International Business Chapter 2 Economics and Decision Making

2.1 The Basic Economic Problem Consumers are limited by the amount of time and money they have available to acquire the things they want. Countries and individuals have limited resources. Decisions are necessary to make the best use of resources. Scarcity – limited resources available to satisfy the unlimited needs and wants of people Economics – the study of how people choose to use limited resources to satisfy their unlimited needs and wants

Study of economics helps people understand… Why some earn more than others Why certain items cost more at different times of the year Why business managers make one choice over another

Making Economic Decisions Step 1: Define the problem. Step 2: Identify the alternatives. What are the different ways my problem can be solved? Step 3: Evaluate the alternatives. What are the advantages and disadvantages of each? Step 4: Choose. Based on advantages and disadvantages and can you live with your choice? Opportunity costs – most attractive alternative given up when a choice is made Step 5: Act on the choice. Step 6: Review the decision. Did your decision solve the problem?

Individual checkpoint Select an important decision that you might have to make this year. This could be buying a car, selecting post-secondary plans, selecting a specific college, selecting a major, or any other significant decision. Work through the six steps of the decision making process to help you make your decision.

2.2 Basics of Economics Supply – Quantity of a product or service that businesses are willing and able to provide at a certain price. Demand – Quantity of a product or service that consumers are willing and able to buy at a certain price.

How many CDs will be demanded at $16 a piece? Who determines demand? Consumers How many CDs will be demanded at $16 a piece? 500

How many CDs will be supplied at $18 a piece? Supply Who determines Supply? Producers How many CDs will be supplied at $18 a piece? 700

Supply and Demand Affect Prices Business must decide what price to charge Can’t be too high  Won’t sell Can’t be too low  No profit made Their goal: produce a product as long as it can be sold at a price that covers the cost of producing it and they can make a profit Law of demand – as price declines, demand increases As demand increases, prices tend to increase As a group identify some examples of items in demand right now Demand for a product affects the price. Supply and demand together determine how of product to be produced and what to charge. Why is the price for holiday cards relatively high before the holiday? Why does the price drop dramatically the day after the holiday? Quantity of Product – Affects price due to availability of product Diamonds Oil Notes Question – Why do you think this occurs? High demand, leads to high prices

Supply and Demand challenge

Supply and Demand challenge

Supply and Demand challenge

Supply and Demand challenge

Supply and Demand challenge

Meet in the Middle Market price (equilibrium) – the point where supply and demand intersect

Surplus and Shortages Surplus – The excess quantity supplied by the producer Shortage - Not enough of a good or service to meet the demands of consumers

2.3 Economic Systems Factors of production – the three types of resources used to produce goods and services Natural resources – also known as land are raw materials that come from the earth, water, and air Human resources – also known as labor are the people who work to create goods/services Capital resources – also called capital include buildings, money, equipment and facilities used to produce goods/services

Checkpoint Analyzing Dallastown Area School District as a business, list the factors of production we utilize. Recorders are responsible for writing down group thoughts and speakers will report to the class

Types of Economic Systems Due to scarce economic resources, there are 3 KEY ECONOMIC QUESTIONS that every country must answer. What to produce? How to produce? For whom?

Types of Economic Systems Economic system – method a country uses to answer the basic economic questions Three common types of economic systems Command economy Market economy Mixed economy

Command Economy (Central Planning) - Resources are owned and controlled by the government AND the government makes all decisions Dictate what and how goods will be produced and how they will be distributed Freedom of the people is limited Communism – a political and economic environment where the government owns all the productive resources of the economy and a single party controls the government Businesses are given a plan from the government that tells them what they will be producing Determines all the prices, styles, colors, and even the amount to be produced. Goods not considered a necessity may not be produced Little choice in goods available No incentive to produce better products because there is no competition Government can even tell you what your job will be – No CHOICE Examples: Former Soviet Union (now broke up into different countries and moving towards a market economy) North Korea Cuba China Some Latin American Countries African Countries Write communism and socialism on the board Communism – governments make all decision Socialism – some private enterprises exist – France & Sweden Advantages: Everyone has same standard of living (job, place to live, healthcare) Lower crime & poverty – needs/wants are equally met Disadvantages: No choice Prices fixed, wage fixed

