Transcript economic system

1
chapter
Chapter 1, Understanding
the Bus. System
Business Essentials, 6th Canadian Edition
Ebert
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PowerPoint Presentation prepared by
Carol Vollmer Pope Alverno College
LEARNING OBJECTIVES
After reading this chapter, you should be able to:
1. Define the nature of business and Identify Its main
goals.
2. Describe different types of global economic systems
according to the means by which they control the
factors of production through input and output
markets.
3. Show how demand and supply affect resource
distribution .
4. Identify the elements of private enterprise .
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Exercise
A. Write four things do you know about
business. Write 4 things you would like
to know?
B. Try to know your neighbor and brake
the ice.
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The Concept of Business and Profit
• Business
–An organization that provides goods or
services that are then sold to earn
profits.
• Profits
–The positive difference between a
business’s revenues and its expenses.
The rewards owners get for risking
their money and time.
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The Benefits of Business
1. Provision of goods and services
2. Employment of workers
3. Innovation and opportunities
4. Increased quality of life and standard of living
5. Enhanced personal incomes of owners and
stockholders
6. Tax payments support government
7. Support for charities and community leadership
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Factors of Production
Labor
Capital
Information
Resources
Entrepreneurs
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Physical
Resources
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Factors of production
A. Labor: The people who work for
businesses. Labor includes both
physical and mental contributions. A
country with a highly educated
workforce is considered rich in this
resource.
B. Capital: The funds needed to create
and operate a business. Sources include
personal investment by owners, loans,
sale of stock and bonds, and revenue
from the sale of product.
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Factors of production
A. Entrepreneurs: People who are willing to accept
the risks that are part of creating and operating
businesses, in return for the potential profits.
B. Physical resources: Tangible things
organizations use in the conduct of their
business. Possibilities include natural resources,
raw materials, office equipment and facilities,
computers, transportation and communication
infrastructure, etc.
C. Information resources: Data and other
information used by business. This factor has
become increasingly important in the last
decade.
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Information Resources
Information resources include: the
specialized knowledge and expertise of
people who work in businesses, as well
as information that is found in market
forecasts and various other forms of
economic data.
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Exercise: group Discussion
1. In your faculty of business, list the
factors of production that were used to
provide higher education service.
2. What are the factors of production used
to produce clothes?
3. Factors of production in a supermarket.
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Economic Environment
–The relevant conditions that exist in
the economic system in which a
company operates
–Examples: recession and growth.
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Recessions & Depressions
Recession:
Aggregate output declines,
unemployment increases. A
recession is usually measured by
two consecutive quarters of
decline in real GDP.
Depression:
Severe and long-lasting
recession
Economic Environment
– Examples:
• If an economy is doing well enough that
most people have jobs, a growing company
may find it necessary to pay higher wages
and offer more benefits in order to attract
workers from other companies.
• If many people in an economy are looking
for jobs, a firm may be able to pay less and
offer fewer benefits.
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Economic Systems
• Economic System
– A nation’s system/methods for allocating its
resources among its citizens, both
individuals and organizations
• Factors of Production are the resources.
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Types of Economic Systems
• Planned Economy (command)
–A centralized government controls all
or most factors of production and
makes all or most production and
allocation decisions for the economy.
Planned Economy (command)
includes: communism and socialism.
–With communism—as currently
operating in North Korea—all sources
of production are owned and operated
by the government.
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Planned Economies
• Communism
– A system Karl Marx envisioned in which
individuals would contribute according to
their abilities and receive benefits according
to their needs.
• The government owns and operates all
factors of production.
• The government assigns people to jobs
and owns all businesses and controls
business decisions.
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Socialism
In the partially planned system called
socialism, the government owns and
operates selected major industries.
Smaller businesses such as clothing stores
and restaurants may be privately owned.
Although workers in socialist countries are
usually allowed to choose their
occupations or professions, a large
proportion generally work for the
government.
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Types of Economic Systems
• Market Economy
–Individual producers and consumers
control production and allocation by
creating combinations of supply and
demand.
• Market
–A mechanism of exchange between
buyers and sellers of a good or service.
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The Concept of Business and Profit
• Consumer Choice and Demand
– The freedom of consumers to choose how
to satisfy their wants and needs.
