How economic issues affect Business

Economics

The study of how society chooses to employ resources to produce goods and services and distribute them for consumption among various competing groups and individuals

Resources Land, labour, capital, entrepreneurship and knowledge

Macroeconomics

Concerned with the operation of a nation’s economy as a whole

Example: With respect to job availability. Macroeconomics looks at how many total jobs are available within a

nation

Microeconomics

Concerned with the behviour of people and organizations within particular markets

Example: With respect to job availability Microeconomics looks at how many jobs are available within each

market

Market people who have unsatisfied wants, but have the resources to attain it, were it available

Adam Smith

Coined the term: “the invisible hand” of the market Whereby individuals can make profit and maximize it without the

need for government intervention

So what does this ultimately mean?

Free-market capitalism

Capitalism – an economic system in which all or most of the factors of production and distribution are privately owned (not by the government)

In a pure capitalist environment, business people decide what to produce, how much to pay workers how much to charge for goods and services, and where to sell them.

How does a free market work?

How are prices determined?

Explain supply and demand

How is the Market price determined

Describe the four types of competition within a free market

Pros and cons of a free market?

Socialism

An economic system where some or most basic businesses should be owned by the government, so that profits can be evenly distributed amongst the people.

Wealthy individuals pay higher taxes, and these tax dollars can be redistributed to lower income individuals through various government programs What are some of these programs?

Socialism cont.

Some negative consequences include: Less incentives for business people

High income tax for higher paying jobs such as doctors and lawyers

Fewer inventions and less innovation why?

Communism

An economic and political system in which the government makes all economic decisions and owns almost all the major factors of production.

Communism in the business perspective

Government has no way of knowing what to produce, as supply and demand is not readily observed as in a free-market environment

Shortages or over production of goods can occur more easily

Business people/entrepreneurs lose incentive as the government will take most of their profits

Ex: China…

Mixed Economies

Where a mix of capitalism/socialism creates the ideal economic conditions

Ex: Free-market economies are less adequate at meeting the needs of the poor, the old or the disabled. Which type of economy might address this better?

How might this be encouraged?

Mixed Economies

Ex: Socialism doesn’t create enough wealth or job opportunities.Which type of economy might address this

better?How might they encourage it?

Indicators of economic conditions

1. Gross Domestic Product (GDP) – Total value of goods and services produced in a country in a given year.

Foreign and domestic companies may produce goods and services included in the GDP so long as the company resides in the country

Strong economy leads to higher standard of living, as people have more money to buy goods and services

Indicators of economic conditions

2. Unemployment rate

Indicators of economic conditions

3. Price indexes – measures levels of:

A. Inflation – general rise in the prices of goods and services overtime

B. Disinflation – the decrease in the rate of inflation

C. Deflation – when prices of goods and services is decreasing

Indicators of economic conditions

D. Stagflation – when the economy is slowing but the pries of goods and services are still increasing

E. Industrial price index (IPPI) – prices that producers receives for their goods

F. Raw materials price index (RMPI) - prices paid by Canadian manufacturers for key raw materials

Business cycles

Economic boom – Business is booming!

Recession – two or more consecutive quarters (3 months) of decline in the GDP

Depression – a severe recession with subsequent deflation

Recovery – when the economy stabilizes and starts to grow

Questions

1. Compare and contrast communism and a free-market economy

2. In a socialist economy, describe the effects of lowering taxes for business owners, and workers.

3. Read “Practicing management decisions” and answer the questions.

4. How does business affect technology? Consider Inside and outside the work place, and requirement for transportation.

5. Describe a scenario where a prosperous business could contribute to the spread of disease.