Transcript Economic Systems

Economic Concepts
“It is in this manner that money has become
in all civilized nations the universal
instrument of commerce, by the intervention
of which goods of all kinds are bought and
sold, or exchanged for one another.”
Adam Smith, The Wealth of Nations
1
Objectives
1. To identify economic resources.
2. To analyze how supply and demand
impact price.
3. To investigate influences on a
nation’s ability to trade.
4. To understand the concept of
productivity.
5. To explore factors affecting business
risk and profit.
2
What is Economics?
• Economics is how humans allocate
scarce resources to produce various
commodities and how those
commodities are distributed for
societal consumption
3
Economic Resources
• Are scarce and cannot meet all
human wants and needs
– human necessities
• include goods and services we
cannot live without
– human wants
• include every other type of
goods and services we may
want but do not need
– examples:
• need: open heart surgery
• want: liposuction
4
Economic Resources
•
Resources are anything used to
make goods or services, also called
factors of production
•
Distributing and managing these
resources efficiently and equitably
are part of the basic question to be
answered by economists
5
Factors of Production
1. Land
– natural resources found on earth
– includes everything contained in the earth or
the seas
2. Labor
– human resources
– includes all people who work within an
economy
3. Capital
– monetary resources needed to start and
operate a business or goods used in the
production process
4. Entrepreneurship
– involves human skills required to start and
run a business
– organize the other three factors to create
economic goods and services
6
Economic Utilities
• Are the role of marketing adding value to a
product; this added value is called utility
–
time utility
• is having a product available to consumers during a certain time of
year or day
• example:
– retailers often keep stores open later than 5:00 p.m. to accommodate
those who work during the day
–
place utility
• places products in easily accessible locations for consumers
–
form utility
• creates more useful products out of raw materials or separate parts
–
possession utility
• exchanges a product for some monetary form
–
information utility
• gains from and supplies information to the consumer
7
Basic Economic Questions
• Are answered by economic systems in
different ways including:
– What goods and services do we produce?
– How do we produce those goods and
services?
– Who should benefit from the goods and
services produced?
• Are answered through a nation’s market or
command system
– no economy on the planet is purely market or
command; elements of both systems are found
in every economy, making them mixed
economies
8
Types of Economic Systems
• Market Economies
– consumers decide what is produced by the
purchases they make
– businesses make production decisions
– consumers earning more money purchase
more goods and services
– consumers are motivated to work in order to
earn more money
9
Types of Economic Systems
• Command Economies
– one person or group of persons make
production decisions
– one person or group of persons owns all
businesses and runs all businesses
– one person or group of persons decides who
will receive goods and services produced
10
Types of Economic Systems
• Mixed Economies
–All present-day global
economies have a mixture of
the market and command
economic systems
• History shows need for some
government involvement in a free
market
– United States depression in 1930s
11
Economic Systems
– On a economic
continuum, with command
economic systems far left
and market economic
systems far right, most
countries fall somewhere
in between
Communism is
the farthest left
system
Left of center but
still right of
communism
Where on this
continuum would
you place the
United States?
Canada?
Russia? China?
North Korea?
Capitalism is the
farthest right
system
12
Capitalism
• Is an economic system where:
– businesses are privately owned
– product development is proportionate to the
accumulation and reinvestment of profits gained
in a free market
– government is usually democratic and maintains
fewer social services than in a socialist country
• example:
– Japan versus the United States
China has been a communist country since 1949. Since then, many
of the country’s corporations have become government owned;
resulting in almost 90% ownership in the 1990s and sagging profits.
However, China’s leader in 1997, Jiang Zemin, has taken steps to
privatize Chinese industries. Haier, a Chinese appliance maker, has
opened plants in the United States to increase its international
competition.
