Unit 5 Basic Economic Concepts

Our Free Enterprise System Why do people want to immigrate to the United States, both legally and illegally?

Unit 5 Vocabulary Business Cycle Business Risk Command Economy Competition Consumer Price Index (CPI) Copyright Demand Depression Economy Entrepreneurship Expansion Factors of Production Free Enterprise System Gross Domestic Product (GDP) Gross National Product (GNP) Inflation Infrastructure Marginal Utility Market Economy Monopoly Non-price competition Patent Price Competition Producer Price Index (PPI) Productivity Profit Recession Recovery Resources Scarcity Supply Trademark Traditional Economy Utility

Unit 5 Essential Question How do customer behaviors and the economic environment in which they function relate?

Basic Economic Concepts Essential Question 1 Basic Economic Concepts What is the relationship between marketing and the economy?

Marketing and the Economy Marketing plays an important role in the economy. Provides new and improved products Marketing provides a means for competition to take place. This competition fosters new and improved products. This creates a larger variety of goods and services.

Marketing and the Economy Marketing plays an important role in the economy. Lowers Prices Marketing activities increase demand. This will result in manufactures increasing production. This causes the fixed costs per unit to decrease which lowers prices.

Basic Economic Concepts Essential Question 2 Basic Economic Concepts What are the differences between economic concepts and economic activities and economic goods and economic services?

Basic Economic Concepts Profit Risk Basic Economic Concepts People's Rights Competition

Concepts vs. Activities Some basic economic concepts include: Free enterprise Competition Types of competition Risk Profit Economic activities are those specific events that occur within the defined concept.

Free Enterprise System People have the right to make economic choices. Can choose what products to buy. Can choose to own property. Can choose to start a business and compete with others.

Competition The struggle between companies. Forces companies to become efficient. Keeps prices down and quality up.

Types of Competition Price Competition: Goes on the assumption, all things being equal, customers will buy the product that is lower in price. Rebates Coupons Non-price Competition: Quality Service Location Reputation

Risk & Profit Business Risk: Potential for loss or failure. As the potential for earning gets greater, so does the risk. Risk of failure serves as a positive function to encourage quality. Profit: Money left after all expenses. Main incentive of a free enterprise system.

Basic Economic Concepts Essential Question 3 Basic Economic Concepts What are the major types of economic resources?

What is an Economy? Economy: A system by which a nation decides how to use its resources to produce and distribute goods and services. Resources: All the things used in producing goods and services. Also known as factors of production.

Factors of Production Land: Everything contained in the earth or found in the sea.

Factors of Production Labor: Full and part-time workers, managers, public workers and professional people.

Factors of Production Capital: Money as well as buildings, equipment and tools needed for the operation of a business.

Factors of Production Entrepreneurship: Skills of the people who are willing to risk their time and money to run a business.

Developmental Factors Factors that influence the level of economic development. Affect the efficiency and quality in which the factors of production are used.

Developmental Factors Infrastructure: Roads, ports, sanitation facilities, and utilities.

Developmental Factors Literacy Level: Better education results in more goods and services that are of higher quality.

Developmental Factors Technology: Automated production, distribution, and communications systems allow companies to create and deliver goods, services, and ideas more quickly and more efficiently.

Developmental Factors Agricultural Dependency: Agricultural based economies generally do not have the manufacturing base to provide high quality products.

Essential Question 4 Basic Economic Concepts What are the types of economic utility created by business activities?

Added Value The functions of marketing add value to a product. This added value is known as utility. Utility is the usefulness of a product. There are five types of economic utilities.

Form Utility Making or producing things. Involves changing raw materials or putting parts together to make them more useful.

Place Utility The product’s usefulness is increased because of its location.

Time Utility Making a product available at the right time of year or a convenient time of day.

Information Utility Usefulness added to the product through communication. Packages, labels, advertisements, displays, signs . . .

Possession Utility The ability to aid customers in owning goods.

Marginal Utility Law of Diminishing Marginal Utility: Usefulness or utility of a product decreases as the number of units of the product obtained by the customer increases.

Basic Economic Concepts Essential Question 5 Basic Economic Concepts What are the various economic systems and the effects on what, how, and for whom goods and services will be produced?

How does an economy work? In deciding how to use their limited resources, nations, businesses, and people must answer three basic economic questions.

How does an economy work? Basic Economic Questions What goods and services should be produced? How should the goods and services be produced? For whom should the goods and services be produced?

How Does an Economy Work? Traditional Economy: Cultural or religious practices and ideals that have been passed down by generation make the economic decisions. Culture decides what should be produced. Generational practices decide how products will be produced. Tradition regulates for whom products should be produced.

How Does an Economy Work? Market Economy: No government involvement in economic decisions. Consumers decide what should be produced with their purchases. Businesses decide how products will be produced. People with money decide for whom products should be produced.

How Does an Economy Work? Command Economy: The government makes all economic decisions. The dictator or central committee decides what should be produced. The government decides how products will be produced because it runs all businesses. The government decides for whom products should be produced.

How Does an Economy Work? Mixed Economy: No economy is 100% traditional, market or command. Every economy has influences from all three. The degree of influence tends to classify the economy.

Basic Economic Concepts Essential Question 6 Basic Economic Concepts How do the various economic systems (traditional, command, market, and mixed) affect private ownership and the role of government?

