Economic-Systems and Business Decisions, Chapter 1

8/8/2019 Economic-Systems and Business Decisions, Chapter 1

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Economic SystemsEconomic Systems


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What is Economics?What is Economics?

Economics studies how individuals andEconomics studies how individuals andsocieties seek to satisfy needs andsocieties seek to satisfy needs and

wants through incentives, choices, andwants through incentives, choices, andallocation of scarce resources.allocation of scarce resources.

Oil & fuelLand

Doctors

Technology


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Factors of ProductionFactors of Production

Economic ResourcesEconomic Resources Natural ResourcesNatural Resources raw materials found inraw materials found in

nature that are used to produce goodsnature that are used to produce goods

Human ResourcesHuman Resources peoples knowledge, efforts,peoples knowledge, efforts,and skills used in their workand skills used in their work

Capital ResourcesCapital Resources used to produce goods andused to produce goods andservices (buildings, materials, and equipment)services (buildings, materials, and equipment)

Entrepreneurial ResourcesEntrepreneurial Resources -- recognize the needrecognize the needfor new goods or servicefor new goods or service

ScarcityScarcity shortage of resourcesshortage of resources


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Why Economic Systems?Why Economic Systems? Nations use economic systems toNations use economic systems to

determine how to use their limiteddetermine how to use their limitedresources effectively.resources effectively.

Primary goal of an economic system is toPrimary goal of an economic system is toprovide people with a minimum standardprovide people with a minimum standardof living, or quality of life.of living, or quality of life.

Different types of Economic SystemsDifferent types of Economic SystemsTraditional EconomyTraditional Economy

Market Economy (free enterprise)Market Economy (free enterprise)

Command EconomyCommand Economy

Mixed EconomyMixed Economy


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Traditional EconomyTraditional Economy Found in rural, underFound in rural, under--

developed countriesdeveloped countries VanuatuVanuatu

Pygmies of CongoPygmies of Congo

Eskimos & Indian tribesEskimos & Indian tribes

BelarusBelarus

Customs govern theCustoms govern theeconomic decisionseconomic decisions

that are madethat are made Farming, hunting andFarming, hunting and

gathering are done thegathering are done thesame way as thesame way as the

generation beforegeneration before

Economic activities areEconomic activities are

centered around thecentered around thefamily or ethnic unitfamily or ethnic unit

Men and women areMen and women are

given different economicgiven different economicroles and tasksroles and tasks

AdvantagesAdvantages: people: peoplehave specific roles;have specific roles;

security in the waysecurity in the waythings are donethings are done

DisadvantagesDisadvantages::Technology is not used;Technology is not used;

difficult to improvedifficult to improve


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Market Economy (Free Enterprise)Market Economy (Free Enterprise)

Also called aAlso called a Free MarketFree MarketEconomy or FreeEconomy or FreeEnterprise EconomyEnterprise Economy

Businesses andBusinesses and

consumers decide whatconsumers decide whatthey will produce andthey will produce andpurchase and in whatpurchase and in whatquantitiesquantities

Decisions are madeDecisions are madeaccording toaccording to law oflaw ofsupply & demandsupply & demand

Supply and demand ofSupply and demand ofgoods and servicesgoods and servicesdetermine what isdetermine what isproduced and the priceproduced and the price

that will be chargedthat will be charged.. AdvantageAdvantagecompetitioncompetition

to have the best productsto have the best productsand servicesand services

DisadvantageDisadvantagehuge rifthuge riftbetween wealthy andbetween wealthy andpoorpoor

Note: aNote: a true markettrue market

economyeconomy does not exist.does not exist.


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Command EconomyCommand Economy

The government (orThe government (orcentral authority)central authority)determines what, how,determines what, how,and for whom goods andand for whom goods andservices are produced.services are produced.

Two types:Two types: Strong CommandStrong Command wherewhere

government makes allgovernment makes alldecisions (communismdecisions (communism China, CubaChina, Cuba))

Moderate CommandModerate Command where some form ofwhere some form ofprivate enterprise existsprivate enterprise existsbut the state owns majorbut the state owns majorresources (socialismresources (socialism France and SwedenFrance and Sweden))

AdvantagesAdvantages Guarantees equalGuarantees equalstandard of living forstandard of living foreveryoneeveryone

Less crime and povertyLess crime and poverty

Needs are provided forNeeds are provided forthrough the governmentthrough the government

DisadvantagesDisadvantages Minimal choicesMinimal choices Fewer choices of itemsFewer choices of items

No incentive to produceNo incentive to producebetter product or engagebetter product or engagein entrepreneurshipin entrepreneurship

Also known as aAlso known as a PlannedPlannedor Managed Economyor Managed Economy


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Mixed EconomyMixed Economy Combination of aCombination of a

market and amarket and acommandcommand

economyeconomy Government takesGovernment takes

of peoples needsof peoples needs

Marketplace takesMarketplace takescare of peoplescare of peopleswants.wants.

Most nations have aMost nations have amixed economy:mixed economy:United States,United States,England, AustraliaEngland, Australia

AdvantageAdvantagebalancebalanceof needs and wantsof needs and wantsmet by governmentmet by government

and in marketplaceand in marketplace DisadvantageDisadvantage

citizens have to paycitizens have to paytaxestaxes


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SocialismSocialism

Non-Antagonistic

Productive Forces Production Relations Ownership of the

Means of Production

Labour:

Human abilityand skill specialization

Means ofLabour:

Sophisticated and

advanced techniques

of production,

Industrial Plants,equipment, tools

Objects ofLabour:

Land

Economic Planning

Complex Division ofLabour

Commodity

Production

Close

interdependence Mutual Cooperation

Absence of Self

Interest

Social Welfare

Social ownership ofthe means of

production


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Classification ofModes ofClassification ofModes of

ProductionProduction1.1. AntagonisticAntagonistic: Ownership of the means of production: Ownership of the means of production

is separated by those who work on them.is separated by those who work on them.Differentiation between haves and haveDifferentiation between haves and have--notsnotsExamples are:Examples are: Slavery, Feudalism, Capitalism.Slavery, Feudalism, Capitalism.

2.2. Non AntagonisticNon Antagonistic: Ownership of the means of: Ownership of the means ofproduction is not separated by those who work onproduction is not separated by those who work onthem. There is no conflict between those who work onthem. There is no conflict between those who work onthem and who owns the means of production.them and who owns the means of production.Examples are:Examples are: Primitive Community, SocialismPrimitive Community, Socialism


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Classification of EconomicClassification of Economic

SystemsSystemsOwnership Pattern

DecisionPattern

Predominantly Private Predominantly Public

Predominantly

decentralized with the use

of market principle

Capitalist Laiseez Faire

Economy

SocialisticMixed Economy

Predominantly centralized

with the use of command

principle

CapitalistMixed Economy Socialist Economy


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Role of Business Enterprises underRole of Business Enterprises under

different Economic Systemdifferent Economic System

Private and Public enterprises (PPPs)Private and Public enterprises (PPPs)

Economic-Systems and Business Decisions, Chapter 1

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