Business Economics

Economics is the science of how society allocates limited resources to satisfy unlimited needs. This definition may seem simple, but behind it lies one of the most profound and practically significant problems faced by every person, every firm, and every state. At the core of economic science lie...

Why does economics exist as a science at all? Imagine a world where there is enough of everything: infinite energy, unlimited food, enough time for all activities. In such a world, there would be no need to make choices, and economics as a discipline simply would not arise. But reality is differe...

Economic science originated in the 18th century, when Adam Smith published his famous work "An Inquiry into the Nature and Causes of the Wealth of Nations" (1776). Since then, economists have tried to answer the key question: how to make the best use of what we have to maximize the welfare of soc...

Scarcity means that resources are limited compared to people's needs. This is not a matter of poverty or wealth—it is a fundamental property of our world. Even the richest countries and people face scarcity, because their desires always grow faster than their possibilities.

Formulas

Scarcity forces us to make choices—at every level: from the everyday decisions of an individual to the strategic decisions of governments. But how should this choice be made exactly? Economic science offers the concept of rational choice—a process of systematically comparing benefits and costs wi...

This does not mean that people always act rationally in life—psychological research by Daniel Kahneman and Amos Tversky showed that people systematically deviate from rational behavior (cognitive biases). But the rational choice model remains a powerful analytical tool that helps to understand an...

One of the most powerful tools of economic thinking is marginal analysis. The word “marginal” in economics means “additional” or “incremental.” Economists state that optimal decisions are made not based on total (aggregate) costs and benefits, but on the additional benefits and costs from each ne...

Why is the marginal approach so important? Imagine you manage a coffee shop. The question “Should I sell coffee at all?” is not a marginal question. The marginal question is: “Should I sell one more cup of coffee? Should I hire one more barista? Should I extend opening hours by one more hour?” It...

Definitions

Fiscal policy

— use of government spending and taxes:

Monetary policy

— managing interest rates and money supply (conducted by the central bank):

Every society must decide what, how, and for whom to produce. The way a society organizes answers to these questions determines its economic system. Throughout history, humanity has experimented with various approaches, and the study of these systems helps us understand why some countries are wea...

The three main economic systems are the command (planned) economy, the free market economy, and the mixed economy. In pure form, neither of the first two systems exists: all real economies are mixed, but with varying "weight" of market and government mechanisms.

In a command economy, economic decisions are made by a central government or planning body. The state decides which goods to produce, in what quantities, by which methods, and how to distribute the output. Private ownership of the means of production is either absent or severely limited.

The largest and longest experiment with a command economy was the Soviet Union (1922–1991). Gosplan (the State Planning Committee) developed five-year plans, determining production targets for each sector and enterprise. Prices were set by the state, not by the market.

Before delving into the theory of demand, it is necessary to understand what a market is and how it functions. A market is any mechanism by which buyers and sellers interact to exchange goods and services. It is not necessarily a physical location: the stock exchange, the online platform Amazon, ...

Real markets are rarely perfectly competitive (we will discuss this in the module on market structures), but the competitive market model is an indispensable analytical tool for understanding the basic principles of pricing.

In a free market economy, the coordination of millions of individual decisions occurs through the price mechanism — the process by which prices convey information, create incentives, and allocate resources. It is one of the most elegant mechanisms in economics, and its significance cannot be over...

Real-life example: the mask market during COVID-19. At the beginning of the pandemic (March 2020), demand for medical masks rose tenfold. Supply could not quickly increase — there were few factories. A severe shortage arose. The price mechanism operated instantly: mask prices increased 5–10 times...

If demand reflects the behavior of buyers, then supply reflects the behavior of sellers (producers). Supply is the quantity of a good that producers are willing and able to offer for sale at a given price over a certain period of time.

As with demand, it's important to emphasize: supply is not simply the stock of goods in a warehouse. It is the amount that producers want and can sell at the given price. A firm may have the capacity to produce a million units, but if the price is too low, it won’t want to do so (it would operate...

The Law of Supply states: as price rises, the quantity supplied increases, and vice versa (other things being equal). The supply curve has a positive slope (it rises from left to right).

Why? A higher price makes production more profitable, which: 1. Stimulates existing producers to increase output 2. Attracts new producers to the market 3. Justifies the use of more expensive (less efficient) resources and technologies

Formulas

The law of demand tells us that when the price rises, demand decreases. But by how much does it decrease? This question is critically important for business: if a company raises its price by 10%, will it lose 5% of its customers or 50%? The answer determines whether a price increase will bring mo...

