Business & Marketing Unit 2: Economics Chapter 3: Political and Economic Analysis

Section 3.1: What is an Economy?

What is an Economy? -- Ch 3 Sec. 1 What is meant by the term economy The factors of production The concept of scarcity The difference between a traditional, a market, a command, and a mixed economy What you’ll learn...

Economy The way in which a nation makes economic choices. Also called an Economic System

Resources = Factors of Production Resources are all the things used in producing goods and services. The technical term for it is factors of production.

Resources = Factors of Production Factors of Productions comprise four categories: 1.Land 2.Labor 3.Capital 4.Entrepreneurship

Resources = Factors of Production Land -- everything on the earth that is in its natural state, or the Earth’s natural resources.

Resources = Factors of Production Labor -- all the people who work in the economy

Resources = Factors of Production Capital -- includes money needed to start and operate a business. It also includes the goods used in the production process. Factories, office buildings, computers, and tools are all capital resources.

Resources = Factors of Production Entrepreneurship -- the skills of people who are willing to risk their time and money to run a business.

Economic Systems are needed because: Scarcity is the difference between wants and needs and available resources. No one country has enough resources to supply everything that is needed or wanted which creates scarcity. Scarcity forces nations to make economic choices.

Three Economic Questions Nations must answer three basic questions when deciding how to use their limited resources. 1.What goods and services will be produced? 2.How should goods and services be produced? 3.For whom should the goods and services be produced?

Types of Economic Systems Traditional Economy – Traditions and rituals answer the basic questions. Answers are often based on cultural or religious practices and ideals that have been passed down for generations. Market Economy – In a pure market economy there is no government involvement in economic decisions. Command Economy – A system in which the government controls the factors of production and makes all decisions about their use. Mixed Economies –All economies in the world today (including the Free Enterprise System in the U.S.) are mixed with varying degrees of government regulation

Types of Mixed Economies Capitalism -- Characterized by private ownership of businesses and marketplace competition.

Political Foundations of Capitalism The political system most frequently associated with capitalism is democracy.

Types of Mixed Economies Socialism – there is increased government involvement in people’s lives and the economy. –Tend to have more social services to ensure a certain standard of living for everyone –Government runs key industries and makes economic decisions

Types of Mixed Economies Communism – Countries have a totalitarian form of government, which means that the government runs everything. –All who are able to work are assigned jobs –Housing and schooling are decided by the government

Types of Mixed Economies Economies in Transition – the breakup of the former Soviet Union probably provides the best examples of societies making the difficult change from command to market economies.

Command Economy Socialism Market Economy CommunismCapitalism If you place economic systems on a continuum, they would look something like this.

What Is an Economy? Chapter 3 Political and Economic Analysis Section 3.1 What Is an Economy? Section 3.2 Understanding the Economy Section 3.1 What Is an Economy? Section 3.2 Understanding the Economy

Marketing Transition 3-2 With a partner answer the following: 1.What do you think constitutes a healthy economy? 2.What is state of our economy today? 3.How can the economy be fixed?

What Makes a Healthy Economy? Low unemployment Fair and stable prices Good productivity Good sales

What Is an Economy? Chapter 3 Political and Economic Analysis Section 3.1 What Is an Economy? Section 3.2 Understanding the Economy Section 3.1 What Is an Economy? Section 3.2 Understanding the Economy

Understanding the Economy Objectives List the goals of a healthy economy Explain how an economy is measured Analyze the four key phases of the business cycle Marketing Essentials Chapter 3, Section 3.2

The Economy and Marketing If you are a marketer and you want to perform a useful SWOT (Strength, Weakness, Opportunities, Threats) analysis, you need to consider the economic factors that will influence your marketing planning such as: Economy Consumers Businesses Government Marketing Essentials Chapter 3, Section 3.2

