UNDE RSTANDING THE BUS INESS SYSTEM CHAPTER 1

1. UNDERSTANDING THE BUSINESS SYSTEMCHAPTER 1 This slide set is prepared for use with Ebert and Griffin, Business Essentials. Fifth Edition. Prentice Hall, New Jersey, 2005.

2. The Concept of Business and Profit • Business -- an organization that provides goods and services for profit (ticari kuruluş) • Profit -- revenue minus expenses (kar) • All kinds of businesses produce goods and services (mal ve hizmet) • profits from businesses • taxes from businesses • charitable activities • Businesses exist in economic systems

3. ECONOMICSYSTEMS • An economic system is a set of rules and institutions used to allocate (dağıtım; tahsis) a society’s resources to satisfy its citizens’ needs. • Shaped by politics and social values • link between economy & society is crucial

4. ECONOMICSYSTEMS • Factors of Production (üretim faktörleri) Resources of the society used in the production of goods and services • labor (human resources) • capital (funds needed to create and operate a business) • physical resources (natural resources,raw materials, production facilities, parts and supplies, and other elements used to produce goods &services)

5. ECONOMICSYSTEMS • entrepreneurs (girişimciler) • risk takers • locomotive role • can you name some entrepreneurs? • information resources (data and other information used by businesses) (bilgi kaynakları)

6. ECONOMICSYSTEMS • Types of Economic Systems • ownership of factors of production (private or owned by the government) • decisions about allocation and production individuals or government) • Planned Economies • Market Economies • Mixed Market Economies

7. ECONOMICSYSTEMS • Planned Economies central government controls all or most factors of production and makes all or most production and allocation decisions communism and socialism • Communism • All factors of production owned & operated by the state • No private property • Planned resource allocation -- “planned economy” concept • social equality • private enterprise considered wasteful & exploitative (kötüye kullanmak, sömürü)

8. ECONOMICSYSTEMS • Various degrees --Pure (Cuba, North Korea, People’s Rep. Of China, USSR in the past) • Karl Marx (1818-1883) -- German political philosopher and economist • founder of communism along with Friedrich Engels (also German) • “from each according to his abilities, to each according to his needs” - a society envisioned by Marx

9. ECONOMICSYSTEMS • Socialism • state ownership & operation of key industries (trans., utilities, steel, communication) • private ownership of less vital industries & businesses • concept of “welfare state” (refah devleti) • medical care, education, housing, social services, etc.

10. ECONOMICSYSTEMS • Market Economies Market --mechanism for exchange between buyers & sellers of a good or service (piyasa) Basic idea: people are free to make free choices regarding production and consumption of goods and services. Demand & supply regulate production and prices • Capitalism : market economy (piyasaekonomisi) that provides for private ownership of production and encourages entrepreneurship by offering profits as an incentive

11. ECONOMICSYSTEMS Adam Smith - Wealth of Nations (1776) “Pure Capitalism” -- Laissez faire - laissez passe (let them do, let them pass) (bırakınız yapsınlar, bırakınız geçsinler) Market --- self-correcting mechanism (invisible hand) Demand & Supply regulate production and prices

12. ECONOMICSYSTEMS • Mixed Market Economies (Karma Ekonomi) Economic system featuring characteristics of both planned and market economies • some government intervention (müdahale) in prices, wages, and conduct of business activities • minimum wage laws • anti-trust legislation (tekelciliği önleyici yasalar) • prices of certain basic goods • subsidy system (subvansiyon, destekleme alımları) • consumer and environmental protection regulation

13. ECONOMIC SYSTEMS • Statism -- “devletçilik” • Government + private enterprises • A form of socialism (although not called by that name in Turkey) • State Economic Enterprises (Kamu İktisadi Teşekkülleri - KİT) • Turkey • France • Italy, England are examples • Issue of privatization (Özelleştirme) • a very current issue in Turkey and other countries such as Hungary, Poland, Romania)

14. A CLOSER LOOK AT THE ECONOMIC SYSTEM • How does the economic system of a country work? • markets (piyasalar) • nature of demand and supply (arz ve talep) • private enterprise (özel teşebbüs) • competition (rekabet)