Price elasticity of demand (PED) measures the degree of reaction of the quantity demanded to a change in price. Formally:

PED is always negative (law of demand: price increases → demand decreases), but for convenience the absolute value (modulus) is usually used.

The coffee shop raised the price of a latte from 250 to 300 rubles. Before the increase, it sold 200 cups per day; after — 160 cups.

In economic theory, the distinction between the short run and long run is not a matter of calendar time (days, months, years), but a matter of resource flexibility. This difference is fundamental for understanding how firms make production decisions.

Short run is the period during which at least one factor of production is fixed (cannot be changed). Usually, capital is the fixed factor: the size of the plant, the amount of equipment, the area of retail space. Labor is variable: the firm can hire additional workers or reduce their number.

Long run is a period long enough for all factors of production to become variable. The firm can build a new plant, install new equipment, change the scale of production, enter or exit the industry.

The duration of the "short run" and "long run" varies depending on the industry. For an ice cream stand, the "long run" may be several weeks (rent a new space, buy new equipment). For a petrochemical plant — 5–10 years (building a new plant is a multi-year project). For a nuclear power station — ...

Definitions

MC = ΔTC / ΔQ

— additional cost of producing one more unit of output.

Formulas

Understanding the structure of costs is the foundation for making decisions about pricing, production volume, and business strategy. A manager who does not understand their firm’s costs is like a pilot who cannot see the instrument panel—disaster is only a matter of time.

Fixed costs are costs that do not depend on the volume of output. Even if the firm produces nothing (Q = 0), it incurs fixed costs. They are associated with fixed factors of production.

Examples: rent for premises, equipment depreciation, salary of management personnel, insurance premiums, loan payments, licensing fees.

Specific example: A restaurant pays 300,000 rubles/month in rent, 100,000 rubles/month in administrator’s salary, 50,000 rubles/month in insurance. Total FC = 450,000 rubles/month—regardless of whether it serves 0 or 1,000 clients.

Definitions

TR = P × Q

— price multiplied by the quantity sold.

AR = TR / Q = P

— revenue per unit of product, which always equals the price.

MR = ΔTR / ΔQ

— additional revenue from selling one more unit of output.

Formulas

To make decisions about pricing and production volume, a firm needs to understand three types of revenue.

This is the most intuitive indicator: how much money the firm receives from selling all its products. But by itself, TR says little about profitability — to gauge that, it must be compared to costs.

AR = TR / Q = P — revenue per unit of product, which always equals the price.

The AR curve is the demand curve for the firm's product. This is logical: the price at which the firm sells its product is determined by the demand for its output.

Formulas

Before a firm makes even a single strategic decision—about price, output volume, advertising budget, or investment in research—it needs to understand in which market structure it operates. The market structure determines the “rules of the game”: how freely the firm can set prices, how easily new ...

Imagine a farmer growing wheat in Krasnodar Krai. He arrives at an elevator and receives the price he is quoted—he cannot bargain, because wheat of a particular grade and class is virtually identical among all producers. Now imagine Apple releasing a new iPhone: it sets the price itself, because ...

Economists distinguish four main market structures, arranged by degree of competitiveness:

Perfect competition stands out in this lineup—it is a theoretical benchmark, a model with which economists compare all other market structures. Understanding perfect competition is the foundation for analyzing any real market.

Formulas

Monopoly is a market structure in which a single firm is the sole producer of a good or service without close substitutes. Unlike perfect competition, where a firm is a grain of sand in an ocean, the monopolist is the entire market. The firm's demand curve coincides with the market demand curve, ...

It is important to understand: even a monopolist cannot set any price at will. They are constrained by consumer demand. If the monopolist sets too high a price, sales volume will fall so much that profits will decrease. The monopolist chooses the optimal “price–quantity” combination on the demand...

Sole seller. One firm controls the entire supply in the market. A classic historical example is De Beers, which throughout most of the 20th century controlled up to 80–85% of the global diamond market. Founded by Cecil Rhodes in 1888 in South Africa, De Beers bought diamond mines around the world...

No close substitutes. Consumers cannot switch to an alternative product. If you live in a city where water supply is provided by one company, there is no way to “switch to the competition”—the water network is singular. This fundamentally distinguishes monopoly from monopolistic competition, wher...

Definitions

Tacit collusion. Firms coordinate actions without a formal agreement, through price leadership

— one firm (usually the largest) sets the price, and the others follow. In the banking sector, when the central bank changes the key rate, the largest bank usually is first to announce new lending rates, and the rest quickly match them.

