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Understanding Economic Systems: Impact on Business Operations

Learn how economic issues influence business decisions. Explore capitalism, socialism, and communism - their pros, cons, and effects on society. Understand economic indicators and business cycles. Discover the interplay between economic systems and business success.

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Understanding Economic Systems: Impact on Business Operations

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  1. How economic issues affect Business

  2. Economics • 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  Land, labour, capital, entrepreneurship and knowledge

  3. Macroeconomics • Concerned with the operation of a nation’s economy as a whole • Example: With respect to job availability. • Macroeconomics looks at how many total jobs are available within a nation

  4. Microeconomics • Concerned with the behviour of people and organizations within particular markets • Example: With respect to job availability • Microeconomics looks at how many jobs are available within each market • Market  people who have unsatisfied wants, but have the resources to attain it, were it available

  5. Adam Smith • Coined the term: “the invisible hand” of the market • Whereby individuals can make profit and maximize it without the need for government intervention • So what does this ultimately mean?

  6. Free-market capitalism • Capitalism – an economic system in which all or most of the factors of production and distribution are privately owned (not by the government) • In a pure capitalist environment, business people decide what to produce, how much to pay workers how much to charge for goods and services, and where to sell them.

  7. How does a free market work? • How are prices determined? • Explain supply and demand • How is the Market price determined • Describe the four types of competition within a free market • Pros and cons of a free market?

  8. Socialism • An economic system where some or most basic businesses should be owned by the government, so that profits can be evenly distributed amongst the people. • Wealthy individuals pay higher taxes, and these tax dollars can be redistributed to lower income individuals through various government programs • What are some of these programs?

  9. Socialism cont. • Some negative consequences include: • Less incentives for business people • High income tax for higher paying jobs such as doctors and lawyers • Fewer inventions and less innovation  why?

  10. Communism • An economic and political system in which the government makes all economic decisions and owns almost all the major factors of production.

  11. Communism in the business perspective • Government has no way of knowing what to produce, as supply and demand is not readily observed as in a free-market environment • Shortages or over production of goods can occur more easily • Business people/entrepreneurs lose incentive as the government will take most of their profits • Ex: China…

  12. Mixed Economies • Where a mix of capitalism/socialism creates the ideal economic conditions • Ex: Free-market economies are less adequate at meeting the needs of the poor, the old or the disabled. • Which type of economy might address this better? • How might this be encouraged?

  13. Mixed Economies • Ex: Socialism doesn’t create enough wealth or job opportunities. • Which type of economy might address this better? • How might they encourage it?

  14. Indicators of economic conditions • 1. Gross Domestic Product (GDP) – Total value of goods and services produced in a country in a given year. • Foreign and domestic companies may produce goods and services included in the GDP so long as the company resides in the country • Strong economy leads to higher standard of living, as people have more money to buy goods and services

  15. Indicators of economic conditions • 2. Unemployment rate

  16. Indicators of economic conditions • 3. Price indexes – measures levels of: A. Inflation – general rise in the prices of goods and services overtime B. Disinflation – the decrease in the rate of inflation C. Deflation – when prices of goods and services is decreasing

  17. Indicators of economic conditions • D. Stagflation – when the economy is slowing but the pries of goods and services are still increasing • E. Industrial price index (IPPI) – prices that producers receives for their goods • F. Raw materials price index (RMPI) - prices paid by Canadian manufacturers for key raw materials

  18. Business cycles • Economic boom – Business is booming! • Recession – two or more consecutive quarters (3 months) of decline in the GDP • Depression – a severe recession with subsequent deflation • Recovery – when the economy stabilizes and starts to grow

  19. Questions • Compare and contrast communism and a free-market economy • In a socialist economy, describe the effects of lowering taxes for business owners, and workers. • Read “Practicing management decisions” and answer the questions. • How does business affect technology? Consider Inside and outside the work place, and requirement for transportation. • Describe a scenario where a prosperous business could contribute to the spread of disease.

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