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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