If a firm raises the price above the current level, competitors do not follow

— why should they? They will lure away the customers of the firm that raised prices. Demand for this firm’s product will sharply drop—the demand curve is elastic above the current price.

If perfect competition is the theoretical ideal and pure monopoly is the extreme case, then monopolistic competition is the market structure we encounter every day. When you choose among dozens of restaurants in your neighborhood, among clothing brands in a shopping mall, among hair salons or cof...

This model was first proposed by economist Edward Chamberlin in 1933 in his work “The Theory of Monopolistic Competition” and independently by Joan Robinson in “The Economics of Imperfect Competition” in the same year. Both researchers realized that real markets do not fit either the model of per...

Many firms, none dominates. The market operates with enough firms that each can make decisions relatively independently, not worrying about the reaction of any specific competitor. In Moscow, more than 15,000 restaurants and cafes operate—none of them controls a significant share of the market.

Product differentiation. This is the key feature that distinguishes monopolistic competition from perfect competition. Each firm produces a unique variant of a product, differentiated by brand, quality, design, location, atmosphere, or service. Two Italian restaurants side by side are not selling...

Definitions

Marginal Social Benefit (MSB)

— this is the total benefit that the entire society receives from the consumption or production of one more unit of a good. MSB includes:

Marginal Social Cost (MSC)

— this is the total cost for all of society from producing one more unit. MSC includes:

Formulas

When economists speak of "market failures," they refer to situations where the free market does not deliver a socially efficient outcome. But what exactly does social efficiency mean?

Social efficiency is a state of the economy in which it is impossible to improve one person's situation without worsening another's. This condition, known as Pareto optimum, is achieved when resources are allocated in such a way that social welfare is maximized.

In practice, economists formulate the social efficiency condition via the relationship of marginal social benefits and costs:

Marginal Social Benefit (MSB) — this is the total benefit that the entire society receives from the consumption or production of one more unit of a good. MSB includes:

Formulas

Externality (external effect, externality) is the impact of economic activity on third parties who are not direct participants in the transaction and whose interests are not reflected in the market price. This is one of the most common and significant causes of market failure.

Why does the market “not see” externalities? Because market prices are formed based on private costs and benefits — those incurred or received by direct participants in the transaction (buyer and seller). Costs or benefits “spilled over” to third parties are not included in the price and therefor...

Imagine a factory that dumps waste into a river. The pollution costs (deteriorating health of residents, fish kills, loss of the river's recreational value) are borne neither by the factory nor its clients, but by the residents of the surrounding area and fishermen. Since the factory does not pay...

Productive activity creates costs for third parties that are not reflected in the price of the good.

Definitions

Nominal GDP

— measured in current prices. It can increase for two reasons: (1) the economy is actually producing more goods and services, or (2) prices have simply increased. If a loaf of bread rises in price from 30 to 60 rubles, nominal GDP increases, even th...

Real GDP

— measured in constant prices of a base year (for example, 2015). It removes the effect of inflation and shows the real change in output. It is real GDP that we are interested in if we want to know whether the economy is producing more.

Recession

— a period of decline in real GDP for two or more consecutive quarters. This is the technical definition. For example, if GDP falls in January–March and falls again in April–June—the economy is officially in recession. However, some economists belie...

Actual growth

— the annual percentage increase of national output.

Potential output

— the level of output at “normal utilization” of capacity. This is the volume of products the economy could produce if all resources (labor, capital, land) were used at “normal” levels—not overstrained, but not left idle either.

Output gap

— the difference between actual and potential output. A positive gap (actual > potential) means the economy is overheating: factories work in three shifts, workers are in short supply, wages rise, and this leads to inflation. A negative gap (actual ...

1. Upturn (Recovery)

— the beginning of recovery after a downturn. The economy has “bounced off the bottom.” Firms begin cautiously hiring workers, consumers slowly increase spending. Confidence gradually returns. Example: the economies of most developed countries in 20...

2. Expansion (Boom)

— rapid growth, falling unemployment, rising consumer and business confidence. Firms actively invest, banks willingly lend, new jobs are created. Example: the US economy in 2014–2019—a long period of stable growth when unemployment fell from 6.7% to...

3. Peaking Out

— maximum output. The economy is working at the limit of its capabilities. Main signs: high inflation (resources are becoming more expensive due to increased demand), labor shortages, increasing imports (domestic producers cannot meet demand). Examp...

4. Slowdown / Recession

— decrease in output, rising unemployment, falling confidence. Firms reduce production and lay off workers. Consumers cut back on spending. Investment drops. Example: the global recession of 2008–2009, when the GDP of most developed countries fell b...