– The freedom of business owners to decide
how to meet those wants and needs.
• Opportunity and Enterprise
– Success in business requires spotting a
promising opportunity and then developing
a good plan for capitalizing on it.
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Market Economics
Capitalism: The political basis for the free
market economy, which allows private
ownership. The government supports
private ownership and encourages
entrepreneurship.
–Individuals choose where to work,
what to buy, and how much to pay.
–Producers choose who to hire, what to
produce, and how much to charge.
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“Circular Flow in Market Economy”
SUPPLY
OUTPUT MARKETS
DEMAND
Goods
Services
FIRMS
HOUSEHOLDS
• Supply products
in output markets
• Demand
resources in input
markets
DEMAND
Copyright ©2003 Prentice Hall, Inc.
INPUT MARKETS
Labor
Capital
Entrepreneurs
Physical Resources
Information Resources
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• Demand products
in output markets
• Supply resources
in input markets
SUPPLY
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Mixed Market Economy
A. Mixed Market Economies: mixed of planned
and market economies; many countries are
moving from planned systems to mixed
market systems through privatization, which
involves the transformation of governmentcontrolled businesses into privately owned
enterprises.
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Nationalization
-converting private firms into government
owned firms. Venezuela, for example,
nationalized its telecommunications
industry.
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Deregulation
Deregulation means a reduction in the number of laws
affecting business activity and in the powers of
government enforcement agencies.
This trend also developed during the 1990s, and
deregulation occurred in many industries, including
airlines, pipelines, banking, trucking, and
communications.
But this trend has also slowed (and even reversed in
some cases) due to the 2008 recession. For
example, there have been calls for a dramatic
tightening up of the laws regulating business
activity, particularly
in the financial sector.
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Interactions between Business and
Government
How Government Influences Business
A. Government plays several key roles In
the economy, and each of these roles
influences business activity in some
way. The roles government plays are as
follows.
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Interactions between Business and Government
The roles government plays are as follows.
A. Government as a Customer Government
buys thousands of different products and
services. E.g., PA buys medicines.
B. Government as a Competitor.
C. Government as Regulator: Reasons for
regulating business activity include
protecting competition, protecting
consumers, achieving social goals, and
protecting the environment.
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Interactions between Business and
Government
The roles government plays are as follows.
A. Promoting Competition: Competition is
crucial to a market economy.
B. Protecting Consumers.
C. Government as a Taxation Agent: Taxes are
Imposed and collected by the federal, and
local governments.
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Interactions between Business and
Government
The roles government plays are as follows.
A. Government as a Provider of Incentives and
Financial Assistance.
B. Government as a Provider of Essential
Services. E.g., PA provides health and
education services.
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The Economics of Market Systems
• Demand
–The willingness and ability of buyers to
purchase a product (a good or a
service).
• Supply
–The willingness and ability of
producers to offer a good or service for
sale.
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The Economics of Market Systems
• The Laws of Demand and Supply in a
Market Economy
– Demand: Buyers will purchase (demand)
more of a product as its price drops and
less of a product as its price increases.
– Supply: Producers will offer (supply)
more of a product for sale as its price
rises and less of a product as its price
drops.
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Private Enterprise in a Market Economy
• Private Enterprise System
– Allows individuals to pursue their own
interests with minimal government
restriction.
• Elements of a Private Enterprise System
– Private property rights
– Freedom of choice
– Profits
– Competition
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Economic Indicators
• Economic Indicators
–Statistics that show whether an
economic system is strengthening,
weakening, or remaining stable
–Measure key goals of the economic
system: economic growth and
economic stability
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Economic Indicators
–Economic growth indicators
• Aggregate output, standard of
living, gross domestic product,
and productivity
–Economic stability indicators
• Inflation and unemployment
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Economic Growth: Aggregate Output,
and Standard of Living
The elements:
• Business Cycle
–The pattern of short-term ups
and downs (or, better,
expansions and
contractions/reductions) in an
economy.
