15
4 4 4
15
4 4 4
100 25 25 25
18
5 5 5
548 137 137 137
948 137 183 217
52 -137 -83 -17
32
66
12
110
191
20
23
5
8
23
13
10
4
4
25
5
137
247
54
60
88
16
164
237
105 252 308
187 264 440
24 24 24
316 540 772
184 40 -172
LOWER
BREAK EVEN POINT
TOTAL COSTS AND REVENUE
1000
T
900
COSTS AND REVENUE £
PERIOD
SALES £000 (Revenue)
OUTPUT (000units)
COST OF SALES
Labour
Materials
Distribution
TOTAL VARIABLE COSTS
GROSS PROFIT
UPPER BREAK EVEN
POINT
800
V
700
600
R
20 20 20 20
500
23 23 23 23
5
5
5
5
400
8
8
8
8
300
23 23 23 23
F
200
13 13 13 13
100
10 10 10 10
0
4
4
4
4
0
10
20
30
40
50
60
4
4
4
4
OUTPUT (000units)
25 25 25 25
5
5
5
5
137 137 137 137 SEE THE EFFECT OF CHANGING THE PRICE BY
301 453 677 909 CLICKING ON IT AND TYPING IN A NEW FIGURE
100 47 -97 -309 PRICE £
10.0
Total Costs and Revenue on the previous sheet
give a usefull picture of the business, but a more
telling picture emerges if we consider Average
Costs and Price. Average Costs are obtained by
dividing Total Cost by Output. Price is the same
as Revenue divided by Output and is sometimes
called Average Revenue.
Sheet 5 shows a table and chart of Average Costs
and price.
AVERAGE COSTS AND PRICE IN A
GROWING BUSINESS IN THE SHORT RUN
UNIT EXPENSES
Administrative Salaries
Directors Fees
Communications
Information Technology
Premises
Advertising
Travel/Entertaining
Insurance
Professional Fees
Depreciation
Tax
AVERAGE FIXED COSTS
AVERAGE TOTAL COSTS
UNIT NET PROFIT
Q1 Q2 Q3 Q4 Q5 Q6 Q7
10.0 10.0 10.0 10.0 10.0 10.0 10.0
AVERAGE COSTS
20.0
2.1
2.1
0.4
4.6
5.4
2.0
2.3
0.5
0.8
2.3
1.3
1.0
0.4
0.4
2.5
0.5
13.7
18.3
-8.3
1.4
2.2
0.4
4.0
6.0
1.0
1.1
0.3
0.4
1.1
0.6
0.5
0.2
0.2
1.3
0.2
6.9
10.9
-0.9
1.1
2.2
0.4
3.7
6.4
0.7
0.8
0.2
0.3
0.8
0.4
0.3
0.1
0.1
0.8
0.2
4.6
8.2
1.8
1.5
2.2
0.4
4.1
5.9
0.5
0.6
0.1
0.2
0.6
0.3
0.3
0.1
0.1
0.6
0.1
3.4
7.5
2.5
2.1
3.7
0.5
6.3
3.7
0.4
0.5
0.1
0.2
0.5
0.3
0.2
0.1
0.1
0.5
0.1
2.7
9.1
0.9
4.4
4.6
0.4
9.4
0.6
0.3
0.4
0.1
0.1
0.4
0.2
0.2
0.1
0.1
0.4
0.1
2.4
11.8
-1.8
5.1
7.3
0.4
12.9
-2.9
0.3
0.4
0.1
0.1
0.4
0.2
0.2
0.1
0.1
0.4
0.1
2.3
15.2
-5.2
18.0
16.0
AVERAGE COST £
PERIOD
AVERAGE REVENUE (Price)
Try changing price in cell B7
UNIT COST OF SALES
Labour
Materials
Distribution
AVERAGE VARIABLE COSTS
UNIT GROSS PROFIT
UPPER AND LOWER
BREAK EVEN POINTS
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
0
10
20
30
40
50
OUTPUT
AVC
AFC
ATC
PRICE
58
Looked at either from the Total Cost and Revenue perspective or from
Average Cost and Price, the business is in trouble: the demand for the
product is beyond capacity. The business needs to increase the SCALE of
operations by increasing the CAPITAL (factory space, machinery and
equipment). This can be achieved only after the time needed to extend
premises and install new machinery. This is known as the long run . Once
the expansion is achieved the business is in a new short run time period
until sufficient time has elapsed to allow a further increase in scale.