15. A CLOSER LOOK AT THE ECONOMIC SYSTEM • Markets • many different markets in the economy (housing, white goods, money, tobacco, etc.) • producers, consumers, prices • many many exchanges (alış-veriş) take place in these markets • events in one market often have effects on other markets (for example; money market & tourism)

16. A CLOSER LOOK AT THE ECONOMIC SYSTEM • Supply and Demand • Supply : quantity of a product that the seller is able and willing to provide at various prices at a given time (arz, sunu) • Demand : quantity of a product that consumers are willing and able to buy at various prices at a given time (talep, istem)

17. A CLOSER LOOK AT THE ECONOMIC SYSTEM • Laws of Supply and Demand (arz ve talep yasası) • Law of demand -- buyers will purchase more of a product as its price drops and less of a product as its price increases • Law of supply -- producers will offer (supply) more of a product for sale as its price rises and less as its price drops

18. A CLOSER LOOK AT THE ECONOMIC SYSTEM • Demandcurve -- graph showing how many units of a product will be demanded (bought) at different prices (talepeğrisi) • Supply curve -- graph showing how many units will be supplied (offered for sale) at different prices (arzeğrisi) • Market (or equilibrium) price -- price at which quantity demanded equals quantity supplied (piyasa veya denge fiyatı)

19. Supply & Demand curves Demand Price equilibrium price at this quantity Supply Quantity

20. Supply and Demand Schedule Equilibrium price where supply = demand

21. A CLOSER LOOK AT THE ECONOMIC SYSTEM Surplus = quantity supplied > quantity demanded Shortage = quantity supplied < quantity demanded

22. A CLOSER LOOK AT THE ECONOMIC SYSTEM • Private Enterprise (Özel Teşebbüs; Özel Girişimcilik) Economic system that allows individuals to pursue their own interests without undue governmental restriction Four elements of private enterprise: 1. private property rights (özel mülkiyet hakları) 2. freedom of choice (seçme özgürlüğü) 3. profits 4. competition (rekabet)

23. A CLOSER LOOK AT THE ECONOMIC SYSTEM • Private Property Rights Right to buy, own, use, and sell almost any form of property (mal ve mülk) -- car, home, TV sets, diapers, walkman, etc. • Freedom of Choice Sell your labor, buy any product, make and sell any product/service, hire any one Some exceptions -- drugs, guns, child labor, etc.

24. A CLOSER LOOK AT THE ECONOMIC SYSTEM • Profits Necessary for continued existence of businesses. Also to attract people to invest in new products and services. Entrepreneurs. • Competition Vying among businesses for the same resources or customers • Nike vs. Reebok athletic shoes • Turkcell vs. Telsim GSM operators • Compaq vs. Dell computers • Ulaş Taxi vs. Günay Taxi in Mağusa

25. A CLOSER LOOK AT THE ECONOMIC SYSTEM • Degrees (or types) of Competition • Perfect(or pure)Competition (Tam rekabet): • small firms in the market • large number of firms producing identical products or services • because of the above, no single firm can control price and quantity • prices are known by all parties (sellers & buyers) • easy to enter or leave the market • demand and supply determine the price

26. A CLOSER LOOK AT THE ECONOMIC SYSTEM • Examples of pure competition -- farmers, all kinds of small businesses such as restaurants, grocery stores • Monopolistic Competition (Tekelci rekabet) Market or industry where there are a large number of buyers and a relatively large number of sellers trying to differentiate (farklılaştırmak) their products from those of competitors • no one company dominates the market • fewer sellers than in pure competition • brand names heavily used (Coke and Pepsi; Nike and Adidas; Uludağ Kebabcısı and Kebab 49)

27. A CLOSER LOOK AT THE ECONOMIC SYSTEM • Oligopoly (Oligopoli) Market or industry where there are a handful (few) of sellers • power to influence the prices of their products • sellers are usually very large companies • entry is difficult (large capital investment necessary) • actions of one can seriously affect the sales of others, such as price changes • examples -- auto industry, steel, airlines, white goods (Arçelik, Profilo, Teba), banking (Vakıfbank, İsbank, Garanti Bankası)

