Chapter 2
How Economics Effect Business
Understanding economics:
* Economics impact every aspect of our lives, every thing we do is almost related to economics (e.g.: when we decide to buy or not buy anything this is economics).
* Economics also impact every business small or large.
Basics of Economics:
Different economic systems can either promote or hinder: business growth, the creation of wealth, and the quality of life.
Economics: is the study of how society chooses to employ resources to produce goods and services and distribute them for consumption among various competing groups and individuals.
Resources: are the factors of production (which are: land, labor, capital, entrepreneurship and knowledge).
Microeconomics & macroeconomics:
*There are two basics types of economics study:
Macro: means something very big in scale.
Macroeconomics: is the study of operations of a nation economy as a whole. I.e. the government of countries (e.g.: inflation, tax).
Microeconomics: is the study of behavior of people and organization in a particular market.
e.g.: macroeconomics looks at how many jobs exist in the whole economy, wile microeconomics examines how many people will be hired in a particular industry or a cretinregion of the country.
* Some economistdefines economics as allocation of “SCARCE” resources. They believe that resources (such as food,water,land) are scarce (i.e. little, not enough) and need to be carefully divided among people, usually by the government.
Resource development: is the study of how to increase resources and to create conditions that will make better use of those resources.
* They believe that there isn’t enough recourse available today to merely divide them among nations and live in peace.
* So businesses may contribute to an economic system by inventing products that greatly increase available resources, e.g. . Might discover new energy sources, new ways of growing: food, and new ways of creating needed goods and services. (e.g. the genetically modified food GMF, which need less water to grow and can produce larger crops on smaller pieces of land.)
Supply & Demand:
Supply: refers to the quantity of products that manufactures or owners are willing to sell at different prices at specific time.
* Generally speaking; the amount of goods and services supplied will increase as the price increase because sellers can make more money with a higher price.
Demand: refers to the quantity of products that people are willing and able to buy at different prices at a specific time.
* Generally speaking: quantity of goods and services demanded will increase as the price decrees.
* Demand & Supply are very much related to each other if demand increases, supply will increase, this is in the ideal world. If supply does not go up and the demand is still high, the price will then increase because there isn’t enough of the product to meet the need of the customers.
* The ideal economic situation is when our economy is at an equilibrium point.
Equilibrium: is the point where the amount of goods sought or demanded by buyers is equal to the amount of goods produced or supplied by suppliers.
Business cycle:
it denotes a common pattern where there is a period of rapid growth (recovery and prosperity) in the economy. When supply and demand stimulate each other, alternating with a period of decline (contraction or recession) with diminishing demand & supply. Its also called economic cycle.
Free market capitalism:
Free market: is one in which decisions about what to produce and in what quantities are made by the market which is represented by buyers and sellers.
*Here consumers send signals to tell producers what to make, how many, in what colors, and soon, they do that by choosing to buy (or not to buy) certain products and services. So as consumers we have immense power in the market to determine the price of items and the availability of items.
In a free market system competition is a major force:
There are 4 types of competition which are:
1)Perfectcompletion: exists when there are many sellers in a market and no seller is large enough to dictate the price of a product. Here sellers produce products that appear to be identical (e.g.: apples, corn, potatoes etc). Today there are no true examples of perfect competition; even farming is not considered perfect competition because of government price supports and reduction in number of frames.
2)Monopolistic: exists when a large number of sellers produce products that are very similar but are perceived by buyers as different (e.g. candy, personnel computers, t. shirt etc).
In monopolistic competition product differentiation is the key (e.g. attempt to make buyers think similar products are different by: advertising, branding , packing, etc.
3)Oligopoly: is a form of competition in which just a few sellers dominate a market (e.g. companies that produce tobacco, automobile, aluminum, aircraft).
- one reason some industries remain in the hand of just a few sellers is that the initial investment required to enter he business is tremendous, (very very high)
- Here price for products from different companies tend to be close to the same, because intense price competition would lower profit for all the competitors. If one producer cuts its price it would immediately be matched by other. So they depend on products differentiation rather then price in rather then price in their competition, and success. (e.g. the price of breakfast cereal is very similar , also prices of soft drink, they depend advertising , packing etc….)
4)Monopoly:Occurs when there is only one seller that controls the total supply of product and its price.
- By law it’s prohibited to create monopolies.
- In Bahrain the production of water and electricity is still a monopoly but its price are monitored and controlled by the government.
Socialism & communism:
Socialism: it is an economic system based on the premise that some if not most , basic business (such as: steel, coal,utilities, oil) should be owned by the government, so that profit can be evenly distributed among all the people.