The necessary increase in scale will also require some increase in the size of
the management team and the number of administrative staff. Fixed costs
will thus rise. This can only be achieved in the long run. In most cases this
increase in size will allow ECONOMIES OF SCALE to be achieved, resulting in
a reduction in average total cost.
The next sheet shows how the business increases scale during year 2 so that
in year 3 it can increase output. This is shown on the next sheet: year 1 is
included for comparison purposes and year 3 shows the first full year of the
new larger operation. Q0 is the transitional period during which production is
transfered to the new factory.
TOTAL COSTS AND REVENUE IN A LARGER
GROWING BUSINESS IN THE SHORT RUN
PERIOD
SALES £000 (Revenue)
OUTPUT (000units)
COST OF SALES
Labour
Materials
Distribution
TOTAL VARIABLE COSTS
GROSS PROFIT
(Revenue - Variable Cost)
EXPENSES
Administrative Salaries
Directors Fees
Communications
Information Technology
Premises
Advertising
Travel/Entertaining
Insurance
Professional Fees
Depreciation
Tax
TOTAL FIXED COSTS
TOTAL COSTS
NET PROFIT
YR 1
1000
100
YR 3
3000
400
Q0
0
0
Q1
300
40
Q2
600
80
Q3
900
120
Q4
1200
160
Q5
1500
200
Q6
1725
230
Q7
1800
240
140
220
40
400
600
400
750
125
1275
1725
0
0
0
0
0
60
75
13
148
153
80
150
25
255
345
100
225
38
363
538
120
300
50
470
730
180
375
63
618
883
320
525
225
1070
655
800
675
250
1725
75
80
90
20
30
90
50
40
15
15
100
18
548
948
52
120
135
30
45
180
150
60
23
23
200
50
1015
2290
710
30
34
8
11
45
38
15
6
6
50
13
254
254
-254
30
34
8
11
45
38
15
6
6
50
13
254
401
-101
30
34
8
11
45
38
15
6
6
50
13
254
509
91
30
34
8
11
45
38
15
6
6
50
13
254
616
284
30
34
8
11
45
38
15
6
6
50
13
254
724
476
30
34
8
11
45
38
15
6
6
50
13
254
871
629
30
34
8
11
45
38
15
6
6
50
13
254
1324
401
30
34
8
11
45
38
15
6
6
50
13
254
1979
-179
There is a
Total Cost
and
Revenue
graph
shown
below:
Scroll
down to
view.
TOTAL COSTS AND REVENUE
2500
2000
COSTS AND REVENUE £
TOTAL
COST
NOTE THE POSITION
OF THE NEW BREAK
EVEN POINTS
1500
REVENUE
VARIABLE
COST
1000
500
FIXED COST
0
0
50
100
150
OUTPUT (000units)
200
250
300
In the chart below, the two scales of operation are compared on one average
cost graph. Economies of Scale drive down the costs of the larger business.
As scale changes the period shown is the long run
AVERAGE TOTAL COST
Small scale
Price = £10
20.0
COST AND PRICE
17.5
Larger scale
Price = £7.50
15.0
12.5
10.0
7.5
5.0
2.5
0.0
0
50
100
150
OUTPUT
200
250
Profits are maximised where Marginal Cost equals Marginal Revenue.
Here is an explanation of Marginal Cost:
This data is taken
from Sheets 3 and
5
PERIOD
PRICE ( = Marginal Revenue) £
OUTPUT (000units)
TOTAL VARIABLE COSTS £000
MARGINAL COST £
AVERAGE TOTAL COSTS £
Marginal Cost (MC) is the extra cost of
producing one more unit: to calculate MC
from the data below take the increase in TVC
and divide by the increase in output
Q1
Q2
Q3
Q4
Q5
Q6
Q7
10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0
10.0
20.0
30.0
40.0
50.0
58.0
60.0
46.0
80.0
110.0
164.0
316.0
540.0
772.0
3.4
18.3
10.9
8.2
7.5
9.1
11.8
15.2
The value in this cell is the increase in TVC (80 - 46 or 34)
divided by the increase in output (10).
The answer is put in between the columns as Marginal Cost is
related to the change in output between Q1 and Q2
You will get the same result if you work out MC using the
change in Total Cost rather than Total Variable Cost
Now work out the Marginal
Cost for Q2 to Q7.
Check your results on the
next sheet - this includes a
graph of Marginal Cost