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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
cretin region of the country.
* Some economist defines 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.
I-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)
Perfect completion: 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….
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.
II-Socialism & communism:
a-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 these benefits 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, retirement benefit,
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.
b-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 economic system.
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 employ
because 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.
ECONOMIC INDICATORS:
The economic indicators discuss how a government determines how well the
economy is doing. So understanding these terms will greatly increase your ability to
assess the nation’s economy.
The indicators are:
1- Gross domestic product.
2- Unemployment rate.
3- Price indexes.
1- Gross domestic product:
Gross Domestic Product (GDP): is the total value of final goods and services
produced in a country in a given year.
The goods and services included in the GDP calculation could be produced by either a
domestic company or a foreign-owned company as long as the companies are located
within the country’s boundaries.
Another way to measure GDP is per CAPITA.
GDP per Capita= GDP/ population.
Bahrain’s total GDP for the year 2010 =
Bahrain’s GDP per capita for 2010=
Gross National Product(GNP): is a similar term, but refers to the value of goods
and services produced by that countries own companies, it does NOT include
products produced by foreign companies operating in the country.
i.e. GNP of Bahrain will take into consideration only the products and services
produced by Bahraini companies only.
If GDP growth slows or declines, there are often many negative effects on businesses.
One of the major influences on the growth of GDP is how productive the workforce
is, i.e. how much output workers create with a given amount of input.
The higher the GDP in a country, the higher the standard of living of the people of
that country.
2- Unemployment:
Unemployment Rate: refers to the number of civilians at least 16 years old who are
unemployed and who have tried to find a job within the prior four weeks.
Types of Unemployment:
1- Frictional: it occurs when people are “between” jobs. E.g. if you quit your job
and are planning on starting a new job as soon as you take a two weeks
vacation, you would be considered frictionally unemployed.
2- Structural: means something within industries has changed that results in
unemployment. E.g. when the manufacturing of clothing started moving from
the USA to china, this resulted in structural unemployment.
3- Cyclical: means that there are not enough jobs for people who want to work
and is usually a result of political or economic forces.
4- Seasonal: might occur in construction jobs, where workers are laid off during
summer months. It can also include tourism jobs, where hotels workers might
be laid off due to a low season.
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