When Is an Economy Successful? A healthy economy has three goals: 1.Increase productivity 2.Decrease unemployment 3.Maintain stable prices Marketing Essentials Chapter 3, Section 3.2

When Is an Economy Successful? By analyzing their economies, nations keep track of how well they are doing. The key economic measurements used to determine economic strength are: 1.Labor productivity 2.Gross domestic product (GDP) 3.Gross national product (GNP) 4.Standard of living 5.Inflation rate 6.Unemployment rate Marketing Essentials Chapter 3, Section 3.2

Productivity is output per worker hour that is measured over a defined period of time, such as a week, month, or a year. Businesses can increase productivity by: Investing in new equipment or facilities for higher efficiency Providing additional training or financial incentives for workers Reduce their work force and increase the responsibilities of those who remain Understanding the Economy Marketing Essentials Chapter 3, Section 3.2

Two key concepts related to increasing productivity are: Specialization Division of labor One example of specialization and division of labor is an assembly line, where each part of a finished product is completed by a different person. Understanding the Economy Marketing Essentials Chapter 3, Section 3.2

Gross domestic product (GDP) is the output of goods and services produced by labor and property located within a country. The GDP is made up of: Private investment Government spending Personal spending Net exports of goods and services Change in business inventories Understanding the Economy Marketing Essentials Chapter 3, Section 3.2

Here is the calculation for GDP 1.Add private investment, government spending, and personal spending 2.Add a trade surplus or subtract a trade deficit 3.Add expanding inventories or subtract shrinking inventories Understanding the Economy Marketing Essentials Chapter 3, Section 3.2

Gross national product (GNP) is the total dollar value of goods and services produced by a nation, including the goods and services produced abroad by U.S. citizens and companies. Notice that with the GNP, it is not where the production takes place but who is responsible for it. The U.S. used to measure its economy by the GNP, but switched to using the GDP in Understanding the Economy Marketing Essentials Chapter 3, Section 3.2

A country’s standard of living is a measurement of the amount and quality of goods and services that a nation’s people have. To calculate the standard of living: Divide the a country’s GDP or GNP by its population to get the per capita GDP or GNP Understanding the Economy Marketing Essentials Chapter 3, Section 3.2

Inflation refers to rising prices. A low inflation rate (one to five percent) is good because it shows that an economy is stable. A double-digit inflation rate devastates an economy. The higher the inflation rate, the less that country’s money is worth. To combat inflation, governments raise interest rates to discourage borrowing money and slow economic growth. Understanding the Economy Marketing Essentials Chapter 3, Section 3.2

Other indicators are: Wages New payroll jobs Other Economic Indicators & Trends Marketing Essentials Chapter 3, Section 3.2

The cycle of economic growth and decline is called the business cycle. The business cycle consists of four phases: 1.Expansion 2.Recession 3.Trough 4.Recovery The Business Cycle Marketing Essentials Chapter 3, Section 3.2

Expansion is a time when the economy is flourishing, characterized by: Low unemployment High output of goods and services High consumer spending The Business Cycle Marketing Essentials Chapter 3, Section 3.2

Recession is a period of economic slowdown that lasts for at least six months. This time is characterized by: Reduced workforces and higher unemployment Lower consumer spending Low production of goods and services A trough is when the economy reaches its lowest point, then begins to rise. The Business Cycle Marketing Essentials Chapter 3, Section 3.2

A depression is a period of prolonged recession. Businesses shut down Consumer spending is very low Production of goods and services is down significantly The Business Cycle Marketing Essentials Chapter 3, Section 3.2

Recovery is the term used to signify a period of renewed economic growth following a recession or depression. This time is characterized by: Increasing GDP Increasing sales Decreasing unemployment Increased consumer spending The Business Cycle Marketing Essentials Chapter 3, Section 3.2

The business cycle can be affected by the actions of: Businesses Consumers Government These things are, in turn, affected by the business cycle. The Business Cycle Marketing Essentials Chapter 3, Section 3.2