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ECONOMIC ENVIRONMENT OF BUSINESS
Chapter 3 10/6/2000 ECONOMIC ENVIRONMENT OF BUSINESS 3 Describe economic concepts that apply to satisfying economic wants. Discuss three economic systems and three economic-political systems. Summarize five fundamental elements of capitalism. Explain how economic growth can be promoted and measured. List basic economic problems that exist and state what government can do to correct the problems.
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Economics Economic want Non-Economic want
The body of knowledge that relates to producing and using goods and services that satisfy human wants Economic want The desire for scarce material goods and services Non-Economic want The desire for non-material things that are not scarce Air, sunshine, friendship, happiness
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Which of the following are economic wants?
Golf clubs Income tax help A peaceful walk in the park Lunch at the finest restaurant in town Answer: 1, 2 , & 4
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SATISFYING OUR ECONOMIC WANTS
Utility – the ability of a good or a service to satisfy a want Producer – anyone who creates a utility Which of the following are producers? A travel agency A private trash collection A house painter A toy manufacturer Answer: All of them
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Types of Economic Utility
Form Created by changes in the form or shape of a product to make it useful (usually applies only to goods and not to services). Example: Is the swimsuit you desire to buy available in a particular fabric and style? Place Created by having a good or service at the place where it is needed or wanted. Example: Is the swimsuit you desire available in a nearby store where it can be purchased?
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Types of Economic Utility (cont)
Time Created when a product or service is available when it is needed or wanted. Example: Is the store open when you are ready to buy and use your swimsuit? Possession Created when ownership of a good or service is transferred from one person to another, but may also occur through renting and borrowing. Example: Is the swimsuit available at a price you can afford and are willing to pay?
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Factor of Production Land, labor, capital goods, and management – the 4 basic resources that are combined to create useful goods and services Natural Resources – anything provided by nature (fertile soil, mineral, water) Labor – human effort, either physical or mental Human capital – the accumulated knowledge and skills of human beings – the total value of each person's education and acquired skills Capital Goods – buildings, tools, machines, and other equipment used to produce other goods (no not directly satisfy) Entrepreneurship – By starting and managing a business you bring together the other 3 factors
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CAPITAL FORMATION Capital Formation Consumer goods/services
The production of capital goods Consumer goods/services The goods and services that directly satisfy people’s economic goods consumer goods/services capital goods consumer goods/services capital goods Has capital formation occurred When a firm acquires a new truck so that more goods can be shipped to customers? Yes When a business builds a new factory to increase production?
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Capital Goods? A plumber buys a device that aids in replacing broken well pumps for rural customers. Yes A car firm buys robots that will help it make cars faster. A salesperson buys a new suit to wear when selling his firm’s manufactured products. No
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ECONOMIC SYSTEMS Types of economic systems Market economy
Chapter 3 ECONOMIC SYSTEMS 10/6/2000 Types of economic systems Market economy An economic system in which individual buying decisions in the marketplace together determine what, how, and for whom goods and services will be produces. Command economy A central planning authority, under the control of the country’s government, owns most of the factors of production and determines what, how, and for whom goods and services will be produced (dictatorships) Mixed economy Uses aspects of a market and a command economy to make decisions Privatization – the transfer of authority to provide a good or service from government to individuals or privately owned businesses Market – whole grain vs. white bread The individuals rather then the government make the decisions Command - Asian countries – North Korea, Cambodia, Vietnam Mixed – The national government makes production decisions for certain goods and services. For example, the post office, telephone system, schools, health care facilities, and public utilities are owned and operated by governments No country has pure market or command economy Privatization – governments incentive is to reduce costs for the taxpayers and to increase efficiency (jails, trash collections, telephone co)
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ECONOMIC SYSTEMS Types of economic-political systems Capitalism
Socialism Communism
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Chapter 3 10/6/2000 Capitalism An economic-political system in which private citizens are free to go into business for themselves, to produce whatever they choose to produce, and to distribute what they produce. aka Free Enterprise System --United States (operates in a democracy) --As the economy developed without controls by gov, certain abuses took place. --Ex. Some large businesses began to exploit small businesses & manufacturing and pollution --Congress passes laws which require producers to avoid harm to the public or reduce costs to the public
