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Unit (6)
Business and the economic system
- The are not enough resources to satisfy
all consumer's needs and wants.
- This is known as the basic economic
problem.
- Business when allocating scare
resources between different user.
- Economics is the study of how
resources are allocated in situation
where they have different uses.
The opportunity cost :
Opportunity cost refers to the benefit
lost from given up or foregone
alternatives.
- What is an economy?
- An economy is a system which
attempts to solve the basic economic
problem.
- The function of an economy, is to
allocate scarce resources among
unlimited wants.
The basic economic problem is broken down
into three questions :
( 1 ) What should be produced ?
- The economic system must decide which
resources will be used to produce which
products.
- Should resources be used for military
purposes? Should resources be used to
generate wealth.
- In less developed countries the decision about
what to produce may be simpler, Because the
choices available are limited.
( 2 ) How should it be produced?
- The way in which goods and services
are produced.
( 3 ) For whom should it be produced?
- An economy has to determine how the
final goods and services will be allocated
amongst competing groups. The way in
which the previous three questions are
answered depends on the type of
economic and political system .
Market economies :
- Is known as capitalist economies or
free enterprise economies.
- Resources are allow canted through
markets.
- The role of government in a free
market system is limited.
The main functions of the government in the
market economy:
( 1 ) To pass laws which protect the rights of
businesses and consumers and punish
offenders.
- To issue money and make sure that the
monetary system operates will so that the
monetary system operates well so that the
markets work efficiently.
- To provide certain products and services that
would not be provide by firms.
- To prevent firms from dominating the market
and to restrict the power of trade unions.
What to produce?
- Businesses will only produce good
and services if consumers will buy
them.
- Firms must identify consumers
needs and respond to them.
- Resources will be used to produce
goods and services which are
profitable for businesses.
How to produce?
- In market economies, firms decide
this.
- Businesses aim at making profits.
- They will choose production
methods that reduces costs.
- Competition forces firms to keep
costs and prices tow.
- Consumers will prefer to buy their
goods from firms which offer lower
price.
How are goods and services allocated?
- Firms produce goods and services
which consumers purchase with money.
- Workers earn wages from selling their
labor.
- Owners of capital receive interest, owner
of business receive profit, and the owner
of land receive rent.
- All of these can be spent on goods and
services.
- Individuals with the most money can buy
the most products.
Implications of market economies :
- Resources are allocated automatically by the
forces of demand and supply.
- Resources are not wasted in the production of
unwanted goods.
- There should be a wider choice of goods and
services.
- Individuals are free to set up business and to
choose how to spend their income.
- Competition should lead to lower cost and
improve quality as firms try to impress consumers.
- There is often unequal distribution of income,
greens that can not be involved in business
activity, such as the old or the ill, may have a little
or no income.
- Market imperfections often occur, large
companies may dominate an industry, and
exploit consumers.
- Some goods are not provided by private
sector like defiance.
- A lot of time and money is wasted when
businesses collapse.
- Resources are often very slow to move from
one use to another.
- Consumers may lack information to make
choices when buying products.
- In order to keep costs low, firms may choose
pollute the environment.
Planned economies :
- Many countries could be described as planned
or command economies.
- Government has a vital role in a planned
economy.
- Government plans, organizes and coordinates the whole production process.
- In the market economies planning and
organizing carried out by firms.
- The resources in the planned economy belong
to the state.
- Individuals are not permitted to own property,
land and other non-labor means of production.
What to produce?
- The decision is made by government planners.
- They decide the type and mix of goods and
services to be produced.
- Planners make assumptions about consumer's
needs.
How to produce?
government tells producers, how to produce.
Input- out put analysis is often used to make plans.
How are goods and services allocated?
- Services and goods and services with money
these earn state outlets.
- People purchase goods and services with money
they earn.
- Prices are set by the planners and could not be
change without state instruction.
Implications of planned economies :
How does a planned economy affect the
business and consumer that operate in ?
- The planned economy tends to be more
equal distribution of wealth and income.
- The state provides people a minimum
level of payment to all individuals.
- People are not allowed to own property,
so wealth can not be accumulated by
private sector.
- Resources are not duplicated, There is
no competition in the supply of a service.
- Production is for need rather than profit,
so as resources are not wasted through
businesses producing unwanted goods.
- Long term plans can be made taking into
account the future needs.
- Many resources are used up in the
planning process, This situation may lead
to vast bureaucracy.
- People tend to be poorly motivated.
- Planners encourage the production of
standardized goods with poor variety and
choice for consumers.
- Planners may estimate needs wrong,
This can lead to shortage or surpluses in
goods and services.
- Shortage results in long queues, then
the black markets could appear.
- The standard of living may decrease
comparing with countries that use other
economic system.
Mixed economies :
- No country has an economy which is entirely planned
or free market.
- Most economic system around the world have
elements of each system.
- In the mixed economies, some resources are allocated
by governments and the rest by the market system.
- All western European countries have mixed economy
system.
- In mixed economies, the public sector is responsible
for supplying the public goods and merit goods.
- The decision a bout allocating resources are made by
central or local government.
- In the private sector, production decisions are made
by firms in response to the consumers need.
In the public sector, public goods and merit goods are
provided free and are paid for by taxes.
- In the mixed economies, governments
responsible for providing a minimum standard
of living for those who unable to work.
- In the public sector, governments own a
significant proportion of production factors.
- In the private sector, individuals are allowed to
own the means of production.
- Firms are set up by individuals to supply a
wide variety of goods and services.
- The main role for government is to ensure that
there is fair competition in the private sector.
What should be the degree of mixing in this type of
economy?
-The government will decide, how much business
activity there will be in the private sector, and how
much in the public sector.
- Some countries like Sweden, allow the
government to play a major role in the supply of
goods and services than others like UK.
- In countries where the government plays an
important role, social provision will tend to be
greater.
- In countries where the private sector plays an
important role, social provision will tend to be
lower and the distribution of wealth and income
less equal.
Problems of changing systems :
- The former communist regimes
were overthrown and replaced by
democracy regimes.
- Many problems have arisen as a
result of these changes.
- Business in these countries have
had to change to cope with the new
demands.
Implications of changing systems :
( 1 ) Inflation, is known as a rise in the
general price level :
- Most countries have experienced
inflation.
- In the planned economies, where the
prices were set by the state, inflation did
not exist.
- Inflation erodes the functions of money.
In some countries businesses have
reverted to barter system.
( 2 ) Establishing the system :
- A change to a market economy will not
take place overnight.
- The institutions in the former planned
economies will take time to be developed
and operate.
- Business may have problems in raising
finance due to alack of banks.
- There is no stock markets where shares
in a company can be sold to raise finance.
- This can result in late deliveries, a lack
of information and a restriction in selling.
( 3 ) Competition :
- Business in former planned economies
now face competitions from both within
the country and from a broad.
( 4 ) Unemployment :
- In a planned economies, unemployment
should not be exist.
- The state provides work for all
individuals and makes sure that they have
minimum living standards.
- After implementing market economy, the
unemployment started appearing.
( 5 ) Running the business :
- By the end of 1991, after a market system was
introduced, most of businesses have no
experience to how the business should be
operated.
- They face the fact of making a profit or going
out of business.
( 6 ) Transfer of ownership :
- Changing from a planned to a market system,
need to address the transfer of ownership.
- In a planned economy, all resources and firms
were owned by state, and now have to be
passed on to employees and managers.