The Role of Business in the Economy

Presented by:Tom Downey

PayneWest InsuranceMCEE – Bozeman, MT

June 19, 2013

Carroll College graduate – Business Finance, with minor in Economics

Taught Risk management classes at Carroll 2 years

Taught CIC – Certified Insurance Counselor courses in Mt. N.D. and WA

Licensed Consultant and Expert witness in Insurance issues.

CPCU – Charter Property Casualty Underwriter

President Butte Local Development Corporation

Who is Tom Downey?

Please tell us a little about yourself

Field of study

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Other jobs/careers besides teaching

Class Introduction

Better understanding of commerce and trade

Realize that the “invisible hand” will help markets approach equilibrium.

Understand the role of business in the economy.

Understand that externalities may affect equilibrium.

Be able to determine for yourself if people and society is better off in a free society with business interests competing for your purchases of goods and services.

Outcome of this Discussion

First we must establish a basic understanding of relevant terms and definitions so as we discuss concepts in business and the economy, so that we are all on the same page as to what we are actually talking about.

Market – is a social arrangement that allows buyers and sellers to discover information and complete voluntary exchanges of goods and services.

Commerce- trading something of economic value such as a good, service, information, or money between two entities.

Business – the management and coordination of people and resources to accomplish particular production goals, usually for the purpose of making a profit.

** As a result of business in the economy, the variety, quality, and quantity of goods and services available to consumers increases, while the prices of goods and services decreases.

Definitions

To understand the Role of Business in the Economy, and its influence on your life and standard of living, imagine a world in which you had to produce everything you consume.

1. Grow your own food

2. Sew your own clothes

3. Cook all of your meals

4. Build your own car, computer, cell phone, house, and furniture.

Role of Business

It would be impossible to actually complete all of these activities on your own. It takes a lot of time and resources to learn how to

build a car, etc… Time and resources are scarce…

o People have to make choices about how they spend them.

Role of Business

The Pencil Story and Illustration Attach the Pencil story and take turns reading the entire article

to emphasize the complex manufacturing process as well as the many steps and parts to a simple pencil.

Discuss Pencil story – especially how for such a simple item as a pencil there is really no one person who knows how to personally make a pencil and do all the steps himself.

Discuss the “Invisible Hand” theory about all the people and steps necessary to line up in a society to bring a pencil into being. How does the “invisible hand” lead each person and business in the process?

Learning Exercise #1

Definition of 'Invisible Hand‘: A term coined by economist Adam Smith in his 1776 book "An Inquiry into the Nature and Causes of the Wealth of Nations".

In his book he states:

"Every individual necessarily labors to render the annual revenue of the society as great as he can. He generally neither intends to promote the public interest, nor knows how much he is promoting it ... He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for society that it was no part of his intention. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good."

Thus, the invisible hand is essentially a natural phenomenon that guides free markets and capitalism through competition for scarce resources.

Invisible Hand Theory

Investopedia explains 'Invisible Hand'

Smith assumed that individuals try to maximize their own good (and become wealthier), and by doing so, through trade and entrepreneurship , society as a whole is better off. Furthermore, any government intervention in the economy isn't needed because the invisible hand is the best guide for the economy.

*** Buyers and Sellers act in their own best interest and in doing so, the interests of the other party is also served.

Invisible Hand Theory

TRADE is what increases our standard of living.

Instead of having to produce everything you consume on your own, you are able to trade with others and obtain a higher quality of life.

Through specializing in the production of a particular good or service, more is produced compared to each of us producing everything on our own.

Not only do individuals specialize in production, businesses also specialize in producing particular goods and services.

Businesses bring “specialized” people, equipment, and other resources together and coordinate the production of goods and services.

Trade

Nearly all businesses start out small, and only those firms that meet consumers’ demands and produce efficiently stay in business and grow into larger firms.

Big business in not a bad thing

Big businesses are those businesses that are: Able to supply highly demanded products at the lowest

prices, and Consistently meet the demands of consumers.

Consumers are better off because of business in the economy because they gain from purchasing the goods and services supplied by businesses.

Business Size

What if you only traded goods and services with everyone in this classroom… If each of us specialized in producing one good or service, would you be

better off than if you produced everything on your own? What products might you each produce?

Grow food Sew clothing Build furniture

Could one of us produce a car or computer??

Now imagine if we could trade with everyone in our town… Would we have more options? Would we have better products and services available?

Now imagine if we could trade with everyone in our state, or in our country. Does it give us better options and better quality/quantity??

Discussion Topic #1

Businesses are vitally important in coordinating trade. 1. Businesses not only allow for larger scale production to

meet the needs of many consumers,2. They also make it easier for consumers to locate sellers

who produce3. particular goods and services of interest. 4. It is not always easy for an individual to coordinate trade

with people who live far away. 5. It is easier, however, for businesses to coordinate with

other businesses allowing for greater variety, quantity, and quality for consumers, as well as lower prices.

Importance of Business to Trade

Because businesses have the incentive of making profit, they efficiently coordinate resources such as labor and equipment.

Efficient production translates into lower prices, which attract consumers.

Clearly, we, as consumers, are better-off because of business in the economy.

Profit Incentive

The Wal Mart “big business” discussion

How does society benefit from Walmart?

Pros and Cons…

Discussion Topic #2

Markets are not always perfect.

Sometimes people are hurt by business in the economy.

Sometimes transactions between buyers and sellers also affect people not involved in the transaction.

Markets

Negative Externality

When people not involved in the transaction experience costs or are hurt by the transaction.

Pollution is an example of a negative externality. Power plants that burn coal to produce energy may emit pollution into the air which negatively affects people who breathe that air. In cases where negative externalities are present, economists say that these are examples of market failures. In other words, markets and the interaction between buyers and sellers do not always account for all of the costs of trade.

In the event of market failures, government intervention and/or more clearly defined property rights are possible solutions.

Externalities

Positive Externality

If a business purchases an eyesore, for example, such as a junk yard, and replaces it with an aesthetically pleasing facility, a positive externality is generated.

An aesthetically pleasing facility is more likely to attract customers.

The positive externality is received by passers-by that benefit from the positive viewscape.

Externalities

Overall, the presence of business in the economy results in a higher standard of living for each of us.

Even though people are sometimes hurt if market failures are present, the benefits of having business in the economy far outweigh the costs.

Businesses benefit each of us by producing the good and services that we desire.

Instead of having to produce everything we consume on our own, businesses facilitate trade between people and allow for greater variety, quantity, and quality of products and services at lower prices.

Although business is sometimes portrayed in a negative light, it is important to remember that businesses exist only if they serve the needs of consumers.

Without consumers to buy their products, firms go out of business.

We, as consumers, undoubtedly experience a higher quality of life due to business in the economy because each of us voluntarily chooses to engage in trade with businesses.

We make this choice because we benefit from the products and services produced by businesses in the economy.

Conclusion

Questions?