Download UNDERSTANDING THE BUSINESS SYSTEM CHAPTER 1

UNDERSTANDING THE
BUSINESS SYSTEM
CHAPTER 1
This slide set is prepared for use with Ebert and Griffin, Business Essentials. Fifth Edition. Prentice Hall, New
Jersey, 2005.
26/09/2005
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The Concept of Business and
Profit
• Business -- an organization that
•
•
provides goods and services for profit
(ticari kuruluş)
Profit -- revenue minus expenses (kar)
All kinds of businesses produce goods
and services (mal ve hizmet)
– profits from businesses
– taxes from businesses
– charitable activities
• Businesses exist in economic systems
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ECONOMIC SYSTEMS
• An economic system is a set of rules
and institutions used to allocate
(dağıtım; tahsis) a society’s resources
to satisfy its citizens’ needs.
– Shaped by politics and social values
– link between economy & society is crucial
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ECONOMIC SYSTEMS
• Factors of Production (üretim faktörleri)
Resources of the society used in the
production of goods and services
– labor (human resources)
– capital (funds needed to create and
operate a business)
– physical resources (natural resources, raw
materials, production facilities, parts and
supplies, and other elements used to
produce goods & services)
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ECONOMIC SYSTEMS
– entrepreneurs (girişimciler)
• risk takers
• locomotive role
• can you name some entrepreneurs?
– information resources (data and other
information used by businesses) (bilgi
kaynakları)
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ECONOMIC SYSTEMS
• Types of Economic Systems
– ownership of factors of production (private
or owned by the government)
– decisions about allocation and production
individuals or government)
• Planned Economies
• Market Economies
• Mixed Market Economies
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ECONOMIC SYSTEMS
• Planned Economies
central government controls all or most
factors of production and makes all or most
production and allocation decisions
communism and socialism
– Communism
• All factors of production owned & operated by
the state
• No private property
• Planned resource allocation -- “planned
economy” concept
– social equality
– private enterprise considered wasteful & exploitative 7
(kötüye kullanmak, sömürü)
ECONOMIC SYSTEMS
• Various degrees --Pure (Cuba, North Korea,
People’s Rep. Of China, USSR in the past)
• Karl Marx (1818-1883) -- German political
philosopher and economist
– founder of communism along with Friedrich Engels
(also German)
– “from each according to his abilities, to each
according to his needs” - a society envisioned by
Marx
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ECONOMIC SYSTEMS
– Socialism
• state ownership & operation of key industries
(trans., utilities, steel, communication)
• private ownership of less vital industries &
businesses
• concept of “welfare state” (refah devleti)
– medical care, education, housing, social services,
etc.
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ECONOMIC SYSTEMS
• Market Economies
Market --mechanism for exchange
between buyers & sellers of a good or
service (piyasa)
Basic idea: people are free to make free
choices regarding production and
consumption of goods and services.
Demand & supply regulate production and
prices
– Capitalism : market economy (piyasa
ekonomisi) that provides for private
ownership of production and encourages
entrepreneurship by offering profits as an 10
incentive
ECONOMIC SYSTEMS
Adam Smith - Wealth of Nations (1776)
“Pure Capitalism” -- Laissez faire - laissez
passe (let them do, let them pass)
(bırakınız yapsınlar, bırakınız geçsinler)
Market --- self-correcting mechanism
(invisible hand)
Demand & Supply regulate production
and prices
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ECONOMIC SYSTEMS
• Mixed Market Economies (Karma
Ekonomi)
Economic system featuring
characteristics of both planned and
market economies
– some government intervention (müdahale)
in prices, wages, and conduct of business
activities
•
•
•
•
minimum wage laws
anti-trust legislation (tekelciliği önleyici yasalar)
prices of certain basic goods
subsidy system (subvansiyon, destekleme
alımları)
• consumer and environmental protection
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regulation
ECONOMIC SYSTEMS
– Statism -- “devletçilik”
– Government + private enterprises
– A form of socialism (although not called by
that name in Turkey)
– State Economic Enterprises (Kamu İktisadi
Teşekkülleri - KİT)
• Turkey
• France
• Italy, England are examples
– Issue of privatization (Özelleştirme)
• a very current issue in Turkey and other
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countries such as Hungary, Poland, Romania)
A CLOSER LOOK AT THE
ECONOMIC SYSTEM
• How does the economic system of a
country work?
– markets (piyasalar)
– nature of demand and supply (arz ve talep)
– private enterprise (özel teşebbüs)
– competition (rekabet)
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A CLOSER LOOK AT THE
ECONOMIC SYSTEM
• Markets
– many different markets in the economy
(housing, white goods, money, tobacco,
etc.)