13
Socialism
• Is an economic system where:
– there is increased government involvement
– the goal is to keep prices low and provide jobs
for everyone through government-owned
businesses
– such countries include:
• Germany
• Canada
• Great Britain
• Australia
• Sweden
14
Socialism
– Includes additional social services in
order to secure a certain standard of
living such as:
• providing free or low-cost medical care
• providing free education from elementary to
college
• providing pensions and free care for the
elderly
• forcing companies and individuals to pay
much higher taxes
15
Communism
•
Is a totalitarian economic system
where:
– the government runs and controls most
aspects of daily life
– there is little or no economic freedom
– Theoretically every working –age citizen
is assigned a job or continues getting
paid, even if he/she stops going to
– the government decides the type of
schooling each citizen receives
– Examples include:
•
•
China
North Korea
16
The Free Enterprise System
• Is an economic system which:
– using the capitalist approach
– encouraging people to start and run
businesses without government
involvement
– encouraging competition
• a struggle between companies
• an essential component of a free enterprise
system
17
Types of Competition
• Price competition
• focuses on the sale price of a product
• assumes other factors are equal and
customers will choose by price
• Non-price competition
• focuses on factors other than price
• includes:
– product quality
– reputation
– customer service
– business location
18
Degrees of Competition
• Monopolies
– Refer to cone company controlling
a product market
– have no competition
– are harmful to free enterprise
– are regulated by the U.S.
government
What are
some of the
product
markets with a
monopoly or
an oligopoly?
• Oligopolies
– are a few companies controlling a
product’s market
– can affect price and competition
19
Risk
• Includes the possibility of loss or
failure in relation to the possibility of
increased profit in a free enterprise
system
• Is a factor affecting business
– new product development
• close to 90% of new products fail
– competition
• once a product is on the market, other
companies scramble for a piece of the
“market pie”
• Increases when profits increase
20
Profit
• Motivates entrepreneurs to take risks
involved in owning their own business
• Is the income of a business after all
costs and expenses have been
deducted:
– example:
• 5% of sales go to profits
• 95% of sales go to pay costs, expenses,
taxes, etc.
• Increases with lower costs and higher
sales volume
21
Profitable versus Unprofitable Firms
• Profitable firms
– positively affect and benefit:
• employees
– increased job market
– increased salaries and benefits
– an improved economy
• investors
– higher dividend returns
• the government
– increased salaries
– increased business profits
– increased money from taxes
• consumers
– increased competition creates lower profits,
higher quality and better services for consumers
22
Profitable vs. Unprofitable Firms
• Unprofitable firms
– negatively affect the economy with:
• costs to employees
– higher unemployment
– salary cuts
• costs to investors
– loss on investment when stock price dips too low
– selling stocks at a loss, creating an unstable stock market
• costs to the government
– decreasing taxes
– decreasing funds available to social services
The 1990s saw a huge profit growth for many technological companies,
and the bull stock market kept climbing. But was there really profit
growth? In 2001, whistleblowers uncovered nasty accounting cover-ups
for major companies, such as Enron, Worldcom and their accounting
firm, Arthur Andersen.
23
Governmental Role in Free Enterprise
•
Provides four functions:
1.
basic social services, such as:
•
•
•
•
2.
protection provided by the military,
police and fire departments
public education
medical care for the poor and the
elderly
transportation infrastructure
business support, such as:
•
•
relief in the event of disasters (i.e.,
droughts or hurricanes)
trade alliances with other countries
–
North American Free Trade Agreement
(NAFTA) opened trade in North America
by lifting tariffs and gradually reducing
trade barriers within Canada, the United
States and Mexico
NAFTA
affected the
trucking
industry, as
well as the
agriculture
industry. Do
you think these
affects were
positive?
Could the
affects have
been negative?
24
Governmental Role in Free Enterprise
•
Provides four functions:
3. business, individual and resource protection,
through departmental regulation, such as:
•
•
•
•
Food and Drug Administration (FDA)
Occupational Safety and Health Administration
(OSHA)
Equal Employment Opportunity Commission (EEOC)
Environmental Protection Agency (EPA)
4. competition, by running its own business
operations, such as:
•
•
•
U.S. Postal Service
Amtrack
Tennessee Valley Authority (TVA)
25
Consumer Role in Free Enterprise
•
Two main functions :
1. attaching popularity to products
•
consumers ultimately decide what products (and
businesses) survive by making purchases
2. determine the supply and demand for
each products
•
by buying more or less of a product, consumers
establish a supply and demand schedule for the
given product
Between 1993 and 1994, a toy swept the nation. At only $5, Tye Beanie Babies
outsold higher-priced toys and started a craze with people elbowing others to get
to new shipments. The draw to consumers, beside the toys’ lovable names and
cute colors, was the hope of buying collector’s editions worth $100s or $1000s in
the future. To heighten this perception, Tye would “retire” the toys after a short
period on the market. This approach is a classical example of how a smaller
supply of a popular product can increase demand.