Market Economy (Free Enterprise System) - Resources are owned and controlled by the people of the country. Economic questions are answered by individuals through buying and selling in the marketplace - any place where buyers and sellers exchange goods, services, and some form of money Capitalism – the political and economic environment where a market economy exists Three main characteristics: Private property Profit motive Free, competitive market Primary economic system in industrialized countries and those with democratic forms of government. Little involvement of the government Marketplace = supermarket, the Internet, a business office Consumers and businesses make decisions based on their own self interest. When a business buys a new truck or orders several tons of steel, it is making an economic decision When you decide to go to the movies or go to college, you are making an economic decision Ask students: What is the purpose of running a business in a market economy? Purpose of most businesses is to make profit.

Mixed Economy - A blend between government involvement in business and private ownership Publicly owned industries generate income to help fund the government Socialism – a political and economic environment with most basic industries owned and operated by government with government controlled by the people Privatization – process of changing an industry from publicly to privately owned Businesses are given a plan from the government that tells them what they will be producing Determines all the prices, styles, colors, and even the amount to be produced. Goods not considered a necessity may not be produced Little choice in goods available No incentive to produce better products because there is no competition Government can even tell you what your job will be – No CHOICE Examples: Former Soviet Union (now broke up into different countries and moving towards a market economy) North Korea Cuba China Some Latin American Countries African Countries Write communism and socialism on the board Communism – governments make all decision Socialism – some private enterprises exist – France & Sweden Advantages: Everyone has same standard of living (job, place to live, healthcare) Lower crime & poverty – needs/wants are equally met Disadvantages: No choice Prices fixed, wage fixed

So what is a mixed economy? https://www.investopedia.com/terms/m/mixed-economic- system.asp

Minimum Wage – the great debate

2.4 Economic Development Economic development factors: Literacy level – countries with better education systems usually provide more goods/services and higher quality Technology – automated production, distribution, and communication systems Agricultural dependency – a country largely focused on agriculture does not have manufacturing base

Types of Development Less-developed country Developing county Industrialized country

Less-Developed Country (LDC) A country with little economic wealth and an emphasis on agriculture or mining Citizens often have problems such as inadequate housing, starvation, and poor healthcare Average annual income per person less than $1,000 USD. Low literacy Limited technology Agriculture/mining

Developing Country (Emerging Markets) A country evolving from less-developed to industrialized Improving literacy Improving technology Decreased dependence on Agriculture/mining

Industrialized Country A country with strong business activity that is usually the result of advanced technology and a highly educated population Better prepared for international business Infrastructure – nation’s transportation, communication, and utility system High literacy Modern technology Industrial economy

2.5 Resources Economics of Foreign Trade: Absolute advantage – when a country can produce a good or service at a lower cost than other countries Ex: South American countries and coffee production Comparative advantage – when a country specializes the production of a good or service at which it is relatively more efficient

Measuring Economic Progress Gross domestic product (GDP) – measures the output of goods a country produces within its borders, including items produced with resources Strength of a countries domestic economy Gross national produce (GNP) – measures total value of all goods and services produced by the resources of a country Contributions of residence towards a country’s economy

Per capita Because all nations have different populations, comparing GDP and GNP is not always meaningful Per capita – an amount per person Per capita GDP = Total GDP / # of people in country

International Trade Activity Balance of trade – difference between a country’s imports and exports Trade surplus – country sells more than it buys Trade deficit – country buys more than it sells Foreign exchange rate – value of one country’s money in relation to another country Foreign debt – amount a country owes to other countries Consumer price index (CPI) – monthly U.S. federal government report on inflation