– producers, consumers, prices
– many many exchanges (alış-veriş) take
place in these markets
– events in one market often have effects on
other markets (for example; money market
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& tourism)
A CLOSER LOOK AT THE
ECONOMIC SYSTEM
• Supply and Demand
– Supply : quantity of a product that the
seller is able and willing to provide at
various prices at a given time (arz, sunu)
– Demand : quantity of a product that
consumers are willing and able to buy at
various prices at a given time (talep, istem)
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A CLOSER LOOK AT THE
ECONOMIC SYSTEM
– Laws of Supply and Demand (arz ve talep
yasası)
• Law of demand -- buyers will purchase
more of a product as its price drops and
less of a product as its price increases
• Law of supply -- producers will offer
(supply) more of a product for sale as its
price rises and less as its price drops
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A CLOSER LOOK AT THE
ECONOMIC SYSTEM
– Demand curve -- graph showing how many
units of a product will be demanded
(bought) at different prices (talep eğrisi)
– Supply curve -- graph showing how many
units will be supplied (offered for sale) at
different prices (arz eğrisi)
– Market (or equilibrium) price -- price at
which quantity demanded equals quantity
supplied (piyasa veya denge fiyatı)
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Supply & Demand curves
Demand
Price
equilibrium price at
this quantity
Supply
Quantity
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Supply and Demand Schedule
Quantity
Quantity
Price
Demanded
Supplied
2
2000
100
4
1700
400
6
1500
600
8
1200
800
10
1000
1000
12
800
1200
14
600
1300
16
400
1600
Equilibrium price where
supply = demand
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A CLOSER LOOK AT THE
ECONOMIC SYSTEM
Surplus = quantity supplied > quantity
demanded
Shortage = quantity supplied < quantity
demanded
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A CLOSER LOOK AT THE
ECONOMIC SYSTEM
• Private Enterprise (Özel Teşebbüs; Özel
Girişimcilik)
Economic system that allows individuals
to pursue their own interests without
undue governmental restriction
Four elements of private enterprise:
1. private property rights (özel mülkiyet
hakları)
2. freedom of choice (seçme özgürlüğü)
3. profits
4. competition (rekabet)
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A CLOSER LOOK AT THE
ECONOMIC SYSTEM
– Private Property Rights
Right to buy, own, use, and sell almost any
form of property (mal ve mülk) -- car,
home, TV sets, diapers, walkman, etc.
– Freedom of Choice
Sell your labor, buy any product, make and
sell any product/service, hire any one
Some exceptions -- drugs, guns, child
labor, etc.
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A CLOSER LOOK AT THE
ECONOMIC SYSTEM
– Profits
Necessary for continued existence of
businesses. Also to attract people to invest
in new products and services.
Entrepreneurs.
– Competition
Vying among businesses for the same
resources or customers
•
•
•
•
Nike vs. Reebok athletic shoes
Turkcell vs. Telsim GSM operators
Compaq vs. Dell computers
Ulaş Taxi vs. Günay Taxi in Mağusa
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A CLOSER LOOK AT THE
ECONOMIC SYSTEM
• Degrees (or types) of Competition
– Perfect (or pure) Competition (Tam
rekabet):
• small firms in the market
• large number of firms producing identical
products or services
• because of the above, no single firm can
control price and quantity
• prices are known by all parties (sellers &
buyers)
• easy to enter or leave the market
• demand and supply determine the price
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A CLOSER LOOK AT THE
ECONOMIC SYSTEM
• Examples of pure competition -- farmers, all
kinds of small businesses such as restaurants,
grocery stores
– Monopolistic Competition (Tekelci rekabet)
Market or industry where there are a large
number of buyers and a relatively large number
of sellers trying to differentiate (farklılaştırmak)
their products from those of competitors
• no one company dominates the market
• fewer sellers than in pure competition
• brand names heavily used (Coke and Pepsi;
Nike and Adidas; Uludağ Kebabcısı and Kebab26
49)
A CLOSER LOOK AT THE
ECONOMIC SYSTEM
– Oligopoly (Oligopoli)
Market or industry where there are a
handful (few) of sellers
• power to influence the prices of their products
• sellers are usually very large companies
• entry is difficult (large capital investment
necessary)
• actions of one can seriously affect the sales of
others, such as price changes
• examples -- auto industry, steel, airlines, white
goods (Arçelik, Profilo, Teba), banking
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(Vakıfbank, İsbank, Garanti Bankası)
A CLOSER LOOK AT THE
ECONOMIC SYSTEM
– Monopoly (Tekel, monopoli)
Market or industry in which there is only
one producer
• the producer can set the prices of its products
• the producer dominates the market
Anti-trust laws in many countries (including
Turkey) prevent monopolies.
