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Economic Environment of Business

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John Blechacz

on 20 October 2014

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Transcript of Economic Environment of Business

Satisfying Economic Wants
Economic Wants
Economic Systems
What is a Market System?
A set of laws, institutions and activities that guide economic decision making

Pure Market Economy
Private firms account for all production
NO government interaction at all
Private ownership of all resources and coordination of economic activity based on the prices generated in free, competitive markets
Any income derived from selling resources goes exclusively to the resource owners

Economic Environment of Business
Non-Economic Wants
The desire for scarce material goods and services. No economic system has the resources to satisfy all wants.
(clothing, houses, food)
Desires for non-material things that are not scarce
(air, friendship, happiness)
Factories of Production
(Natural Resources) such as water, soil, oil, minerals, and wood

(Human Resources) the physical and mental efforts people use to create goods and services

(Manufacturing Resources) the buildings, tools, and machines used to help to product goods and services.

(Ideas) the imagination, innovative thinking, and managerial skills need to start and operate a business.
A set of laws, institutions, and activities that guide economic decision making
Four Fundamental Questions
What goods and services should be produced?
What quantity of goods and services should be produced?
How should goods and services be produced?
For whom should goods and services be produced?
Market Systems
The way nations answer the four basic economic questions determines their economic system.
Traditional system:

Relies on farming and simple barter trade

Market system:
Based on supply and demand with little government control

Command system:

Run by a strong centralized government
Problems with Pure Market Economies
Difficulty enforcing property rights
Some people have few resources to sell
Some firms try to monopolize markets
No public goods

Command Economy
All resources are government owned
Production is coordinated by the central plans of government
There is little individual freedom
There is no competition
Government sets prices of goods & services

Cuba, North Korea, China

Problems With Command Economies
Consumers get low priority
Little freedom of choice
Central planning can be inefficient
Resources owned by the state are sometimes wasted
Government dictates the job in which you will work

Mixed Economy
Government & individuals share decision making process
Government guides & regulates production of goods and services
Individuals own means of production
Protects consumers and workers from unfair policies
Most effective economy for providing goods and services
All countries are mixed to a degree.

The U.S. is a mixed economy with many characteristics of a market economy, but with gov’t involvement.
Traditional Economy
Found in rural, non- developed countries

Some parts of Asia, Africa, South America and the Middle East have traditional economies

Customs govern the economic decisions that are made

Technology is not used in traditional economies

Farming, hunting and gathering are done the same way as the generation before

Economic activities are usually centered toward the family or ethnic unit

Men & women are given different economic roles and tasks

Africa, South America, Middle East

Free Enterprise
The system that most democratic nations operate within
People have the right to make economic choices:
Choose what they want to buy
Choose to own private property
Choose to start a business and compete with other businesses
Also called capitalism or market economy

Market Structures
Market structure refers to the nature and degree of competition
Market structures affect market price
Four Different Market Structures:
Perfect competition
Monopolistic competition

Perfect Competition
There are numerous buyers and sellers, and no single buyer or seller can affect price
It is easy for sellers to enter the market
Encourages economic efficiency by forcing prices down
Few, if any, perfectly competitive markets exist

Many sellers produce similar but differentiated products
Sellers have some power to control the price of their products
Monopolistic competitors try to dominate a small portion of the market

Think of all the different game systems How many companies produce games systems and how do they differentiate themselves?

Monopolistic Competition
A particular commodity has only one seller who has control over supply and can exert nearly total control over prices
Monopolies are discouraged in free market economies
A few monopolies exist where it would be wasteful to have more than one: our government regulates these industries

Examples: Electric, sewer and water companies

Just a few competing firms control the market for a given commodity
For example for decades the auto industry was dominated by just a few competing firms
Under antitrust laws, most forms of monopolies and oligopolies are illegal

Types of
Economic-Political Systems
Every country has an economic system and a political system.

The political system always determines the economic system.
Economic-Political Systems
Private Goods
Public Goods
A product or resource that is owned, produced, or sold to consumers by an individual.
(funded by individual investments)

A product that must be purchased in order to be consumed, and whose consumption by one individual prevents another individual from consuming it.

food, electronics, automobiles
A product or resource that is owned, produced, or offered to consumers by a government.
(funded through tax revenue)

A product that one individual can consume without reducing its availability to another individual and from which no one is excluded.

roads, sewage, military, education
Economic-Political Systems
A system in which private citizens are free to go into business for themselves, to produce and distribute what they want
United States
A system in which the government controls and decides the some-most uses of a country's resources
Sweden and France
(extreme socialism)
A system in which the government controls and decides the uses of all the country's resources
Soviet Union, Cuba and North Korea
Full transcript