26
Supply and Demand
• Supply
– is the amount of a product available to the
market; stock
– according to the law of supply, maintains as
product price increases, the product quantity
increases; causing a positive slope
• as quantity rises, price rises
• as quantity falls, price falls
• Demand
– is the consumer’s willingness to buy a product
– according to the law of demand maintains as
product price increases, the demand for the
product decreases; causing a negative slope
27
Supply and Demand Schedules
Supply Schedule for Leather Jackets
As price
increases,
supply
increases
Price per Jacket
$300
$250
$215
$175
$140
$115
$95
Number Supplied
7,400
4,780
4,330
3,400
2,860
2,300
1,890
28
Supply and Demand Schedules
Demand Schedule for Leather Jackets
As price
increases,
demand
decreases
Price per Jacket
$300
$250
$215
$175
$140
$115
$95
Number Demanded
1,650
2,100
3,880
4,900
5,725
6,780
7,600
29
Supply and Demand Curves
30
Supply and Demand
• Interactions in the marketplace result in
either surpluses, shortages or equilibriums
– surpluses happen when a product is produced
in larger quantities than it is demanded
– shortages happen when a product is
demanded and there are not enough quantities
– equilibrium is met when the quantity of a
product matches the demand of the product
• can be found at the point where the demand curve
meets the supply curve
• at this point, the producer and the consumer are
satisfied with the price of the product and the amount
to produce
31
Economic Success
• Can be measured in several ways:
– employee productivity
• measures the output per hour of individual
employees for a defined time period
• multiple ways of increasing productivity:
– furnishing new equipment or facilities to support
better efficiency
– arrange for more training or financial incentives
– decrease employee ratio and give more
responsibilities to remaining employees
32
Economic Success
• Can be measured in several ways:
– Gross Domestic Product (GDP)
• total output of goods and services produced in a
country
8
7
6
7.1
6.7
6.1
5.2
5
4.1
4
3
2
1
Source: Bureau
of Economic
Analysis of the
U.S. Department
of Commerce,
2002
5
4.8
4
3
2.2
2.7
2.6
2
1.3
1.1
0.6
0
-1
-2
-0.6
What does this graph
say about the GDP
trend in the United
States for the last five
years?
-0.3
-1.6
-3
33
Economic Success
• Can be measured in several ways:
– by the rate of inflation
• the rate of rising prices in a country
• low inflation rates signify a stable
economy
• high inflation rates signify an unstable
economy
• governmental goal to control inflation
rates
– combating rising inflation by raising interest
rates to keep people from borrowing money
» higher interest rates slow economic
growth, thus slow down the rise of
inflation
34
Economic Success
• Can be measured in several
ways:
– the Consumer Price Index (CPI) is
used to measure inflation
– measures about 400 goods and services
used by average household
– is also called cost-of-living index
– the Producer Price Index (PPI) is
used to measure inflation
– measures wholesale price levels
– is considered the trendsetter of the two
since consumer prices generally follow
producer prices
35
Economic Success
16
14
13.5
12
11.3
11
10
9.1
8
6
4
2
0
10.3
6.2
3.2
7.6
6.5
5.8
6.2
5.4
4.8
4.3
4.2
4.1
3.6
3.6
3.4
3.2
3 3 2.62.83
2.8
2.3 2.2
1.9
1.6
Source: Bureau
of Labor
Statistics of the
U.S. Department
of Labor, 2002
How would you describe the inflation rates from 1972 to 2001?
36
Economic Success
• Can be measured in several ways:
– unemployment rate
• tracked by all countries
• is then amount of people without jobs
• higher unemployment rates can mean
economic slowdowns
• lower unemployment rates can mean
economic expansions
– with more people working, there are
more people spending money and paying
taxes
37
The Business Cycle
• Constitutes economic production
rising then falling in a long cycle of
expansion and contraction
– Cycles occur everywhere in nature and
in human behavior
• weather patterns often show cycles of
drought followed by cycles of precipitation
• cycles are used by the Old Farmer’s
Almanac to predict everything from snowfall
depth to fruit productivity
38
What Is a Business Cycle?