28. A CLOSER LOOK AT THE ECONOMIC SYSTEM • Monopoly (Tekel, monopoli) Market or industry in which there is only one producer • the producer can set the prices of its products • the producer dominates the market Anti-trust laws in many countries (including Turkey) prevent monopolies. • Competition Council (Rekabet Kurulu) in Turkey

29. A CLOSER LOOK AT THE ECONOMIC SYSTEM • A number of factors help prevent development of monopolies & oligopolies • if tomatoes are expensive use carrots • copper prices go up, fiber optics used for communication • cotton prices go up, synthetic fibers are used • oil crisis of 1974 gave rise to oil substitutes such as natural gas, solar power, gasohol, more energy efficient cars, machines, etc.

30. A CLOSER LOOK AT THE ECONOMIC SYSTEM • Natural Monopolies Industry in which one company can most efficiently (verimli) supply all needed goods or services. Examples: • power (electricity) • water • bus service within a large city (Ankara, New York, etc)

31. UNDERSTANDING ECONOMIC PERFORMANCE • How do we know if the economic system of a country is working well and achieving key goals (anahedefler)? This is what we mean by “performance of the economic system”. • Two Key Economic Goals : 1. Economic growth (büyüme) 2. Economic stability ( istikrar)

32. UNDERSTANDING ECONOMIC PERFORMANCE 1. EconomicGrowth (Ekonomik Büyüme) Growth is the increase in the amount of goods and services produced by a nation’s resources. • It is difficult to achieve growth without triggering inflation and other economic problems • Turkey’s economy has grown at an average rate of 6 % for the past 5-10 years • What about China?

33. UNDERSTANDING ECONOMIC PERFORMANCE • How do we know whether or not an economic system is growing? • Business cycle - pattern of short-term expansions and contractions (ups and downs) in an economy • The main measure of growth in the business cycle is aggregate output (toplam üretim): • total quantity of goods and services produced by an economic system during a given period.

34. UNDERSTANDING ECONOMIC PERFORMANCE • An increase in aggregate output is called economic growth. • If output growth rate is more than the growth rate of the population, the result is • an increase in output per capita (kişi başına üretim miktarı) • the system provides more of the goods & services that people want RESULT : HIGHER STANDARD OF LIVING FOR THE PEOPLE Standard of living - total quantity & quality of goods and services that people can buy

35. UNDERSTANDING ECONOMIC PERFORMANCE • Measures of aggregate output • 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 (Gayri Safi Yurtiçi Hasıla - GSYİH) • If GDP is increasing, the nation’s aggregate output is increasing, which means the economy is also growing. • Gross National Product (GNP) The value of all final goods & services produced by an economic system in one year regardless of where the factors of production are located (Gayri Safi Milli Hasıla (GSMH) veyaMilli Gelir)

36. UNDERSTANDING ECONOMIC PERFORMANCE • Real Growth Rate Increase in GDP and GNP must be adjusted for inflation and changes in the value of the country’s currency. This is called the real growth rate. • GDP per capita - GDP per person For real growth to take place, output must increase at a faster rate than population. If this is the case, GDP per capita will increase and the country will become richer.

37. UNDERSTANDING ECONOMIC PERFORMANCE • Nominal GDP - GDP measured in current (cari; bugünkü) Turkish Liras or at current prices. • Real GDP - Nominal GDP that has been adjusted for price changes (usually inflation) and exchange rates • Purchasing Power Parity (PPP) - principle that exchange rates are set so that the prices of similar products in different countries are about the same. (Satınalma gücü paritesi) • PPP gives us a much better idea of what people can actually buy with what they earn in an economic system.

38. UNDERSTANDING ECONOMIC PERFORMANCE • GDP & GNP may be misleading… “Underground (kayıt dışı) economy” Barter (takas), cross-border trade, illegal transactions Unreported to the government - legal & illegal

39. UNDERSTANDING ECONOMIC PERFORMANCE • Productivity (üretkenlik; verimlilik) • Measure of economic growth that compares how much an economic system produces with the resources needed to produce it. • Essential for continued economic growth • Examples: • 80 cars/day by Toyota vs. 60 cars/day by Tofaş using the same amount of equipment and labor • Canon 1000 $ per copier vs. Xerox 1200 $ per comparable copier • If more products are produced with fewer factors of production, prices of products go down. This means a higher standard of living.

