Near East University Faculty Of Economics & Administrative Sciences MAN Introduction To Business Week 4 (Chapter 1) Business & Economics Tuğberk KAYA

 An economy is a system that attempts to solve the basic economic problem. Decision-makers in an economy have to decide what to produce, how to produce and for whom to produce.  In any economy goods and services may be provided by the public sector or the private sector. In the private sector, individuals or groups o individuals are free to set up businesses and supply goods and services to anyone who wants to buy them.

The public and private sectors  In the public sector, a range of organisations such as government departments public corporations and other agencies, provide services that are often neglected by the private sector

Types of economy  A market or free enterprise economy relies least on the public sector for the provision of goods & services. The vast majority are provided by private business. The allocation of resources is determined by market forces.  A command or planned economy relies entirely on the public sector to choose, produce and distribute goods. All resources in planned economies belong to the government and the state is responsible for planning, organising and co-ordinating the whole production process. Goods are distributed from state outlets where they are sold to consumers at prices set by the state.

Types of economy  A mixed economy relies both the public sector and the private sector to provide goods & services. The mixed economy:  In reality no economy is entirely planned or free market. Most countries in the world have mixed economies and the decisions what to produce, how to produce and for whom to produce are made jointly between consumers and the state.

The mixed economy:  What to produce? - The public sector tends to provide goods that the private sector might fail to provide in sufficient quantities due to market failure.  How to produce? - To meet consumers’ needs firms will use production methods that help them to maximise quality and minimise costs.  For whom to produce? - The market system is responsible for their allocation.

Efficiency Since resources are scarce, economies should ensure that production is efficient.  Producing goods at the lowest cost possible  Minimising the quantity of resources that are needed to produce goods.  Only producing those goods that are needed by people. In the private sector, if competition exists goods are likely to be produced efficiently. Only the most efficient firms will survive. In the public sector, efficiency is sometimes lacking, possibly due to lack of competition. (Post Office)

Market Failure Sometimes market failure occurs and resources are not allocated efficiently. It can occur for a number of reasons;  Externalities: Sometimes firms do not take into account all the costs of production. For example, a firm producing chemicals may pollute the atmosphere. This is because it has not taken measures to clean its discharges. This imposes a cost on society such as poor air quality. Any damage done to a third party, such as ill health, as a result of this activity is called a negative externality.  The role of the public sector in this case to impose laws that force such firms to meet these costs by cleaning or stopping their discharges.

Market Failure  Lack of competition : A market may fail if there is no competition and it becomes dominated by one or a small number of firms. When this happens the dominant firms may exploit consumers, by charging higher prices and restricting choice for example.  Results in monopoly (government must control)…

Market Failure  Missing markets: Some goods & services, called public goods, are not provided by the private sector. Examples include national defence, policing and street lighting.  Other goods, called merit goods, such as education and health care are underprovided by the private sector. This is because they are so expensive that many people would not be able to afford them.

Market Failure  Lack of information : Markets will only be efficient if there is a free flow of information to all buyers and sellers. Consumers need to know everything about, the nature, price and quality of all products. And firms need to know everything about, e.g. the resources and production techniques used to make product.  However, in recent years the internet has improved the flow of information about products. This has helped to improve the efficiency of markets.

Market Failure  Factor Immobility: For markets to work efficiently factors of production need to be mobile. This means that factors such as labour and capital must be able to move freely from one use to another. In practice, though, factors can be quite immobile. For example, a specialised laser machine designed specifically to cut sheet glass may not have any further use if the glass-making factor has to close down.  Their ‘old’ jobs become redundant.

Micro & Macro Economics

Factors of Production

Degrees of Competition  Perfect Competition  Oligopoly  Monopoly

Economic Stability  Inflation:  Unemployment:  Recession & Depression:

References  Ebert, R. J. and Griffin, R. W. (2015) Business Essentials. 10 th Edn. Harlow: Pearson Education Limited  Kadri Mirze (2002) Introduction to Business. Istanbul: Literatür Publishing.

Any Questions?