X100 Introduction to Business Free Enterprise & Economic Systems X100 Introduction to Business Free Enterprise and Economic Systems Professor Kenneth EA Wendeln X100 X100 Introduction to Business

Business: a Definition Free Enterprise & Economic Systems Free Enterprise & Economic Systems Business: a Definition The organized effort of individuals & organizations To produce & sell…. for a profit Goods and services to customers That satisfy a society’s needs X100 Free Enterprise & Economic Systems X100 Introduction to Business X100 Introduction to Business 2

Fundamental Business Resources Free Enterprise & Economic Systems Free Enterprise & Economic Systems Fundamental Business Resources Business Human Resources Informational Resources Material Resources Financial Resources Goods & Services Business must effectively combine all four resources to be successful X100 Free Enterprise & Economic Systems X100 Introduction to Business X100 Introduction to Business 3

Free Enterprise & Economic Systems Society’s rules - for allocating its resources to produce & distribute goods & services for consumption Impacts economic growth and development Different societies use different approaches U.S. economy is a ‘Modified Capitalistic’ or ‘Free Enterprise’ system X100 Free Enterprise & Economic Systems X100 Introduction to Business X100 Introduction to Business 4

Types of Economic Systems Free Enterprise & Economic Systems Free Enterprise & Economic Systems Types of Economic Systems Capitalism Adam Smith – ‘laissez faire’ economy where society’s interest best served when individuals in that society are allowed to pursue own best interest’. Individuals - own and operate majority of businesses that provide goods and services & have right to own & sell private property. Market Economy – businesses & individuals decide what to produce & buy. Market determines the quantity sold and prices. Mixed Economy – the US economy is a ‘modified capitalist’ or ‘free enterprise’ system with some government participation. Socialism Professed aims – equitable distribution of income, elimination of poverty, distribution of social services based on need, eliminate economic waste. Government – owns & controls key industries. Private ownership of smaller businesses may be permitted. Command Economy – government decides what will be produced, how it will be produced, who gets what is produced and the price. Visible Socialism – is present in many democratic governments, the most notable with a high degree of socialism include Sweden, Finland and India. Communism Karl Marx – ‘classless society’, where individuals contribute based on their capabilities and receive benefits based on their needs. Government – owns almost all of the economic resources. Practice a strictly controlled type of socialism. Command Economy – where emphasis is placed on production of goods that the government needs rather than on products consumers might want. Communism – has dwindled with breakup of the Soviet Union & economic reforms in China. North Korea & Cuba are the best remaining examples. X100 Free Enterprise & Economic Systems X100 Introduction to Business X100 Introduction to Business 5

Key Features of the U.S. ‘Free Enterprise’ System Free Enterprise & Economic Systems Free Enterprise & Economic Systems Key Features of the U.S. ‘Free Enterprise’ System System of business in which the individuals are free to decide what to produce, how to produce it and what to sell it for. Consumers’ freedom of choice – to allocate their own resources and spend their own money as they please Private ownership of land and real property – by individuals and businesses as governed by laws & covenants Competition – among businesses for the consumers’ dollars Supply & Demand – determined by consumer demand, availability, prices and market forces Circular Flow – of money for labor, resources & capital in exchange for goods & services Business Cycles – driven by economic growth & contraction $$ Profit Motive $$ For reinvestment & reward to investors X100 Free Enterprise & Economic Systems X100 Introduction to Business X100 Introduction to Business 6

Circular Flow of Resources in ‘Free Enterprise’ System Free Enterprise & Economic Systems Free Enterprise & Economic Systems Circular Flow of Resources in ‘Free Enterprise’ System Resource markets Product Goods & Services Resources Labor & Capital Consumer Spending Sales Revenue Wages Rent & Interest Income Govt Spend Resources US & Local Governments Taxes Taxes Households Consumers Businesses Services Services Govt Spend Products X100 Free Enterprise & Economic Systems X100 Introduction to Business X100 Introduction to Business 7

