CISI – Introduction to Securities & Investment Topic – The economic environment (2.1.1) Economic activity

Factors of Production Land Labour Capital Enterprise There are four kinds of inputs in any economic activity. These are used to satisfy the needs of consumers: Land Labour Physical space required: Fields for agriculture Factory for manufacturing Shop for retail Office space The workforce: Skilled workers Unskilled workers Mixture of skilled and unskilled workers Capital Enterprise Money invested in plant and equipment required: Production machinery Computer equipment The ‘know how’, knowledge or ability to use the other three factors of production.

Managing the Factors of Production Questions/ Economy type Planned economy Market economy Mixed economy Open economy Who controls the factors of production? Objective? Advantages? Disadvantages? (Soviet Union) (USA) (UK) (Singapore) The Government and private sector Either the Government or the private sector or a combination The Government Privately owned – businesses and individuals Economic activity is carried out according to a plan under government control The workforce is for the collective good of society, not for individual gain Supply and demand allocates resources through the market (consumer goods, labour, money and capital goods ) The market clearing price is the price consumers are willing to pay and what suppliers will accept for them A flourishing market economy but the government cushions the less able in society (welfare – benefits, care) Government also provides key services e.g. defence and education via taxation and borrowing Free Trade - an open relationship with outside countries Few barriers to trade controls or foreign exchange National priorities taken into account Government can make more informed decisions regarding investment and the allocation of economic resources Provides greater choice Competition drives down prices No taxation in a pure market economy Businesses innovate Businesses adapt and respond quickly Faster economic growth Increased economic stability – laws protect consumers and financial help can be offered to businesses Provides unprofitable essential services e.g. NHS Regulates monopolies The best labour force Specialisation Imports provide products traditionally unavailable Competition driving prices down and offers greater choice Increased chance of failure Prices rise if supply cannot meet demand Businesses focus on profits Less regard for individuals and the environment Harmful products could be produced if profitable Greater inequality Disposable income reduced by taxation Regulation means increased costs for businesses Public sector organisations can mean inefficiencies Increased pollution Exploitation of cheap labour Competition – products are bought cheaper elsewhere Disagreements – sanctions and protectionism (World Trade Organisation arbitrates) Diluted culture Reduced individual choice Increased bureaucracy

Managing the Factors of Production Planned economy Centrally controlled - rarely found today Associated with communist states e.g. former Soviet Union North Korea is presently the most centrally planned economy Market economy Supply and demand - pure market economies do not exist Consumerism Normally an element of government control in the real world The most common form of economy Government intervention can vary – provision of welfare, regulations and services provided deemed unprofitable to the private sector Mixed economy Open economy Open trading relationships with other countries – Free Trade No economy is ever completely open Protectionism often occurs