•
Ever heard a news anchor say the
economy is in an upswing or a downswing?
What does this mean?
–
–
when the GDP increases from one quarter
(three-month period) to the next, it indicates the
economy is growing (or in an upswing)
when the GDP rises less than in other quarters,
or decreases, it indicates the economy is
slowing down (or in a downswing)
39
What Is a Business Cycle?
•
•
The business cycle is a series of
periods of growing and shrinking
economic activity measured by
increases or decreases in the real
GDP
The business cycle consists of four
phases:
1.
2.
3.
4.
expansion
peak
contraction
trough
40
What Is a Business Cycle?
Period of lowest
economic activity
A period of
increasing
economic activity–
GDP increases,
unemployment
decreases
A period of
decreasing
economic activity–
GDP decreases,
unemployment
increases
Period of highest
economic activity
41
What Is a Business Cycle?
• Business cycles do not always rise and fall
in neat, predictable patterns
– in the 1930s, the United States experienced a
severe depression
• a phase of the business cycle characterized by
drastic unemployment increases and severe
decreases in economic activity for long periods of
time
What caused the great depression of the 1930s? Several factors led to
the collapse of the economy but none are so memorable as “Black
Tuesday.” The day was October 29, 1929, and businesses began the
day with a hesitant optimism– the week before, on Thursday, October
24, the stock market had crashed but was saved by J.P Morgan and
others. On Tuesday, however, the stock market plummeted again. This
second crash proved to be the catalyst to a devastating period in
American history.
42
Recession & Expansion
• Recession– two or more
consecutive fiscal quarters of
decreasing GDP
•
during a recession, plans for
new projects decrease, prices
increase and unemployment
rates increase
• Expansion– two or more
consecutive fiscal quarters of
increasing GDP
•
during an expansion, spending
and production increase,
prices increase and
unemployment rates decrease
How would
you describe
the current
U.S.
economy? Is
it in an
expansion or
recession?
What factors
led you to
your
decision?
43
International Trade
• Is economic interdependence
– where most countries depend, in some
part, on other countries for certain goods
or services
– each country possesses unique resources
– the Middle East possesses oil
– Asia possesses an inexpensive labor
force
• Imports
– are goods and services purchased from
other countries
– example:
• silk
• Exports
– are goods and services sold to other
countries
– example:
• computers
• grain
Do you
think
international
trade is
good or bad
for the
United
States?
44
International Trade Theory
• Seeks to answer questions such
as:
– “Why do nations trade?”
• besides cultural and political reasons,
the main reason is price
• countries can buy some goods
cheaper than they can make them
– “What goods should be traded?”
• most countries understand complete
self-sufficiency is more expensive than
global interdependence
How do you
think
countries
decide what
goods to
purchase
from other
countries
and what
goods to
produce on
their own?
45
Advantages of International Trade
• Absolute advantage:
– is when a country possesses unique resources or
capabilities to allow the lowest costs of production
for a product
• Comparative advantage:
– is when a country is able to produce a product
more efficiently and at lower costs than other
countries
The original absent-minded professor, Adam Smith, is famous for being a
forward-thinking economist, who, in the 18th century, wrote many books,
including Wealth of Nations and influenced persons like Thomas Jefferson, Karl
Marx and eminent economists of the 20th century, like John Maynard Keynes,
John Kenneth Galbraith and Milton Friedman. He also introduced many
concepts, such as laissez-faire, which are becoming major components of most
economics courses.
46
Government Involvement in Trade
• Laissez-faire
– French word for “leave alone”
– an economic concept opposing
governmental involvement in
commerce beyond what is
necessary to keep an economic
system running on its own laws
– usually associated with a free
enterprise system
• Most countries have some form
of governmental involvement,
which usually includes:
– trade barriers
– trade alliances and agreements
How much
involvement
do you
think a
government
should have
in a nation’s
economic
system?