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Chapter 3 10/6/2000 Socialism An economic-political system in which the government controls the use of the country’s factors of production How scarce resources are used is determined by the government Often associated with mixed economies --disliked in the US because it limits the right of the individual to own property for productive purposes --different degrees of socialism depending upon the amount of gov ownership and control --found in Western Europe countries of Sweden and Italy --some degree of socialism exists in most countries (Canada has a health care plan operated by the national government, but Canada is not usually considered socialistic) --Sweden has been considered high socialistic but many corp such as Volvo successfully operate there
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Chapter 3 10/6/2000 Communism Extreme socialism, in which all or almost all of a nation’s factors of production are owned by the government Command economy is most often practiced by communist countries --Cuba and North Korea --consumers are often in short supply --workers cannot move easily from one job to another and managers of businesses do not decide what is to be produced --all economic decisions are made by government leaders
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Capitalism Socialism Communism Market/Mixed Economy Mixed Economy
Command / Mixed Economy Who may own natural resources and capital goods? Businesses and Individuals Government for some, but not all Government for most How are resources allocated? By customers based on competition By gov for some and customers for others By government only To what extent does gov attempt to control business decisions? Limited Extensive over the allocation of some resources, but little over distribution Extensive How are marketing decisions made? By market conditions By gov Good example United States Sweden North Korea
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FUNDAMENTALS OF CAPITALISM
Chapter 3 10/6/2000 FUNDAMENTALS OF CAPITALISM Private property- consists of items of value that individuals have the right to own, use, and sell Profit - subtract the total cost of producing the product from the total received from the customer Price setting Demand – the number of products that will be bought at a given time at a given price Supply – the number of like products that will be offered for sale at a particular time and at a certain price Competition – rivalry among sellers for consumers’ dollars Monopoly – the existence of only one seller of a product Income distribution (wages and salaries) --Right to private property (constitution) --Right of a business to make a profit, to set its own prices, to compete, and to determine the wages paid to workers --Average profit is about 5% of the total (95% represents costs) --Ex. Yearly receipts of $500,000 – owner earns $25,000 profit ($500,000 x .05) --Competition today has more to do with just price (non-price competition)– provide products that are better quality or by adding features or using unusual and colorful packaging --Monopoly – Utilities, Cable, Bus co.
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SUPPLY AND DEMAND Price Supply Demand Market Price Quantity Chapter 3
10/6/2000 SUPPLY AND DEMAND Price Quantity Supply Demand Market Price --The market price is the price at which the producer can meet costs and make a reasonable profit. It is also the price at which consumers will buy. --Do you think that basketball/baseball players are paid too much? If a player draws more customers to the games (demand), team owners make more money. The number of exceptionally outstanding players is limited (supply)
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Could a competitor be able to maintain product quality and lower the product’s price if it
Manufactured the product in a third-world nation Yes, could still control the quality while paying lower wages Used higher-quality materials No, the manufacturing cost would rise Changed the product color Yes, if the color is popular but no, if it isn’t
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MANAGING THE ECONOMY Promoting economic growth
Measuring economic growth Identifying economic problems Correcting economic problems
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Economic Growth Economic Growth
Occurs when country’s output exceeds its population growth More goods and services are available for each person
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Measuring Economic Growth
Consumer Price Index Indicates what is happening in general to prices in the country Is a measure of the average change in prices of consumer goods and services typically purchased by people living in urban areas
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Identifying Economic Problems
Recession Decline in the GDP that continues for six months or more Occurs when demand for the total goods and services available is less than the supply Inflation Rapid rise in prices caused by an inadequate supply of goods and service Total demand exceeds supply Results in a decline in purchasing power of money (the dollar does not buy as much as it did before inflation)
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Correcting Economic Problems
Business Cycles A pattern of irregular but repeated expansion and contraction of the GDP Cycles last about 5 years 4 Phases Expansion (inflation) Peak Contraction (recession) Trough Raise or lower taxes (raised to slow growth and lowered to ecnourage growth)
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Correcting Economic Problems (cont)
Chapter 3 10/6/2000 Correcting Economic Problems (cont) Government expenditures influence economic growth (increase spending to stimulate a slow economy) Regulated through interest rates (interest rates low, then businesses are encouraged to borrow) Depression A long and severe drop in the GDP (also affect foreign countries) The Great Depression of the 1930’s Stock fell 40%, 9,000 banks went out of business, 9 million savings accounts were wipes out 86,000 businesses failed, and wages were decreased by an average of 60%. The unemployment rate went from 9% to 25% (about 15 million jobless)
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