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Business environment

Learning Outcomes: Identify factors of production Understand and evaluate different economic systems Describe the tools by which economic performance can be measured Identify key government influences over economic activity. Business environment. Economic Systems Around the World.

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Business environment

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  1. Learning Outcomes: Identify factors of production Understand and evaluate different economic systems Describe the tools by which economic performance can be measured Identify key government influences over economic activity Business environment

  2. Economic Systems Around the World Economic System A nation’s system for allocating its resources among its citizens

  3. Resources used in the production of goods and services Factors of Production Four traditional factors of production: Natural Resources Labour Capital Entrepreneurs Newer perspectives include: Physical Resources Information Resources

  4. Factors of Production Natural Resources Materials supplied by nature (such as land, water, mineral deposits, and trees) Labour (or Human Resources) Physical and mental capabilities of people as they contribute to economic production Capital Funds needed to create and operate a business enterprise

  5. Factors of Production Entrepreneur Person who starts a new business or makes the decisions that expand a small business. Physical Resources Tangible things organizations use in the conduct of their business. Information Resources Data and other information used by a business.

  6. An economic system describes how a country’s economy is organized • Because of the problem of scarcity, every country needs a system to determine how to use its productive resources • Scarcity = not having enough of something • An economic system must answer 3 questions… Economic Systems

  7. Economic Systems • WHAT TO PRODUCE? (What kinds of goods and services should be produced?) • HOW TO PRODUCE? (What productive resources are used to produce goods and services?) • FOR WHOM TO PRODUCE? (Who gets to have the goods and services?

  8. Types of Economic Systems Planned Economy Centralized government controls all or most factors of production and makes all or most production and allocation decisions Market Economy Individuals control production and allocation decisions through supply and demand

  9. Planned Economies Communism Planned economic system in which the government owns and operates all major sources of production Socialism Planned economic system in which the government owns and operates selected major sources of production

  10. Market Economies Market  Mechanism for exchange between buyers and sellers of a particular good or service Input Market Firms buy resources from supplier households Output Market Firms supply goods and services in response to demand on the part of households Capitalism Market economy that provides for private ownership of production and encourages entrepreneurship by offering profits as an incentive

  11. OUTPUT MARKETS SUPPLY DEMAND Goods Services FIRMS HOUSEHOLDS • Supply products in output markets • Demand resources in input markets • Demand products in output markets • Supply resources in input markets INPUT MARKETS Labor Capital Entrepreneurs Physical Resources Information Resources DEMAND SUPPLY “Pure Market Economy” 1-11

  12. INCOME FLOW OF WAGES, INTERESTS, RENTS HOUSEHOLDS PRODUCING UNITS PURCHASES OF GOODS AND SERVICES The Circular Flow of Income

  13. All the resources in a market economy are privately owned by people and firms. Every business will aim to make as much profit as possible i.e. profit is the main motive. There is consumer sovereignty. Firms will only produce those goods which consumers want and are willing to pay for. Price is determined through the price mechanism Market Economy/Free Market Economy Features

  14. Market economies responds quickly to people’s wants Factors of production which are profitable will only be employed. Resources used efficiently. There is wide variety of goods and services in the market. New and better methods of production are encouraged thus leading to lower cost of goods Market Economy/Free Market Economyadvantages

  15. Public goods (MERIT GOODS) may not be provided for in Market economy, thus the government will have to interfere to provide these types of goods. Market economies encourage consumption of harmful goods (DEMERIT GOODS) Prices are determined by the demand and supply of goods. Social cost may not be considered while producing goods (No employment laws etc) Market Economy/Free Market Economydisadvantages

  16. Government decides how all scarce resources were to be used. Government will decide what is to be produced, how much to be produced and how much should be charged for goods and services. The economy only has Public Sector Planned Economy/ Command Economy features

  17. Advantages There is no competition between firms thus resulting in less wastage. Government ensures that everybody is employed. Less gap between poor and rich Disadvantages No incentives for businesses to produce. Production of goods is decided by government thus there is no consumer sovereignty. Businesses usually are less efficient because of lack of profit motive Planned Economy/ Command Economy

  18. Market + Command = Mixed • There are no pure command or market economies. • To some degree, all modern economies exhibit characteristics of both systems and are often referred to as mixed economies. • Most economies are closer to one type of economic system than another • Businesses own most resources and determine what and how to produce, but the government regulates certain industries Mixed economy features

  19. Price liberalisation – removal of price controls Removal of subsidies Privatisation Trade liberalisation – prevent monopolies Reform of financial sector Institutional reforms – commercial banks etc Transitional economies

  20. Evaluating Economic Systems Nearly every economic system has three broad goals: • Stability ( no inflation) • Full Employment • Growth

  21. Economic Goals Stability Condition in which the balance between the money available in an economy and the goods produced in it are growing at about the same rate. Inflation Phenomenon of widespread price increases throughout an economic system. Recession Period characterized by decreases in employment, income, and production. Depression Particularly severe and long-lasting recession.

  22. Economic Goals Full Employment Everyone who wants to work has an opportunity to do so Unemployment Level of joblessness among people actively seeking work Knowledge Workers Skilled employees in high-tech industries Growth Increase in the amount of goods and services produced by a nation’s resources

  23. Assessing Economic Performance Gross National Product (GNP) The value of all goods and services produced by an economic system in a year regardless of where the factors of production are located Real Gross National Product (real GNP) Gross national product adjusted for inflation and changes in the value of a country’s currency Gross Domestic Product (GDP) The value of all goods and services produced in a year by a nation’s economy through domestic factors of production

  24. Assessing Economic Performance Productivity Measure of economic growth that compares how much a system produces with the resources needed to produce it Balance of Trade The difference between a country’s exports to and imports from other counties Budget Deficit Situation in which a government body spends more money than it takes in National Debt Total amount that a nation owes its creditors

  25. Managing the U.K. Economy Fiscal Policies Government economic policies that determine how the government collects and spends its revenues Monetary Policies Government economic policies that determine the size of a nation’s money supply

  26. Government influences over economic activity Government Overall economic policy Industry policy Organisations Market demand Cost of finance Taxation Protection v free trade Grants, incentives Regulation Entry barriers, capacity

  27. Government influences over economic activity Government Environment & infrastructure policy Social policy Foreign policy Organisations Distribution Workplace regulations, employment law, labour skills, supply & education Trade promotion, EU & WTO obligations

  28. Taxation and interest rate policies Public spending on goods and services Regulation Three ways government intervenes

  29. http://www.bbc.co.uk/news/10613201 http://www.tutor2u.net/blog/index.php/economics/comments/prospects-for-the-uk-economy-in-2012-powerpoint-download http://www.youtube.com/watch?v=Fh_dsfj7Kk0 The uk economy today

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