• Competition Council (Rekabet Kurulu) in Turkey
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A CLOSER LOOK AT THE
ECONOMIC SYSTEM
– A number of factors help prevent
development of monopolies & oligopolies
• if tomatoes are expensive use carrots
• copper prices go up, fiber optics used for
communication
• cotton prices go up, synthetic fibers are used
• oil crisis of 1974 gave rise to oil substitutes
such as natural gas, solar power, gasohol,
more energy efficient cars, machines, etc.
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A CLOSER LOOK AT THE
ECONOMIC SYSTEM
– Natural Monopolies
Industry in which one company can most
efficiently (verimli) supply all needed goods
or services. Examples:
• power (electricity)
• water
• bus service within a large city (Ankara, New
York, etc)
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UNDERSTANDING ECONOMIC
PERFORMANCE
• How do we know if the economic
•
system of a country is working well and
achieving key goals (ana hedefler)?
This is what we mean by “performance
of the economic system”.
Two Key Economic Goals :
1. Economic growth (büyüme)
2. Economic stability ( istikrar)
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UNDERSTANDING ECONOMIC
PERFORMANCE
1. Economic Growth (Ekonomik Büyüme)
Growth is the increase in the amount of
goods and services produced by a nation’s
resources.
• It is difficult to achieve growth without triggering
inflation and other economic problems
• Turkey’s economy has grown at an average
rate of 6 % for the past 5-10 years
• What about China?
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UNDERSTANDING ECONOMIC
PERFORMANCE
• How do we know whether or not an
economic system is growing?
– Business cycle - pattern of short-term
expansions and contractions (ups and
downs) in an economy
– The main measure of growth in the
business cycle is aggregate output (toplam
üretim):
• total quantity of goods and services produced
by an economic system during a given period. 33
UNDERSTANDING ECONOMIC
PERFORMANCE
– An increase in aggregate output is called
economic growth.
– If output growth rate is more than the
growth rate of the population, the result is
• an increase in output per capita (kişi başına
üretim miktarı)
• the system provides more of the goods &
services that people want
RESULT : HIGHER STANDARD OF LIVING
FOR THE PEOPLE
Standard of living - total quantity & quality of
goods and services that people can buy
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UNDERSTANDING ECONOMIC
PERFORMANCE
– Measures of aggregate output
• Gross Domestic Product (GDP)
The value of all goods and services produced
in a year by a nation’s economy through
domestic factors of production (Gayri Safi
Yurtiçi Hasıla - GSYİH)
– If GDP is increasing, the nation’s aggregate output is
increasing, which means the economy is also
growing.
• Gross National Product (GNP)
The value of all final goods & services
produced by an economic system in one year
regardless of where the factors of production
are located (Gayri Safi Milli Hasıla (GSMH)
veya Milli Gelir)
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UNDERSTANDING ECONOMIC
PERFORMANCE
• Real Growth Rate
Increase in GDP and GNP must be adjusted for
inflation and changes in the value of the
country’s currency. This is called the real
growth rate.
• GDP per capita - GDP per person
For real growth to take place, output must
increase at a faster rate than population. If this
is the case, GDP per capita will increase and
the country will become richer.
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UNDERSTANDING ECONOMIC
PERFORMANCE
• Nominal GDP - GDP measured in current (cari;
bugünkü) Turkish Liras or at current prices.
• Real GDP - Nominal GDP that has been
adjusted for price changes (usually inflation)
and exchange rates
• Purchasing Power Parity (PPP) - principle that
exchange rates are set so that the prices of
similar products in different countries are about
the same. (Satınalma gücü paritesi)
• PPP gives us a much better idea of what
people can actually buy with what they earn in
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an economic system.
UNDERSTANDING ECONOMIC
PERFORMANCE
• GDP & GNP may be misleading…
“Underground (kayıt dışı) economy”
Barter (takas), cross-border trade,
illegal transactions
Unreported to the government - legal &
illegal
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UNDERSTANDING ECONOMIC
PERFORMANCE
– Productivity (üretkenlik; verimlilik)
• Measure of economic growth that compares
how much an economic system produces with
the resources needed to produce it.
• Essential for continued economic growth
• Examples:
– 80 cars/day by Toyota vs. 60 cars/day by Tofaş using
the same amount of equipment and labor
– Canon 1000 $ per copier vs. Xerox 1200 $ per
comparable copier
• If more products are produced with fewer
factors of production, prices of products go
down. This means a higher standard of living.
