HNC/HND Unit 1 International Group

 You are required to produce an essay of no more than 3000 words (font size 12) which answers the following question:  “The market environment and the national environment in which an organisation operates shape the decision making, behaviour and activities of that organisation” Discuss using examples.  You will be expected to describe and evaluate the following in relation to your chosen organisation: ◦ The type of economic systems that exist (free market, closed economy etc.) ◦ Governmental policies regarding fiscal and monetary policies ◦ Competition policy and regulatory practices. ◦ Different market types (monopoly, oligopoly etc.) ◦ Market forces (supply and demand, economies of scale etc.) and organisational responses to these forces.

 Adam Smith Adam Smith ◦ The father of (free trade) economics ◦ An Inquiry into the Nature and Causes of the Wealth Of Nations (1776) commonly known as The Wealth of Nations ◦ The Wealth Of Nations was not just a study of economics but a survey of human social psychology: about life, welfare, political institutions, the law, and morality

◦ In his day countries and communities sought to restrict buying from outside the community, although selling was seen as good ◦ They imposed heavy import taxes, subsidised local production and protected local industry ◦ A countries wealth was the total of the gold and silver that it had stockpiled

 Smith argued that free trade promotes wealth, nobody trades unless they benefit from it  Because trade benefits both sides it increases our prosperity just as surely as do agriculture or manufacture.  A nation’s wealth is not the quantity of gold and silver in its vaults, but the total of its production and commerce – what today we would call gross domestic product.

 Is the excess of human wants over what can actually be produced to fulfil these wants  Every state has to deal with the “economic problem” of finite resources and infinite wants  Absolute scarcity – less developed economies  Relative scarcity – developed economies

 These are productive resources ◦ Labour  Physical and mental power of people ◦ Land and natural resources ◦ Capital  Machinery, manufacturing plant, premises, offices, infrastructure

 This is linked to scarcity and involves 3 key decisions: ◦ What goods & services to produce ◦ How will these be produced ◦ To whom will they be distributed

 Opportunity cost measures the cost of obtaining one product or service in terms of the quantity of another product or service that could have been obtained instead ◦ Food or clothes?  National or Governmental level ◦ This can mean roads or hospitals, i.e. The amount of hospitals not built in terms of hospitals per mile

 There are different types of economic system to deal with scarcity ◦ Free market economy ◦ Command economy ◦ The mixed economy

 Often called “Capitalism”  Most decisions are taken via the market mechanism  Supply and Demand and ability to pay influence decision making  Very little government influence

 Firms seek to maximise profit  Consumers seek greatest benefit for least cost  Workers seek to maximise wage relative to the cost of working  Individuals are free to make their own decisions  Prices are determined by supply and demand  Trend towards the “Equilibrium price”, where the amount consumers wish to buy equals the amount producers wish to supply

 Discuss with those next to you, what are the limitations of the Free Market Economy?

 What price for “public” goods and services?  De-merit goods freely available ◦ Drugs, tobacco, alcohol etc  Inequality of power in the market place ◦ What is produced may represent what the richest can ensure are produced rather than that for which there is greatest demand  Barriers to entry – Restrictive practices  Producers may ignore “externalities” ◦ Climate change

 The state determines what, how and for whom products and services are produced  Associated with communism but can include any form of dictatorship  Three levels ◦ Macro ◦ Micro ◦ Distribution of output between consumers

 Discuss with those next to you, what are the limitations of the Command Economy?

 Lack of investment ◦ Normally stimulated by competition  No incentive to productivity  Wastage of resources ◦ Vast resources dedicated to planning ◦ USSR Gosplan million prices, 24 million products  Black markets

 A mixed economy combines elements of both private enterprise and intervention by the state  Main types of intervention are: ◦ Provision of public goods or prohibition of de-merit goods ◦ Subsidies and taxation ◦ Regulation

 Remember you must think about these things in relation to your essay  “The market environment and the national environment in which an organisation operates shape the decision making, behaviour and activities of that organisation” Discuss using examples.