The Great Depression (1929–1933)

— the deepest economic crisis of the 20th century. US GDP fell by 30%, unemployment reached 25%, thousands of banks failed. The crisis began with the stock market crash in October 1929 and spread worldwide. This experience caused economists (especia...

Postwar Boom (1945–1973)

— the “golden age” of capitalism. Western economies grew at unprecedented rates: German GDP grew by 8% per year (“economic miracle”), Japanese GDP even faster. Reasons: postwar reconstruction, the Marshall Plan, technological progress, growth of int...

Oil Crises (1973, 1979)

— a sharp rise in oil prices led to stagflation (a combination of inflation and economic stagnation) in advanced economies. This was a supply shock that traditional Keynesian policy could not cope with.

Global Financial Crisis (2007–2009)

— the crisis began in the US subprime mortgage market and quickly spread throughout the world. The largest banks were on the verge of bankruptcy (Lehman Brothers went bankrupt in September 2008), credit markets froze, international trade plummeted. ...

COVID Recession (2020)

— the COVID-19 pandemic led to an unprecedented shock: governments around the world introduced quarantine restrictions, shutting down much of the economy. UK GDP fell by 9.7% in 2020—the deepest drop in 300 years. US GDP fell by 3.4%, the eurozone—b...

Formulas

If microeconomics is a look at individual trees in a forest, then macroeconomics is a view of the entire forest as a whole. Macroeconomics studies the economy as a single unit, analyzing aggregate indicators that characterize the state of the entire national or global economy. Instead of asking “...

Macroeconomics studies a number of interconnected variables, each reflecting a key aspect of the economy’s condition:

All these variables are closely interconnected. When the economy grows too quickly, inflation often arises. When growth slows, unemployment rises. When a country imports a lot, it affects the exchange rate. Understanding these interrelationships is key to informed economic policy and making sound...

For business, the macroeconomic environment is the “weather” in which all firms operate. A company may be perfectly managed, but if the economy as a whole is in a deep recession, its sales will inevitably suffer. That is why managers and entrepreneurs need to understand macroeconomic trends and b...

Definitions

Firms

— these are organizations that hire factors of production (labor, capital, land) and use them to produce goods and services. From a small cafe to a multinational corporation like Apple or Gazprom, all of them belong to the firms sector. Firms are em...

Households

— these are individuals and families who, on the one hand, supply factors of production (working for firms, renting out land or premises, investing capital), and on the other hand, consume the goods and services produced by firms. Importantly, even ...

1. Output

— the sum of added value of all industries. How many goods and services did the economy produce?

2. Income

— the sum of all factor incomes: wages, rent, profit, interest, dividends. How much did all participants in production earn?

3. Expenditure

— the sum of all spending on final products: C + I + G + X − M. How much has been spent on purchasing produced goods?

Formulas

To understand how macroeconomics works, it is useful to imagine the economy as a system of flows — flows of money, goods, and services that continually circulate between various sectors. The circular flow of income model is a simplified yet powerful scheme that shows how the main participants in ...

Firms — these are organizations that hire factors of production (labor, capital, land) and use them to produce goods and services. From a small cafe to a multinational corporation like Apple or Gazprom, all of them belong to the firms sector. Firms are employers and producers.

Households — these are individuals and families who, on the one hand, supply factors of production (working for firms, renting out land or premises, investing capital), and on the other hand, consume the goods and services produced by firms. Importantly, even a single student economically constit...

Between firms and households there are two counter flows forming a closed cycle:

Definitions

Underemployment

— people who work but less hours than they would like at the current wage rate. For example, a person wants to work 40 hours per week, but his employer offers only 20 hours. Or a highly qualified engineer works as a courier because he cannot find a ...

ASL (Aggregate Supply of Labour)

— the aggregate labor supply curve. It shows how many people are willing and able to work at different levels of the average real wage. At higher wages, more people want to work → the curve slopes upward.

ADL (Aggregate Demand for Labour)

— the aggregate labor demand curve. It shows how many workers firms want to hire at different levels of the average real wage. At higher wages, hiring becomes more expensive → firms want fewer workers → the curve slopes downward.

Regional Unemployment

— concentration of unemployment in certain regions, often associated with structural change. When a region’s main industry declines, unemployment concentrates there, because workers cannot or will not relocate.

For cyclical unemployment

— stimulate aggregate demand: cut taxes, raise government spending, reduce interest rates. This is how governments acted during the 2008−2009 crisis and the 2020 pandemic.

