©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Economic Environment of Business Economic Wants Economic Systems Fundamentals of Capitalism Managing the Economy CHAPTER 8

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Economic Wants GOALS ● Describe economic concepts that apply to satisfying economic wants. ● Explain the role of capital formation in an economy. 2 CHAPTER 8

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Wants ● Economics—the body of knowledge that relates to producing and using goods and services that satisfy human wants ● Economic wants—desire for scarce material goods and services ● Noneconomic wants—desire for nonmaterial things that are not scarce, such as air, sunshine, friendship, and happiness 3 CHAPTER 8

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e ©2013 Cengage Learning. All Rights Reserved. Satisfying Our Economic Wants ● Utility ● Form utility—change in the form or shape of the product to make it useful (applies to goods not to services) ● Place utility—having a good or service at the place where it is needed or wanted ● Possession utility—ownership of a good or service is transferred from one person to another, but may also occur in renting and borrowing ● Time utility—when a product or service is available when it is needed or wanted Anyone who creates a utility is a producer. 4 CHAPTER 8

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e ©2013 Cengage Learning. All Rights Reserved. Satisfying Our Economic Wants ● Factors of production ● Natural resources—are anything provided by nature that affects the productive ability of a country (soil, minerals, water & timber resources, and mild climate) ● Labor—the human effort that goes into the production of goods and services ● Human capital—the accumulated knowledge and skills of human beings (high technology world this need increases) 5 CHAPTER 8

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e ©2013 Cengage Learning. All Rights Reserved. Satisfying Our Economic Wants ● Factors of production ● Capital goods—buildings, tools machines and other equipment (allow production of goods in large quantities) ● Entrepreneurship—fourth factor that brings together land (natural resources), labor, and capital 6 CHAPTER 8

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Capital Formation ● Capital formation—the production of capital goods (example, when steel is used to produce the tools and machinery need to make cars) ● Developing countries use large portions of their resources in capital formation ● Consumer goods and services—directly satisfy people’s economic wants (when the production of consumer goods & services increases, the production of capital goods decreases) 7 CHAPTER 8

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Economic Systems GOALS ● Discuss three economic systems and three political-economy systems. ● Explain why a business considers the political- economy system of a country. 8 CHAPTER 8

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Types of Economic Systems ● Economic system—is an organized way for a country to decide how to use its productive resources ● Market economy—is an economic system in which individual buying decisions determine what, how, and for whom goods and services will be produced ● Individual citizens, rather than the government, own most of the factors of production (such as land & manufacturing facilities) 9 CHAPTER 8

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Types of Economic Systems ● Command economy—is an economic system in which a central planning authority, under the control of the government, determines what, how and for whom goods and services will be produced ● Countries that adopt a command economy are often dictatorships (Cuba, Iran, North Korea, Vietnam) 10 CHAPTER 8

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Types of Economic Systems ● Mixed economy—uses aspects of market and command economy ● National government makes production decisions for certain goods and services (post offices, telephone system, schools, health care facilities, & public utilities) ● Privatization—is the transfer of authority to provide a good or service from a government to individuals privately owned businesses ● The governments’ incentive to reduce costs for taxpayers and to increase efficiency 11 CHAPTER 8

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Types of Political-Economy Systems ● Capitalism—is the political economy system in the US (free enterprise, which operates in a democracy) ● Socialism—is a political-economy system in which the government controls the use of the country’s factors of production 12 CHAPTER 8

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Types of Political-Economy Systems ● Communism—is extreme socialism, in which all or almost all of a nation’s factors of production are owned by the government ● People in a pure communist society do not own property 13 CHAPTER 8

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e ©2013 Cengage Learning. All Rights Reserved. Comparison of Political-Economy Systems 14 CHAPTER 8

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Fundamentals of Capitalism GOALS ● Describe why private property is important to capitalism. ● Describe how prices are set in a capitalistic system. 15 CHAPTER 8

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Private Property ● Right to private property—items of value that individuals have the right to buy, use, and sell ● Profit—the incentive as well as the reward of producing goods and services ● Average profit is 5% of total receipts while 95% represents the cost 16 CHAPTER 8

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Price Setting ● Demand—refers to the number of products that will be bought at a given time at a given price ( DEMAND IS NOT THE SAME AS A WANT) ● Supply—refers to the number of liked products that will be offered for sale at a particular time and at a certain price ● If there is a current shortage in supply of the product, its price will rise ● The market price allows producers to make a reasonable profit 17 CHAPTER 8

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Price Setting ● Competition—the rivalry among sellers for consumers’ dollars ● Benefits society, consumers get quality products, development of new products ● Income distribution ● Income on interest for rent ● Wages and salaries 18 CHAPTER 8

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Managing the Economy GOALS ● Explain how economic growth can be promoted and measured. ● List basic economic problems that exist and state what government can do to correct the problems. 19 CHAPTER 8

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Promoting Economic Growth ● Increase the number of people in the workforce ● Increase the productivity of the workforce ● Increase the supply of capital goods ● Improve technology by inventing new and better machines and better methods for producing goods and services ● Redesign work processes in factories and offices to improve efficiency ● Increase the sale of goods and services to foreign countries ● Decrease the purchase of goods and services from foreign countries 20 CHAPTER 8

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Measuring Economic Growth ● Economic growth occurs when a country’s output exceeds its population growth ● Gross domestic product (GDP) shows growth rate over a time period ● Consumer price index (CPI) is a measure of the average change in prices of consumer goods and services 21 CHAPTER 8

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Identifying Economic Problems ● Recession occurs when demand for the total goods and services available is less than the supply ● Sales drop, production of goods and services declines, and unemployment occurs ● Inflation is the rapid rise in prices ● Dollar doesn’t buy as much as it used to 22 CHAPTER 8

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e Identifying Economic Problems ● Business cycles is a pattern of irregular but repeated expansion and contraction of the GDP ● Depression a long and severe drop in the GDP 23 CHAPTER 8

©2013 Cengage Learning. All Rights Reserved. Business Management, 13e ©2013 Cengage Learning. All Rights Reserved. Business Cycle Phases 24 CHAPTER 8