International Business Management - Lecture No 07

Lecture No: 07

Course Facilitator: Khurshid Alam Swati

University of Swat, Swat Email your query to:

[email protected]

Economics & Economic Systems

Economics The science of production and distribution of wealth

The branch of knowledge concerned with the production, consumption, and transfer of wealth

Economics is the study of how people choose to use resources

Resources include the time and talent people have available, the land, buildings, equipment, and other tools on hand, and the knowledge of how to combine them to create useful products and services

It deals with scarce resources to get maximum satisfaction

© Khurshid Alam Swati 2-2

Factors of production

Basic Resources are:

Primary factors of production

Land – Raw Materials

Labor – Workforce

Secondary factors of production

Capital – Equipment and machinery

Entrepreneurship – Skills and abilities


Economics types

1. Theoretical economics

Macro economics

Micro economics

2. Applied economics

Involve Math


How Does An Economy Work? Three issues/questions of economics

Nations must answer 3 basic Economic question:

a) What goods and services should be produced?

b) How should the goods and services be produced?

c) For who should the goods and services be produced?

The way a nation answers these questions defines their economy.


Economic System

The way of addressing these questions is called economic system

These three issues defines structure of economy

I. Traditional economy – depend on beliefs

II. Market economy – capitalist economy

III. Planned economy (Command) – socialist economy

IV. Mixed economy


Economic System (Cont’d)

The system of producing and distributing of goods and services and allocating resources in a society

It includes the combination of the various institutions, agencies and consumers that comprise the economic structure of a given community

It includes how these various agencies and institutions are linked to one another, how information flows between them, and the social relations within the system

No economy can be purely market or purely command

Elements of both economies are found in all systems this makes all economies mixed


1. Traditional Economy

An economic system in which economic decisions are based on customs and beliefs

People will make what they always made & will do the same work their parents did

Exchange of goods is done through Bartering: Trading without using money

Examples:

Villages in Africa and South America

The Inuit tribes in Canada

The caste system in parts of rural India

The Aborigines in Australia


Traditional Economy (Cont’d)

Who decides what to produce? People follow their customs and make what

their ancestors made

Who decides how to produce goods & services? People grow & make things the same way

that their ancestors did

Who are the goods & services produced for? People in the village who need them


2. Market Economy - Capitalist

No government involvement in economic decisions

The government lets the people answer the three basic economic questions

What? Customers decide through their purchases

How? This is left up to the individual business

Who? People who have money can buy more – this encourages hard work and investments


Capitalism (Cont’d)

An economic system characterized by private ownership of businesses and marketplace competition

The government is concerned about its people and takes care of those who cannot care for themselves

The political system is a democracy with leaders elected by the people

The United States and Japan are examples of a Capitalist Economy


Advantages of Market Economy

Adjusts to change based on consumer wants

High degree of individual freedom

Low levels of government interference

Because individuals (with money) make the decisions, everyone (with money) has a voice in the way the economy runs

Wide variety of available goods & services

Many choices = high degree of consumer satisfaction

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Disadvantages of Market Economies

Poverty: only those with money can participate

Market does not provide for people’s basic needs. Governments must attempt to do this

High degree of uncertainty people lose jobs, businesses fail

Greed based system puts profit before people



3. Command Economy - Socialist The Government controls the factors of production and makes all the decisions The government is responsible for answering the

three economic questions

What? One person ( a dictator) or a group of government officials (central planning committee) decide what is to be produced

How? The government owns all the factors of production and makes all the decisions about production

Who? The government decide who receives what is produced in the economy

Socialism (Cont’d)

Increased government involvement in people’s lives and the economy

The main goal is to keep prices low for all people and to provide employment for many

The government runs key industries and makes economic decisions

More social services for all and free or low cost medical care

Canada, Germany, Sweden, Australia and Great Britain are all examples of socialist economies


How do Command economies answer the basic economic questions?

1) What to produce? Whatever the government says to produce

2) How to produce? However the government tells you to produce

3) For whom to produce? For whomever the government tells you to produce (ideally the entire society)


Advantages of Command Economy

Because the government has total control over production and its factors, these economies can change rapidly.

Whatever is needed most will be produced.

There is no uncertainty (people are told when and how to work)

Free education, health care, and other public services


Disadvantages of Command economy

Economy designed to meet needs not wants

No incentive to work hard (people don’t often lose their jobs, so they do the bare minimum to get by)

Large bureaucracy means slow decision making, raises cost of production, lacks flexibility

No reward for initiative which slows progress


Communism

The government runs everything (Totalitarian government)

Only one political party, the Communist party, runs the government

All people able to work are assigned jobs – there is virtually no unemployment

The government assigns housing, schools, and occupations

There is little to no economic freedom

Cuba, North Korea, and China are examples


4. Mixed Economy

A hybrid that blends some aspects of both market and planned economies

Some government involvement through mandatory laws and regulations that businesses follow

Labor Laws, Minimum Wage

The government provides social programs for those who need help

Medicare, welfare

All economies are mixed they are classified based on how much the government is involved in the process