*the distribution of profits among everyone may come through:
- Health care benefit
- Retirement benefit
*to cover for thesebenefits the private business and individuals are taxed relatively steeply to be able to pay for such social programs.
*Socialist acknowledge the major benefit of capitalism(which is wealth creation) but believes that wealth should be more evenly distrusted than what occurs in a free market capitalism.
* They also believe that:
- The government should be the agency that carries out the distribution, that’s why the government owns many of the factors of production.
- The government should provide education, health care, retirementbenefit, unemployment benefits, and other social service.
- Examples of socialist countries: Finland, Belgium,Sweden, Africa, India, etc…
*Benefits or advantage of socialism:
1) Major benefit is a social equality: because income is taken from the wealthier people (in taxes) and re distributed to poorer members of the population through various government programs.
2) Free education, free health care, free child cares are some of the benefits socialist government Distribute to their people using the money for taxes.
3) Workers usually get longer vacation then workers in capitalist countries, and tend to work fewer hours per week and have more employee benefits.
* Disadvantages of socialism:
1) it takes a way the increase to start new business or market new ideas.
2) It takes away some of business peoples incentives and enthusiasm to start work early and leave late.
3) Very high taxes (e.g. high taxes paid by professionals) which force them to leave socialist countries for more capitalistic countries with lower taxes. This is called BRAIN DRAIN which is the loss of the best and brightest people to other countries.
4) In capitalism, the freedom to keep whatever you earn , which creates incentives to work hard, but it also result in un equal distribution of outcome. In contrast, socialism strives for equality of out come, therefore tends to discourage the best from working as hard as they can.
5)Socialism also results in fewer inventions and less innovation because those who come up with new ideas usually don’t receive as much rewards as they would in a capitalist system.
*Communism:
Karl Marx is the founder of communism. He saw the wealth created by capitalism, but he also noted the poor working and living conditions of labors, so he decided that workers should take over ownership of business and share the wealth.
Communism: Is an economic and political system in which the state (i.e. government) makes almost all economic decisions and owns almost all the major factors of production, including housing for its people.
The government also interferes into the lives of people such as not allowing their citizens to practice certain religions, change jobs, or move to the town of their choice.
Disadvantages of communisms:
The government has no way of knowing what to produce, because price doesn’t reflect supply and demand as they do in free markets. The government must give what the economic needs of the people are. That’s why in communist countries there are shortages of many items including shortages of food and basic clothing.
It doesn’t inspire business people to work hard because the government takes most of their earnings, that is why communisms is slowly disappearing as an
The Trend Toward mixed Economies:
Nations of the world are divided between those who follow the concept of capitalism and those that follow the concepts of communism or socialism.
Free market economics:
Exist when the market largely determines what goods and services get produced, who gets them, and how the economy grows.
Capitalism is the popular term used to describe this economic system.
Command economics:
Exist when the government largely decides what goods and services get produced, who gets them, and how the economy grows.
Socialism and communism are the popular terms used to describe variations of this economic system.
The experience of the world has been that neither free market nor command economies have resulted in optimum economic condition because:
The free market economies haven’t been responsive enough to the needs of individuals who are poor, elderly, and disabled.
Command economies haven’t always created enough jobs or wealth to keep growing fast enough, that’s why communist governments are disappearing.
Also people think that business in the free market have not done enough to protect the environment so overtime votes have therefore elected officials who have adopted many social and environmental programs such as :
- Social security
- Welfare
- Unemployment compensation
- Various clean air and clean water laws
And socialist government have been cutting back on social programs and lowering taxes on businesses and workers to compete better.
What everyone wants is to generate more business growth and thus generate more revenue. That’s why the economic picture we see in the real world today is more mixed, i.e. capitalist countries are moving towards more socialist system (i.e. providing programs to take care of poor or disadvantaged people and to safeguard the environment)
Also command economies counties are adopting elements of capitalism to a greater degree.
So there is a blend between capitalism and socialism which is called a mixed economy.
Mixed economy: exist where some allocation of recourses is made by the market (i.e. buyer and seller) and some by the government.
But most countries with mixed economies don’t refer to themselves by such a name:
- Countries that uses mostly the free market mechanism to allocate recourses – the leaders call their system capitalism.
- Countries that use the government to allocate recourses, then leaders call their system socialism.
(See figure 2.5 – page 55)
Some people think that the government should interfere others think it should interfere only a little others think it should not interfere at all- generally the government perceived ideal goal should be to grow the economy while maintaining some measure of social equality but such a balance is very hard to attain.
We should always care about what type of economic systems other countries employbecause of globalization which means we depend on each other for product and services so what one country does effect everyone else, so we need all the countries to prosper because it will eventually effect us.
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