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.

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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

ECONOMICSYSTEMS

Types of economic-political systems Capitalism Socialism Communism

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)