47
Trade Barriers
• Tariffs
– are a tax on imports
– can either be protective or revenue-producing
• protective tariffs– increases price on imports to
protect domestic products
• revenue-producing tariffs– supply revenue for a
country
• Quotas
– limit the quantity or monetary value of an import
– control the level of imports
• Embargos
– are a complete ban on certain products coming
in or leaving the country
– usually for political reasons
• U.N. embargo against Iraq during Persian Gulf War
• U.S. embargo against Cuba imposed in 1960
• U.S. embargo against Vietnam lifted in 1994
48
Trade Alliances and Agreements
• Are when governments establish
agreements in order to establish
international trade guidelines
• World Trade Organization (WTO)
– is a global coalition between 153 countries
located in Geneva, Switzerland
– performs functions, such as:
• providing technical assistance and training
for developing countries
• handling trade disputes and administering
trade agreements
• cooperating with other international trade
organizations
• providing a forum for trade negotiations
49
Trade Alliances and Agreements
• North American Free Trade
Agreement (NAFTA)
– became effective in 1994
– was implemented to increase trade with
Mexico
– has a mission to diminish all trade
barriers and investment restrictions
between Canada, the United States and
Mexico
– immediately dropped tariffs from more
than half of the goods traded between
Mexico and the United States
50
Trade Alliances and Agreements
• European Union (EU)
– union established in 1993 between independent
European countries
– member countries:
• Austria, Belgium, Bulgaria, Cyprus, Czech
Republic, Denmark, Estonia, Finland, France,
Germany, Greece, Ireland, Italy, Latvia,
Lithuania, Luxembourg, Malta, Netherlands,
Poland, Portugal, Romania, Slovakia, Slovenia,
Spain, Sweden, United Kingdom
– encourage free trade among members and
promotes work as a single market
– uses the Euro, the single currency for the EU
• in 2002, 11 member states made complete
transition to the Euro currency
51
Impact of Economics
• The welfare of a nation’s economy can
directly correlate to an individual’s daily
life
– in a stable and expansive economy, individuals
will increase spending and have more jobs
opportunities
– in an unstable and slow economy,
unemployment rates will be high and jobs will be
harder to find
• How might economics affect your career?
52
Assessment
1. What type of utility refers to using raw
materials?
A.
B.
C.
D.
possession utility
time utility
form utility
information utility
2. Why is competition an important element in
the free enterprise system?
3. Economic resources also are called
“factors of production.”
a. true
b. false
53
Assessment
4. Describe the term “economics.”
4. A market economy usually has one
person or a group of persons making
production decisions.
a. true
b. false
5. Which of the following is not a role of
government in the U.S. economy?
A.
B.
C.
D.
provide services
support businesses
regulate by making laws
determine prices
54
Assessment
7. Conditions of supply and demand
interaction include:
A.
B.
C.
D.
surpluses
shortages
equilibriums
all of the above
8. Employee productivity measures the total
goods and services produced in a country.
a. true
b. false
9. What is a tariff?
10.What is meant by absolute advantage in
55
Assessment
9. What is a tariff?
10.What is meant by absolute advantage in
international trade?
56
Internet Links
World Trade Organization
http://www.wto.org/index.htm
Provides information and facts on the World Trade Organization
and its members
U.S. Department of Labor
http://www.dol.gov/
Provides data for unemployment rates and CPIs
U.S. Bureau of Economic Analysis
http://www.bea.doc.gov/bea/di1.htm
Provides GDP data and data on international trade
57
Acknowledgements
Farese, Lois S., Grady Kimbrell, and Carl A. Woloszyk. Marketing
Essentials. New York: Glencoe McGraw-Hill, 2002.
Heilbroner, Robert L. The Worldly Philosophers: The Lives, Times &
Ideas of the Great Economic Thinkers. New York: Simon and Schuster,
1961.
Perreault, William D. and E.Jerome McCarthy. Basic Marketing: A
Global-Managerial Approach. Boston: Irwin McGraw-Hill, 1999.
Terpstra, Vern, Ravi Sarathy and Debra Laverie. International
Marketing. New York: Harcourt College Publishers, 2000.
“The Corporate Scandal Sheet.” Forbes.com, accessed on the web on
January 13, 2003.
http://www.forbes.com/home/2002/07/25/accountingtracker.html
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