CHAPTER
OBJECTIVESOBJECTIVES
ECONOMIC ENVIRONMENT OF BUSINESS
Describe economic concepts that apply to satisfying economic wants.
Discuss three economic systems and three economic-political systems.
Summarize five fundamental elements of capitalism. Explain how economic growth can be promoted and
measured. List basic economic problems that exist and state what
government can do to correct the problems.
3333
Economics The body of knowledge that relates to producing
and using goods and services that satisfy human wants
Economic want The desire for scarce material goods and
services Non-Economic want
The desire for non-material things that are not scarce Air, sunshine, friendship, happiness
Which of the following are economic wants?1. Golf clubs
2. Income tax help
3. A peaceful walk in the park
4. Lunch at the finest restaurant in town
Answer: 1, 2 , & 4
SATISFYING OUR ECONOMIC WANTS
Utility – the ability of a good or a service to satisfy a want
Producer – anyone who creates a utility Which of the following are producers?
1. A travel agency2. A private trash collection3. A house painter4. A toy manufacturer
Answer: All of them
Types of Economic Utility
1. Form Created by changes in the form or shape of a
product to make it useful (usually applies only to goods and not to services). Example: Is the swimsuit you desire to buy available in a particular fabric and style?
2. Place Created by having a good or service at the place
where it is needed or wanted. Example: Is the swimsuit you desire available in a nearby store where it can be purchased?
Types of Economic Utility (cont)
3. Time Created when a product or service is available
when it is needed or wanted. Example: Is the store open when you are ready to buy and use your swimsuit?
4. Possession Created when ownership of a good or service is
transferred from one person to another, but may also occur through renting and borrowing. Example: Is the swimsuit available at a price you can afford and are willing to pay?
Factor of Production
Land, labor, capital goods, and management – the 4 basic resources that are combined to create useful goods and services
Natural Resources – anything provided by nature (fertile soil, mineral, water)
Labor – human effort, either physical or mental Human capital – the accumulated knowledge and skills of
human beings – the total value of each person's education and acquired skills
Capital Goods – buildings, tools, machines, and other equipment used to produce other goods (no not directly satisfy)
Entrepreneurship – By starting and managing a business you bring together the other 3 factors
CAPITAL FORMATION
Capital Formation The production of capital goods
Consumer goods/services The goods and services that directly satisfy people’s economic
goods consumer goods/services capital goods
consumer goods/services capital goods
Has capital formation occurred When a firm acquires a new truck so that more goods can be
shipped to customers? Yes
When a business builds a new factory to increase production? Yes
Capital Goods?
1. A plumber buys a device that aids in replacing broken well pumps for rural customers. Yes
2. A car firm buys robots that will help it make cars faster. Yes
3. A salesperson buys a new suit to wear when selling his firm’s manufactured products. No
ECONOMIC SYSTEMS Types of economic systems
Market economy An economic system in which individual buying decisions in the marketplace
together determine what, how, and for whom goods and services will be produces.
Command economy A central planning authority, under the control of the country’s government, owns
most of the factors of production and determines what, how, and for whom goods and services will be produced (dictatorships)
Mixed economy Uses aspects of a market and a command economy to make decisions
Privatization – the transfer of authority to provide a good or service from government to individuals or privately owned businesses
Capitalism
An economic-political system in which private citizens are free to go into business for themselves, to produce whatever they choose to produce, and to distribute what they produce.
aka Free Enterprise System
Socialism
An economic-political system in which the government controls the use of the country’s factors of production
How scarce resources are used is determined by the government
Often associated with mixed economies
Communism
Extreme socialism, in which all or almost all of a nation’s factors of production are owned by the government
Command economy is most often practiced by communist countries
Capitalism Socialism Communism
Market/Mixed Economy
Mixed Economy Command / Mixed Economy
Who may own natural resources and capital goods?
Businesses and Individuals
Government for some, but not all
Government for most
How are resources allocated?
By customers based on competition
By gov for some and customers for others
By government only
To what extent does gov attempt to control business decisions?
Limited Extensive over the allocation of some resources, but little over distribution
Extensive
How are marketing decisions made?
By market conditions
By market conditions
By gov
Good example United States Sweden North Korea
FUNDAMENTALS OF CAPITALISM
Private property- consists of items of value that individuals have the right to own, use, and sell
Profit - subtract the total cost of producing the product from the total received from the customer
Price setting Demand – the number of products that will be bought at a given
time at a given price Supply – the number of like products that will be offered for sale
at a particular time and at a certain price Competition – rivalry among sellers for consumers’ dollars Monopoly – the existence of only one seller of a product Income distribution (wages and salaries)
SUPPLY AND DEMAND
$0
$10
$20
$30
$40
$50
1000 2000 3000 4000 5000 6000 7000
Price
Quantity
Supply
DemandMarket Price
Could a competitor be able to maintain product quality and lower the product’s price if it1. Manufactured the product in a third-world nation
Yes, could still control the quality while paying lower wages
2. Used higher-quality materials No, the manufacturing cost would rise
3. Changed the product color Yes, if the color is popular but no, if it isn’t
MANAGINGTHE ECONOMY
Promoting economic growth Measuring economic growth Identifying economic problems Correcting economic problems
Economic Growth
Economic Growth Occurs when country’s output exceeds its
population growth
More goods and services are available for each person
Measuring Economic Growth
Consumer Price Index Indicates what is happening in general to
prices in the country
Is a measure of the average change in prices of consumer goods and services typically purchased by people living in urban areas
Identifying Economic Problems
Recession Decline in the GDP that continues for six months or more Occurs when demand for the total goods and services
available is less than the supply Inflation
Rapid rise in prices caused by an inadequate supply of goods and service
Total demand exceeds supply Results in a decline in purchasing power of money (the
dollar does not buy as much as it did before inflation)
Correcting Economic Problems
Business Cycles A pattern of irregular but repeated expansion
and contraction of the GDP Cycles last about 5 years
4 Phases1. Expansion (inflation)2. Peak3. Contraction (recession)4. Trough
Raise or lower taxes (raised to slow growth and lowered to ecnourage growth)
Correcting Economic Problems (cont)
Government expenditures influence economic growth (increase spending to stimulate a slow economy)
Regulated through interest rates (interest rates low, then businesses are encouraged to borrow)
Depression A long and severe drop in the GDP (also affect
foreign countries)