For structural unemployment

— retraining and upskilling programs, relocation subsidies, infrastructure development in depressed regions, investment in education. For example, Germany successfully deals with structural change thanks to its “dual education” system, combining the...

For frictional unemployment

— improve labor market information infrastructure (online platforms, public employment services), reform unemployment benefits (incentivize active job search).

For real-wage unemployment

— reform minimum wage policies, weaken union power, increase labor market flexibility (though these measures are politically controversial).

Formulas

Unemployment is one of the most painful macroeconomic problems, because it directly affects the lives of millions of people. It is not just an abstract figure in economic statistics—behind every percentage point of unemployment are real individuals who have lost their jobs and means of subsistence.

Unemployed are people of working age who do not have a job, but are available for work and actively seeking it at current wage rates. Importantly, not every person without a job is considered unemployed. Students, retirees, housewives by their own choice, people who have despaired of finding work...

Labor Force is the total number of people who are either working (employed) or actively seeking work (unemployed). Labor Force = Employed + Unemployed.

Underemployment—people who work but less hours than they would like at the current wage rate. For example, a person wants to work 40 hours per week, but his employer offers only 20 hours. Or a highly qualified engineer works as a courier because he cannot find a job in his specialty. Underemploym...

Inflation is a sustained general increase in the price level in the economy. It is not simply the rise in price of an individual good (if tomatoes become more expensive due to a poor harvest, that is not inflation), but an increase in the average price level of all goods and services. Government ...

Why 2%, and not 0%? Because a small positive inflation is considered “lubrication” for the economy: it enables real wages to decrease (while nominal wages remain unchanged), which helps the labor market adjust to shocks. Deflation (falling prices) is seen as even more dangerous than moderate infl...

Countries publish Consumer Price Indices (CPI) monthly. The CPI tracks the cost of a “basket” of goods and services typical for the average household. This basket includes food, clothing, housing (rent or mortgage payments), transportation, healthcare, education, entertainment, and other categories.

Inflation rate = the percentage increase in CPI over the previous 12 months.

Definitions

The Federal Reserve System (Fed, USA)

— the largest and most influential central bank in the world. In response to the 2008 crisis, the Fed cut rates almost to zero (0–0.25%) and kept them there until 2015. When inflation accelerated in 2022, the Fed aggressively raised the rate—from 0....

European Central Bank (ECB)

— manages monetary policy for the 20 eurozone countries. After the 2008 crisis, the ECB not only cut rates to zero, but even introduced negative rates (banks paid to keep money at the ECB) to stimulate lending. The ECB also conducted a large-scale q...

Bank of England

— one of the oldest central banks in the world (founded in 1694). Its inflation target is 2%. If inflation deviates from the target by more than 1 percentage point, the Governor of the Bank of England must write an open letter to the Chancellor of t...

Governments and central banks do not simply observe the economy—they actively attempt to influence it, striving to achieve certain objectives. These goals reflect what society considers to be a “good” state of the economy.

High and stable economic growth. Sustained real GDP growth means more goods and services, higher incomes, and more business opportunities. “Stable” means without sharp fluctuations: steady growth of 2–3% per year is preferable to swings between 6% and −3%. China demonstrated impressive growth—on ...

Low unemployment. Maximum employment of resources, especially labor. Unemployment means not only suffering for individuals, but also lost output for the economy. Yet zero unemployment is neither realistic nor even desirable: frictional unemployment is necessary for an efficiently functioning labo...

Low and stable inflation. Most central banks in developed countries target inflation around 2%. The Bank of England, ECB, and the US Federal Reserve System—all of them have an explicit or implicit inflation target of around 2%. The Central Bank of Russia also adopted inflation targeting in 2014 w...

Definitions

Floating exchange rate

— the rate is determined by supply and demand in the currency market. Most major world currencies (dollar, euro, pound, yen) float. Demand for the currency depends on exports (foreigners buy the country's currency to pay for its goods), capital infl...

Fixed exchange rate

— the government or central bank sets the rate and maintains it through interventions in the foreign exchange market (buying or selling currency from reserves). The Chinese yuan was long pegged to the US dollar, although China is now gradually movin...

In the modern world, no economy exists in isolation. Countries trade with each other, invest abroad, and both receive and send out migrants. All these international economic interactions are reflected in the balance of payments—a systematic record of all economic transactions between residents of...

1. Current Account. Reflects trade in goods and services, investment income, and transfers.

2. Financial Account. Reflects capital movement: foreign direct investment (FDI), portfolio investment (purchase of stocks and bonds), and bank loans.

3. Capital Account. Includes capital transfers and transactions with non-produced non-financial assets (patents, licenses).