Download Business Environment Economic Systems

HNC/HND Unit 1 International Group
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You are required to produce an essay of no more than
3000 words (font size 12) which answers the following
question:
“The market environment and the national environment
in which an organisation operates shape the decision
making, behaviour and activities of that organisation”
Discuss using examples.
You will be expected to describe and evaluate the following in
relation to your chosen organisation:
◦ The type of economic systems that exist (free market, closed
economy etc.)
◦ Governmental policies regarding fiscal and monetary policies
◦ Competition policy and regulatory practices.
◦ Different market types (monopoly, oligopoly etc.)
◦ Market forces (supply and demand, economies of scale etc.)
and organisational responses to these forces.
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Adam Smith
◦ The father of (free trade) economics
◦ An Inquiry into the Nature and Causes of the Wealth
Of Nations (1776) commonly known as The Wealth of
Nations
◦ The Wealth Of Nations was not just a study of
economics but a survey of human social psychology:
about life, welfare, political institutions, the law, and
morality
◦ In his day countries and communities sought to
restrict buying from outside the community,
although selling was seen as good
◦ They imposed heavy import taxes, subsidised local
production and protected local industry
◦ A countries wealth was the total of the gold and
silver that it had stockpiled
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Smith argued that free trade promotes wealth,
nobody trades unless they benefit from it
Because trade benefits both sides it increases our
prosperity just as surely as do agriculture or
manufacture.
A nation’s wealth is not the quantity of gold and
silver in its vaults, but the total of its production and
commerce – what today we would call gross domestic
product.
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Is the excess of human wants over what can
actually be produced to fulfil these wants
Every state has to deal with the “economic
problem” of finite resources and infinite
wants
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Absolute scarcity – less developed economies
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Relative scarcity – developed economies
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These are productive resources
◦ Labour
 Physical and mental power of people
◦ Land and natural resources
◦ Capital
 Machinery, manufacturing plant, premises, offices,
infrastructure
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This is linked to scarcity and involves 3 key
decisions:
◦ What goods & services to produce
◦ How will these be produced
◦ To whom will they be distributed
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Opportunity cost measures the cost of
obtaining one product or service in terms of
the quantity of another product or service
that could have been obtained instead
◦ Food or clothes?
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National or Governmental level
◦ This can mean roads or hospitals, i.e. The amount
of hospitals not built in terms of hospitals per mile
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There are different types of economic system
to deal with scarcity
◦ Free market economy
◦ Command economy
◦ The mixed economy
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Often called “Capitalism”
Most decisions are taken via the market
mechanism
Supply and Demand and ability to pay
influence decision making
Very little government influence
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Firms seek to maximise profit
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Consumers seek greatest benefit for least cost
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Workers seek to maximise wage relative to the cost of
working
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Individuals are free to make their own decisions
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Prices are determined by supply and demand
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Trend towards the “Equilibrium price”, where the
amount consumers wish to buy equals the amount
producers wish to supply
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Discuss with those next to you, what are the
limitations of the Free Market Economy?
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What price for “public” goods and services?
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De-merit goods freely available
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Inequality of power in the market place
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Barriers to entry – Restrictive practices
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Producers may ignore “externalities”
◦ Drugs, tobacco, alcohol etc
◦ What is produced may represent what the richest can
ensure are produced rather than that for which there is
greatest demand
◦ Climate change
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The state determines what, how and for
whom products and services are produced
Associated with communism but can include
any form of dictatorship
Three levels
◦ Macro
◦ Micro
◦ Distribution of output between consumers
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Discuss with those next to you, what are the
limitations of the Command Economy?
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Lack of investment
◦ Normally stimulated by competition
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No incentive to productivity
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Wastage of resources
◦ Vast resources dedicated to planning
◦ USSR Gosplan +- 12 million prices, 24 million
products
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Black markets
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A mixed economy combines elements of both
private enterprise and intervention by the
state
Main types of intervention are:
◦ Provision of public goods or prohibition of de-merit
goods
◦ Subsidies and taxation
◦ Regulation
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Remember you must think about these things
in relation to your essay
“The market environment and the national
environment in which an organisation
operates shape the decision making,
behaviour and activities of that
organisation” Discuss using examples.