Communisim Economic Models Capitalism Socialism

Economic Models Capitalist Model: Nations are democracies where the political power is in the hands of the people. Capitalism: Economic system characterized by private ownership of businesses and marketplace competition. Also known as a free enterprise system. Predominately uses a market economic system.

Economic Models Socialist Model: Usually has democratic political institutions. Socialist: Economic system characterized by increased government involvement in peoples lives and the economy. Tries to reduce the differences between rich and poor. Key industries are run by the government. Uses a mix of market and command economic systems. The degree of command is directly related to the degree of socialism.

Economic Models Communist Model: The government runs everything and there is only one political party. Communist: Economic system characterized by a totalitarian form of government. The government decides all aspects of their peoples lives including where they will go to school, live, work, etc. Predominately uses a command economic system.

Basic Economic Concepts Essential Question 7 Basic Economic Concepts How do the measurements of an economy relate to the marketing process?

When is an Economy Successful? Economists use several different indicators and measurements to determine the strength of the economy.

When is an Economy Successful? Economic Measurements Productivity: Output per worker hour usually measured over a designed period of time. Gross Domestic Product (GDP): Measure of the goods and services produced using labor and property located in the country. Gross National Product (GNP): Measure of the goods and services produced by the citizens of a country within the country and abroad.

When is an Economy Successful? Economic Measurements Standard of Living: A measure of the amount of goods and services that a nation’s people have. Reflects quality of life. Inflation: Refers to the rate at which prices rise. Low inflation, 1% - 5%, shows a stable economy.

When is an Economy Successful? Economic Measurements Consumer Price Index (CPI): Measures the change in price over time of 400 specific goods and services used by the average urban household. http://stats.bls.gov/news.release/cpi.t01.htm Unemployment Rate: Low unemployment is a sign of economic expansion, while high unemployment is a sign of an economic slowdown.

The Business Cycle Business Cycle: The recurring economic changes over time. It is affected by: Actions of businesses Actions of consumers Actions of government

The Business Cycle Expansion: A time of economic prosperity. Economy: Growing Unemployment: Low Productivity: High Consumer Spending: High Recovery: A period of renewed economic growth. Economy: Renewed Growth Unemployment: Decreasing Productivity: Increasing Consumer Spending: Increasing The Business Cycle Recession: A period of economic slowdown. Economy: Slowing Unemployment: Rising Productivity: Decreasing Consumer Spending: Decreasing Trough: A period of transition. Economy: Poverty High Unemployment: High Productivity: Very Low Consumer Spending: Very Low

Basic Economic Concepts Essential Question 8 Basic Economic Concepts What are the laws of supply and demand and how do they interact to set prices?

Supply and Demand Demand: The amount of goods and services that consumers are willing and able to buy.

Supply and Demand Law of Demand: Price is inversely proportional to demand. P  D PRICE QUANTITY

Supply and Demand Types of Demand Elastic: A small change in price causes a significant change in demand. Inelastic: Any change in price has little to no effect on demand. No acceptable substitute. Price change is small relative to buyer income. Product is a perceived necessity.

Supply and Demand Supply: The amount of goods and services that producers are willing and able to provide.

Supply and Demand Law of Supply: Producers are more willing to supply products in greater amounts when the price is high. P  S PRICE QUANTITY

Supply and Demand Surplus: Occurs when supply exceeds demand. PRICE QUANTITY

Supply and Demand Shortage: Occurs when demand exceeds supply. PRICE QUANTITY

Supply and Demand Equilibrium: Occurs when the amount of product supplied equals the amount of product demanded. Also known as market price. PRICE QUANTITY

Basic Economic Concepts Essential Question 9 Basic Economic Concepts How do the functions of pricing affect economic markets?

Functions of Pricing Price plays a very important role in the economic system of modern economies. The major functions of price include: Distributive function: Answers for whom to produce and where to produce. Goods and resources are limited, but needs and wants are unlimited; so price will determine affordability and those with the buying power will purchase the limited goods and resources.

Functions of Pricing Allocative function: Answers what, when, and for whom to produce. Signaling function: Prices signal the demand and supply situations. Shortages are reflected in high prices, and surpluses are reflected in lower prices. Equilibrating function: Prices facilitate matching of demand and supply therefore clearing the market.

Functions of Pricing Rationing function: Again a question of limited resources vs. unlimited wants. Transmission function: Prices transmit information to various actors in the market thus enabling them to make informed decisions on what and when to buy and sell. Provision of incentive: Prices act as incentives/disincentives to consumers and producers.

Functions of Pricing Enhancing marketing efficiency and performance: Correct price signals will oil the marketing machine. However, wrong signals on price will hinder smooth functioning of the market thus resulting in poor performance.

Functions of Pricing Pricing determines decision making with respect to the following aspects: Production system: what to produce, by whom, and where to produce Industrial location Product market areas and market boundaries (ISOTIMS and the Law of Market Areas) Isotim: A line drawn about a source of raw materials or a market where transport costs are equal. Law of Market Areas: The boundary line between the territories of two geographically competing markets for like goods.

Functions of Pricing Pricing determines decision making with respect to the following aspects: Arbitrage and patterns of trade (Spatial trade patterns) Arbitrage: The practice of taking advantage of a price difference between two or more markets by striking a combination of matching, simultaneous deals that capitalize upon the imbalance with the profit being the difference between the market prices. Temporal arbitrage (STORAGE) transportation and processing. However, facilitating functions are composed of standardization, financing, risk bearing and market intelligence.