Chapter 3 - Economic Environment of Business

• Economics - the science that relates to producing and using goods and services that satisfy human needs and wants.

• Business has an important role in producing and distributing the particular goods and services that people want.

• People have two different types of wants! Do you know what they are?

Types of Wants

• When studying economics, we are concerned with Economic Wants - the desire for scarce resources for goods and services. What are some economic wants?

• People have another kind of want known as Non-economic wants - those desired wants that are not scarce. These wants are non-material in nature.

Utility

• In order for a good or a service to satisfy our needs, it needs to be “useful” to us in some way.

• Utility = Usefulness (there are 4 types of utility)– Form Utility - changes in the shape of a product to

make it useful.

– Place Utility - is created by having the good or the service at the place where it is needed or wanted.

– Time Utility - is created when a product is available when it is needed or wanted.

– Possession Utility - is created when ownership of the product is transferred from one person to another.

Factors of Production

• Producers use four basic resources. These resources are natural resources, labor, capital and management.

– Natural Resources - anything provided by nature that affects the productive ability of a country.

– Labor - is the human effort (physical or mental) that goes into the production of goods and services. Human Capital - is the accumulated knowledge and skills of human beings (education + skills)

Factors of Production (con’t)

• Capital Goods - are buildings, tools, machines, and other equipment used to produce other goods but do not directly satisfy human wants.– Capital Formation - the production of capital goods

(buildings, equipment etc…)

– Consumer Goods - goods and services that directly satisfy human wants.

• Management - someone or a group of people must bring these factors together to plan and organize the production of the final product.

Activity #1Natural

Res.Labor Capital Entrepreneur

McDonalds Happy Meal

Car

Economic Systems

• The Basic Economic Problem - no country has enough resources to satisfy all of the wants and needs of all people for material goods and services.

• Scarcity - productive resources are scarce in nature. There are only limited amounts found in nature.

• Economic Systems - is an organized way for a country to decide how to use its productive resources– What to produce?

– How the goods should be produced

– For whom should the goods and services be produced?

Three Types of Economic Systems

1. Market Economy - consumers and businesses determine which goods and services should be produced, how and for whom. Also called “Free Enterprise System” The United States is the best example of this type of system.

Types of Economic Systems (con’t)

2. Command Economy - is a system in which the method for determining what, how and for whom goods and services are produced is decided by a central planning authority. The countries that adopt this system are called dictatorships. All decisions regarding the economy are made by the government.

Command Economies can be found in Cuba, China, North Korea, Cambodia, and Vietnam.

Types of Economic Systems (con’t)

3. Mixed Economy - is an economic system in which a combination of a market and a command economy are blended together to make decisions about what, how and for whom goods and services are produced.

No one country has a true pure market economy or command economy. Most countries have mixed economies.

Economic Systems

PureMarket Economy

PureCommand Economy

MixedEconomy

US & Canada Cuba

The move towards Market Economies

• Today the tendency has been to move away from command economies in order to become more like the United States.

• When a country decides that it will start the transformation from command to market, it must sell its government owned resources to business people.

• Privitization - is when a country transfers its authority to provide a good or a service to individuals or businesses. Selling of telephone & transportation services to private firms.

Types of Political Systems

• Each country has an economic and a political system. The political system influences the economic system.

• Three Political Systems exist in the world today. They are capitalism, Socialism, and Communism.

Communism

• Communism is forced socialism where all or most all the productive resources of a nation are owned by the government.

• Decisions regarding what is to be produced, how much is to be produced, and how the goods and services should be distributed are decided by the government.

• Consumer Goods are often in short supply, because heavy emphasis is placed on capital formation.

Socialism

• Socialism is a political system in which the government controls and regulates the means of production. The government makes the majority of the economic decisions. Socialism is a good example of a mixed economy.

• Characteristics of Socialism - – Choice is limited to individuals and businesses

– Private property may be owned

– Government controls most of the resources and decision making power

Capitalism

• The political system found in the United States is Capitalism. In this system, private citizens are free to go into business themselves, to produce whatever they choose to produce, and to distribute what they produce.

• Characteristics of Capitalism or “Free Enterprise System”:– Free to make economic choices

– Free to own private property

– Government intervention to protect the rights of citizens

Comparison of Economic/Political Systems

Capitalism Socialism Communism

Who ownsresources?

Business &Individuals

Government forsome

Government forMost

How are theyallocated?

By customersbased on comp.

By government forsome

Government formost

To what extentdoes thegovernmntcontrol dec.

Limited Extensive overallocation oversome of theresources

Extensive

How are mktgdecisions made?

By marketconditions

By marketconditions

By the government

Example of acountry

U.S.A Sweden China/Cuba

Fundamentals of Capitalism

• Private Property - consists of items of value that individuals have the right to own, use and sell.

• Profit - the incentive as well as the reward for producing goods and services is profit, which is computed by subtracting total costs from total earned receipts.

Price Determination

• Demand - for a product refers to the number of products that will be bought at a given time at a given price.

• With increased demand, prices generally rise in the short - run. Later, when demand decreases, prices generally fall.

• Supply - refers to the number of like products that will be offered for sale at a particular time at a certain price.

• Changes in price determine what is produced and how much is produced in our economy.

Supply and Demand

$

Quantity

SUPPLY

DEMAND

EQUILIBRIUM

Competition

Goal of Sellers? Try to make a profit!

Goal of Buyers? Buy quality goods at the lowest possible prices.

• Competition - the rivalry among sellers for consumers’ dollars.

• Benefits to society - – quality of products is improved– new products are developed– businesses operate efficiently in order to keep prices down

Monopoly

• Monopoly - is the existence of only one seller who is able to avoid most of the elements of competition.

• Effects of Competition - if a seller does not have to compete with other sellers for consumer dollars, then prices tend to increase.

Managing the Economy

• The strength of a nation depends upon its economic growth.

• Economic growth is measured by an annual increase in the GDP, employment opportunities, and the continuous development of goods and services.

• However, our nation has had times growth and also periods of decline.

Identifying Economic Problems

• Recession - is a decline in the GDP that continues for 6 months or more.

• Effects of a Recession - – Demand for the total goods & services is less than

supply.

– Decreased production and increased unemployment occur during recessions.

– Inflation - is the rapid rise in prices caused by an inadequate supply of goods & services. Inflation results in a decline in purchasing power ($ does not go as far)

Business Cycles

Expansion

Peak ProsperityContraction

Trough