Forbes Tax Misery Index 174 150 145 130 126 122 111 113 117 107 108 95 90 80 43 Misery Index is based on the Marginal Tax Rates 46 47 8 38 35 6 www.forbes.com/misery Adapted from 2003 data X100 Free Enterprise & Economic Systems

Economic Trends in the US GDP (Gross Domestic Product) Free Enterprise & Economic Systems Economic Trends in the US GDP (Gross Domestic Product) Real GDP = The total ‘actual’ value of all goods and services produced by all people within the boundaries of a country during a one-year period GDP in current dollars = Includes the impact of inflation, a general rise in the level of prices of goods and services Source: U.S. Bureau of Economic Analysis website at www.bea.gov , accessed September 29, 2005. X100 Free Enterprise & Economic Systems X100 Introduction to Business

Free Enterprise & Economic Systems Economic Performance The US Balance of Trade US has a trade deficit in goods & overall balance of trade Trade Deficit = Imports > Exports goods deficit U.S. International Trade in Goods and Services and the Combined Balance Services surplus overall deficit Source: U.S. Department of Commerce,http://www.ita.doc.gov/td/industry/otea/usfth/aggregate/H99t02.txt, accessed January 3, 2003. X100 Free Enterprise & Economic Systems X100 Introduction to Business

Free Enterprise & Economic Systems Economic Performance World Inflation Rates Inflation rate had been falling in almost every major region of the World – and is expected to remain low in the near future ~3% per year average inflation in the US *Developing economies include most countries in Africa, Asia, the Middle East, and South America. *Advanced economies include the U.S., Japan, Germany, France, Italy, U.K., and Canada. Source: The World Economic Outlook: The International Monetary Fund. X100 Free Enterprise & Economic Systems X100 Introduction to Business

Free Enterprise & Economic Systems Types of Competition Competition - the rivalry among businesses for sales to potential customers Pure Competition – many buyers & many sellers Buyers and sellers must accept going price Monopolistic Competition – many buyers & relatively large number of sellers Businesses compete with product differentiation Oligopoly – market or industry with few sellers Each seller has considerable price control Monopoly – market or industry with only one seller Business with monopoly has complete control over price Natural monopoly – requiring huge capital investment Legal monopoly – with a patent, copyright or trademark © ™ X100 Free Enterprise & Economic Systems X100 Introduction to Business X100 Introduction to Business 12

Free Enterprise & Economic Systems Supply & Demand Curves Assumes many buyers & sellers - with ‘market’ knowledge X100 Free Enterprise & Economic Systems X100 Introduction to Business

The Basis for International Business Free Enterprise & Economic Systems The Basis for International Business International Business – exchanges across national boundaries Global Business  Video Some countries are better equipped than others to produce particular goods or services: Absolute advantage - the ability to produce a specific product more efficiently than any other nation Comparative advantage - the ability to produce a specific product more efficiently than any other product Goods and services are produced more efficiently when each country SPECIALIZES in the products for which it has a comparative advantage X100 Free Enterprise & Economic Systems X100 Introduction to Business

Principle of a Nation’s ‘Comparative Advantage’ Free Enterprise & Economic Systems Principle of a Nation’s ‘Comparative Advantage’ Nations engage in international trade – because they own resources that enable a nation to produce some goods better & more efficiently than other nations In the past, primary sources of comparative advantage were better access to: Lower cost Labor Markets Financial Markets Technology Natural Resources Geographic Areas With ‘Globalization’ - these sources of advantage are becoming less important X100 Free Enterprise & Economic Systems X100 Introduction to Business

Diminishing ‘Comparative Advantage’ Free Enterprise & Economic Systems Diminishing ‘Comparative Advantage’ Why ?? Financial markets are now global With telecommunications & the internet, geographical location per se adds very little value Companies find it relatively easy to bring work to employees, wherever workers live Natural resources can be imported from any location around the world X100 Free Enterprise & Economic Systems X100 Introduction to Business

Free Enterprise & Economic Systems X100 Free Enterprise & Economic Systems X100 Introduction to Business