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Economic Growth: Aggregate Output,
and Standard of Living
The elements:
• Aggregate Output
–Growth during the business cycle is
measured by the total quantity of
goods and services produced by an
economic system during a given
period. It measures the growth
during the business cycle
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Economic Growth, Aggregate Output,
and Standard of Living
• Standard of Living
–The total quantity and quality
of goods and services that
consumers can purchase with
the currency used in their
economic system.
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Gross Domestic Product (GDP)
–An aggregate output measure of the total
value of all goods and services produced
within a given period by a national
economy through domestic factors of
production on the soil of the country. In
US $14 trillion, in PA 5.7 billion.
• If GDP is going up, aggregate output is
going up; if aggregate output is going
up, the nation is experiencing economic
growth.
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Gross National Product (GNP)
–The total value of all goods and
services produced by a national
economy within a given period,
regardless of where the factors of
production are located.
–E.g., When a Japanese automobile
produces cars at its factory in USA, the
profits from that factory are included
in the American GDP, and in the
Japanese GNP.
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Economic Growth
• Productivity
– A measure of economic growth that compares
how much product a system produces with the
resources needed to produce that product.
– Productivity: output/input (resources used)
• If more product is produced with fewer
factors of production, the price of the
product decreases.
• The standard of living in an economy
improves through increases in productivity.
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Balance of Trade
–The economic value of all the products a
country exports minus the economic
value of its imported products.
• Positive balance of trade: When a country
exports (sells to other countries) more than
it imports (buys from other countries).
• Negative balance of trade: When a country
imports more than it exports. Commonly
called a trade deficit.
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FIGURE 1.4 Balance of Trade
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A.National debts in USA in 2007
amounted 9.4$ trillion.
B.Trade deficit: in 2007
exceeded $700 billion.
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Managing the Economy
• Stabilization Policy
–Coordinating fiscal and
monetary policies to smooth
fluctuations in output and
unemployment and to stabilize
prices.
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Types of Policies
Monetary Policy:
Designed to control the amount of money
flowing around the economy (the money
supply).
This policy is used to tackle inflation and balance
of payments.
Methods under this policy:
1. Interest rates:
2. The government may impose restrictions on
financial institutions to affect borrowing.
3. The central bank can control bank assets and
the amount of lending. Level of reserves
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Types of Policies
Fiscal policy:
Aims to control the total spending in
the economy.
1. Government spending.
2. Change in direct taxation.
3. Change in indirect taxation.
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Business Environment
Few things will be mentioned.
The following elements are part
of chapter 2.
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The External Environments of Business
• External Environment
– Everything outside an organization’s boundaries
that might affect it and business cannot control
1. The domestic business environment
2. The global business environment
3. The technological environment
4. The political-legal environment
5. The socio-cultural environment
6. The economic environment
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Domestic Business Environment
– The environment in which a firm conducts
its operations and derives its revenues by:
1. Seeking to be close to its customers
2. Establishing strong relationships with its
suppliers
3. Distinguishing itself from its
competitors
4. Example, lock at the IUG.
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Global Business Environment
– The international forces that affect
business:
1. International trade agreements
2. International economic conditions
3. Political unrest
4. International market opportunities
5. Suppliers outsourcing.
6. Cultural differences
7. Competitors, Currency values
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Technological Environment
– All the ways by which firms create value for
their constituents:
1. Human knowledge
2. Work methods
3. Physical equipment
4. Electronics and telecommunications
5. Various business activity processing
systems
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Political-Legal Environment
– The regulatory relationship between business and the
government (legal system) and its agencies that define
what organizations can and can’t do:
1. Product identification laws (ingredients to be listed).
2. Local zoning requirements e.g., obtain a license to
operate
3. Advertising practices
4. Safety and health considerations, warnings on
cigarette packages.
5. Acceptable standards of business conduct, pollution
– Pro- or anti-business sentiment/attitude in government
and political stability are also important considerations,
especially for international firms.
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Socio-cultural Environment
– The customs (e.g., celebrations),
mores/traditions (e.g., beliefs), values (e.g.,
importance of religion), and demographic
characteristics of the society in which an
organization functions (e.g., education
level).
– Socio-cultural processes determine the
goods, services, and standards of business
conduct a society is likely to accept, e.g.,
children labor, selling certain food.
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Discussion
Why will customers choose to buy from your business,
instead of your competition?
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