Download Powerpoint Lecture

Chapter 3
Economic
Environment of
Business
ECONOMIC ENVIRONMENT OF
3
BUSINESS
Discuss
three economic systems and three
economic-political systems.
Summarize five fundamental elements of
capitalism.
Economic Systems

Market economy –

Command economy –

Mixed economy –
individuals buying decisions
determine what, how, and for whom goods/services will
be produced. Ex: if people buy or want only or mostly
whole grain bread this will influence bread producers
to produce more whole-grain than white bread
gov. owns most of the
factors of production and determines what, who and for
whom goods/service will be produced. These
economies exist is some Asian countries (North Korea,
Cambodia, Vietnam and other small countries like
Cuba—often dictatorship countries)
uses aspects of a market and
command economy to make decisions; nat’l gov. makes
decisions for certain goods/services…post office,
telephone system, schools, etc.
Economic-political systems



Capitalism – US; free enterprise; private
citizens are free to go into business;
produce what they want and distribute
what they produce and own property
Socialism – Sweden; some gov. controls –
on scarce resources.
Communism – North Korea; extreme
socialism; all or almost all factors of
production are owned by the gov.;
decisions on who gets what is decided by
the gov.
FUNDAMENTALS OF
CAPITALISM
Private property
 Profit
 Price setting
 Demand
 Supply
 Competition
 Income distribution

Monopoly
 Opposite
of competition
 Monopoly is the existence of only one
seller of a product
 With no competition a monopolist can
charge unreasonably high prices
 Legislation exists that encourages
competition and discourages
monopolistic practices

Fundamentals - worksheets
Private Property
 Essential
to our capitalistic system
 Private property consists of items of
value that individuals have the right
to own, use and sell.
 Individuals control productive
resources
 Individuals can own land, hire
labor, own capital goods

Then produce goods and services for
profit
Profit
 Incentive
as well as the reward for
producing goods and services
 Profit is computed by subtracting the
total costs of producing the products
from the total received from
customers who buy them
 Average profit earned is 5%
 Many businesses have higher than
that
 Many have lower or even losses
Profit Con’t
 Being
in business does not
guarantee that a company will
make a profit
 To be successful, a company must
produce goods/services that
people want at a price they are
willing to pay.
Price Setting
 Demand
- # of products that will be
bought at a given time at a given
price; high demand – higher cost
 Demand is NOT the same as a want
 Wanting something but not having the
money does not represent demand
 Demand is represented by people who
want something, have the money to
buy it, and are willing to spend the
money for it.
 With
increased demand, prices rise
in the short run
 Later when demand decreases,
prices fall
Supply
 Supply
- # of like products that will be
offered for sale at a particular time and
at a certain price; low supply = higher
cost
 Shortage of supply?
Price will usually rise as consumers bid
against one another to obtain the product
 Example: bad apple crop; prices go up;
next season good crop; prices go down

 Price
changes are the result of changes
in BOTH demand for and the supply of
product
 Changes
in prices determine what is
produced and how much is produced in
our economy
 Prices are determined by the forces of
supply and demand
 Market price is the price at which the
producer can meet costs and make a
reasonable profit
 If demand drops, profit drops
 If demand increases, producer’s profit
increases

If profit gets too large, other producers will
enter into production with similar products
and thus increase the total supply and
then the price will fall
Competition
 Sellers
try to make a profit and
buyers try to buy quality goods at the
lowest possible prices
 Competition - rivalry among sellers
for consumers’ dollars
 Benefits society

improves quality; new products; operate
efficiently; ensures that consumers get
quality products they want for fair prices
 Competition
makes businesses use
scarce resources efficiently

If not, it will fail because customers will
buy lower-priced or higher-quality
products from a firm that is efficient
 Competition
provides the chance for
people to go into business for
themselves and to share in the profits
being made by those already in
business
Income Distribution
 The
same factors that determine the
prices of goods are also important
factors in determining wages and
salaries; that is, the amount of
wages paid for a particular kind of
labor is affected by the supply of and
demand for the kind of labor
 Tasks
for Chpt. 3
 Know
vocab (p. 77) – 18, 19, 20
 Review Facts (p. 78) – 6, 7, 8
 Discussion Ideas (p. 79) – 6
 Analyze Information (p. 80) - 6