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UNDERSTANDING ECONOMIC
PERFORMANCE
• PRODUCTIVITY = OUTPUT/INPUT
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UNDERSTANDING ECONOMIC
PERFORMANCE
– Some factors can play a negative role in
economic growth. Two important factors
are:
1. Balance of Trade (Dış Ticaret Dengesi)
2. National Debt (Ulusal Borç)
Some definitions first -• Importing: Purchasing goods/services from
another country (dışalım, ithal)
• Exporting: Selling and shipping goods or
services to another country (dışsatım, ihraç)
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UNDERSTANDING ECONOMIC
PERFORMANCE
– Balance of Trade: Difference between the value of
products a nation exports and those that it imports
(Dış Ticaret Dengesi)
• If Imports > Exports, we have Trade deficit
(dış ticaret açığı)
• If Imports < Exports, we have Trade surplus
(dış ticaret fazlası)
• Trade deficit is also called “negative trade balance”
– Japan and Taiwan have trade surplus, while Turkey and
the U.S. experience a trade deficit.
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UNDERSTANDING ECONOMIC
PERFORMANCE
– National Debt (Milli/Ulusal Borç)
Government takes in revenues (gelir) and spends
these for many purposes.
• Revenues come mostly from taxes (vergiler);
another source of revenue is borrowing (borç
alma) by selling bonds (devlet tahvili) to
individuals, banks, insurance companies, other
companies, etc.
• Spending (harcama) is for many purposes
(military, social programs, investments for
power generation and highways, education,
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etc.)
UNDERSTANDING ECONOMIC
PERFORMANCE
• Budget Deficit (Bütçe Açığı)
– Government spends more than the money it takes in
( expenses > revenues)
– many governments (including Turkey and TRNC)
experience budget deficits all the time.
– Where do governments get the money to spend
more than they take in? Of course, they borrow from
various sources.
• So what is National Debt? (Ulusal Borç)
Total amount that a nation owes its creditors
(alacaklılar)
• Effect of national debt on economic growth:
– Money borrowed by the government means there is44
less money for private borrowing and investment
UNDERSTANDING ECONOMIC
PERFORMANCE
2. Economic Stability (istikrar): condition in
which the balance between the money
available in an economy and the goods
produced in it are growing at about the
same rate
• enough desirable products to satisfy
consumer demand, and consumers have
enough money to buy what they need and
want
• prices for consumer goods, interest rates
(faiz oranları), and wages (ücretler) paid to
workers change very little
• biggest threat to stability is inflation
(enflasyon)
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UNDERSTANDING ECONOMIC
PERFORMANCE
• What is inflation? Widespread continuous price
increases throughout the economic system.
• Inflation occurs when the amount of money in
the economy is greater than the amount of
goods & services available. This leads to higher
prices for goods and services. The result is a
decrease in purchasing power. (satınalma
gücü)
• Inflation always hurts consumers !!!
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UNDERSTANDING ECONOMIC
PERFORMANCE
• Inflation is not necessarily or entirely bad. A
little inflation, if kept under control, it may be a
sign of economic growth.
• If it gets out of control, as in Turkey and some
other countries (Brazil, Israel for example) then
it can be very damaging to a country.
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UNDERSTANDING ECONOMIC
PERFORMANCE
• Measuring Inflation
– Consumer Price Index (CPI)
• Producers Price Index (In Turkey: ÜFE)
• Consumer Price Index (In Turkey: TÜFE)
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UNDERSTANDING ECONOMIC
PERFORMANCE
• Unemployment (işsizlik): Level of joblessness
among people actively seeking work
– Effect of unemployment on stability
» low unemployment leads to shortage of labor;
result is higher wages
» higher wages means higher costs and prices
» if wage rates are too high, businesses will hire
fewer workers, which means increased
unemployment
– High unemployment usually means that businesses
and the economy are performing poorly. This results
in decreased aggregate output (GDP) and standard
of living.
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UNDERSTANDING ECONOMIC
PERFORMANCE
• Recession and Depression
– Recession: period characterized by decreases in
aggregate output as measured by real GDP
(küçülme, gerileme)
» aggregate output decreases
» unemployment increases
» national income decreases (GDP)
– Depression: Severe and long-lasting recession
(ekonomik bunalım) Example -- the famous
depression of 1929 which started in the U.S. and
spread throughout the whole world
» serious economic and social problems
» Argentina in 2002 is an example
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UNDERSTANDING ECONOMIC
PERFORMANCE
• Managing the Economy
– The government has two ways in which it
can manage the economy:
• Fiscal Policies (Mali Politikalar): policies that
determine how the government collects and
spends its revenues
• Monetary Policies ( Para Politikaları): policies
that determine the size of a nation’s money
supply (interest rates, bank reserves, open
market operations are some major tools).
– Monetary policies are used by the governments
through central banks (merkez bankası). In the
USA, central bank is called Federal Reserve Bank
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(usually called the Fed)
UNDERSTANDING ECONOMIC
PERFORMANCE
– Fiscal and monetary policies are used by
governments as part of a stabilization
policy.
– The goal of stabilization policy is to smooth
(gidermek) out fluctuations (dalgalanma) in
output and unemployment and to stabilize
prices
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