40. UNDERSTANDING ECONOMIC PERFORMANCE • PRODUCTIVITY = OUTPUT/INPUT

41. UNDERSTANDING ECONOMIC PERFORMANCE • Some factors can play a negative role in economic growth. Two important factors are: • Balance of Trade (Dış Ticaret Dengesi) • National Debt (Ulusal Borç) Some definitions first -- • Importing: Purchasing goods/services from another country (dışalım, ithal) • Exporting: Selling and shipping goods or services to another country (dışsatım, ihraç)

42. UNDERSTANDING ECONOMIC PERFORMANCE • Balance of Trade: Difference between the value of products a nation exports and those that it imports (Dış Ticaret Dengesi) • If Imports > Exports, we have Trade deficit (dış ticaret açığı) • If Imports < Exports, we have Trade surplus (dış ticaret fazlası) • Trade deficit is also called “negative trade balance” • Japan and Taiwan have trade surplus, while Turkey and the U.S. experience a trade deficit.

43. UNDERSTANDING ECONOMIC PERFORMANCE • National Debt (Milli/Ulusal Borç) Government takes in revenues (gelir) and spends these for many purposes. • Revenues come mostly from taxes (vergiler); another source of revenue is borrowing (borçalma) by selling bonds (devlet tahvili) to individuals, banks, insurance companies, other companies, etc. • Spending (harcama) is for many purposes (military, social programs, investments for power generation and highways, education, etc.)

44. UNDERSTANDING ECONOMIC PERFORMANCE • Budget Deficit (Bütçe Açığı) • Government spends more than the money it takes in ( expenses > revenues) • many governments (including Turkey and TRNC) experience budget deficits all the time. • Where do governments get the money to spend more than they take in? Of course, they borrow from various sources. • So what is NationalDebt? (Ulusal Borç) Total amount that a nation owes its creditors (alacaklılar) • Effect of national debt on economic growth: • Money borrowed by the government means there is less money for private borrowing and investment

45. UNDERSTANDING ECONOMIC PERFORMANCE • Economic Stability (istikrar): 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 • enough desirable products to satisfy consumer demand, and consumers have enough money to buy what they need and want • prices for consumer goods, interest rates (faizoranları), and wages (ücretler) paid to workers change very little • biggest threat to stability is inflation (enflasyon)

46. UNDERSTANDING ECONOMIC PERFORMANCE • What is inflation? Widespread continuous price increases throughout the economic system. • Inflation occurs when the amount of money in the economy is greater than the amount of goods & services available. This leads to higher prices for goods and services. The result is a decrease in purchasing power. (satınalma gücü) • Inflation always hurts consumers !!!

47. UNDERSTANDING ECONOMIC PERFORMANCE • Inflation is not necessarily or entirely bad. A little inflation, if kept under control, it may be a sign of economic growth. • If it gets out of control, as in Turkey and some other countries (Brazil, Israel for example) then it can be very damaging to a country.

48. UNDERSTANDING ECONOMIC PERFORMANCE • Measuring Inflation • Consumer Price Index (CPI) • Producers Price Index (In Turkey: ÜFE) • Consumer Price Index (In Turkey: TÜFE)

49. UNDERSTANDING ECONOMIC PERFORMANCE • Unemployment (işsizlik):Level of joblessness among people actively seeking work • Effect of unemployment on stability • low unemployment leads to shortage of labor; result is higher wages • higher wages means higher costs and prices • if wage rates are too high, businesses will hire fewer workers, which means increased unemployment • High unemployment usually means that businesses and the economy are performing poorly. This results in decreased aggregate output (GDP) and standard of living.

50. UNDERSTANDING ECONOMIC PERFORMANCE • Recession and Depression • Recession: period characterized by decreases in aggregate output as measured by real GDP (küçülme, gerileme) • aggregate output decreases • unemployment increases • national income decreases (GDP) • Depression: Severe and long-lasting recession (ekonomikbunalım) Example -- the famous depression of 1929 which started in the U.S. and spread throughout the whole world • serious economic and social problems • Argentina in 2002 is an example