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Chapter 3

Economic Environment of Business

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Lesson 3.1 Economic Wants

Goals

Describe economic concepts that apply to satisfying economic wants.

Explain the role of capital formation in an economy.

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Economics

Economics — body of knowledge that relates to producing and using goods and services that satisfy human wants

Economic wants — desire for scarce material goods and services

Noneconomic wants — desire for nonmaterial things that are not scarce, such as air, sunshine, and friendship

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Which of the following are economic wants?

A. Golf clubs

B. Income tax help

C. A peaceful walk in the park

D. Lunch at DiMaio’s

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A

B

D

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Which of the following are producers?

A. A travel agency

B. A private trash collection

C. A house painter

D. A toy manufacturer

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ALL!Which ones are service

businesses?

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1. Economic WantsSatisfying our economic wants

Utility — Form – created by changes in the form or shape of a product to make it useful (applies to goods, not services)

– Ie: swimsuits available in fabrics, styles, etc.Place – having a good or service at the place where it is needed or wanted

– Ie: is a swimsuit in a nearby storeTime – is it available when needed?

– Ie: Is the store open when you are ready to buy and use a swimsuit

Possession – when ownership of a good or service is transferred from one person to another (can occur through renting and borrowing)

– Ie: Is the swimsuit available at a price you can afford and are willing to pay?

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Which type of utility applies to the following situations?

A. You are playing Ping-Pong with a friend in the game room of your home at 10:30 on a Saturday night and your paddle breaks.

B. You enter a convenience store one evening to buy two size D flashlight batteries. You have to find a ring that you dropped near your car, which is parked a block away. However, the store is out of stock.

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A. Time utility – stores will be closed!

B. Place utility

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Factors of production Natural resources

– Fertile soil, minerals, water and timber resources, climate

Labor– Which is more important in recent years, mental or

physical efforts?Capital goods

– Ie: buildings, tools, machines, robots (does not directly satisfy a human want, but contributes to satisfying one)

– Allows the production of goods in large quantities, which should decrease production costs and increase productivity of labor

Entrepreneurship– Uses above 3 factors, assumes the risk of planning,

starting, and managing a business

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Identify the factors of production of an orange!

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2. Capital Formation

A country is capable of producing a fixed quantity of goods and services at any one time

Total production is divided between capital goods and consumer goods and services

Inverse relationship between them

Read this section, p. 55

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Has capital formation occurred…

A. When a firm acquires a new truck so that more goods can be shipped to customers?

B. When a business builds a new factory to increase production?

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BOTH

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Which of the following are examples of capital goods?

A plumber buys a device that aids in replacing broken well pumps for rural customers.

A manufacturer buys robots that will help it make cars faster.

A salesperson buys a new suit to wear when selling his firm’s manufactured products.

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A and B

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Checkpoint!

Goals

Describe economic concepts that apply to satisfying economic wants.

Explain the role of capital formation in an economy.

Finish 3.1 Assessment

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Lesson 3.2 Economic Systems

Goals

Discuss three economic systems and three economic-political systems.

Explain why a business considers the economic-political system of a country.

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3.2 Economic Systems

Economic system — organized way for a country to decide how to use its productive resources; that is, to decide what, how, and for whom goods and services will be produced

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1. Types of Economic Systems

A. Market economy1. Individual citizens, rather than the

gov., own most factors of production2. Best examples – US, Canada, Germany

B. Command economy1. Often found in countries with dictators2. Gov. decides how factors of production will be used3. Ie: N. Korea, Cambodia, Vietnam, Cuba

C. Mixed economy 1. Combo of 2 other types of economies2. Gov. usually own post offices, phone systems, schools,

health care facilities, and public utilities3. *No country purely has a market or command economy4. More countries are moving towards a market economy

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D. How does privatization occur? 1. Selling gov.-run operations to

private businesses or individuals2. Gov. incentive – decreases costs

for taypayers and increases efficiency

3. What is the US trying to privatize now?

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2. Types of Economic-Political SystemsRefer to Chart on page 59

A. Capitalism 1. AKA free enterprise system - US2. Operates in a democracy3. Also includes the right to own

property4. In US, gov. assumes larger role

recently because of certain abuses taking place (Pollution / Pesticides)

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B. Socialism 1. Usually associated with mixed

economies2. Degree to how much the gov.

owns resources is debated by the type of socialist country

3. Disliked in the US because it limits the rights of an individual to own property for production

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C. Communism1. Referred to as extreme socialism2. How to divide results of

production are made by the gov, too!3. Associated with command

economies4. Often have a shortage of consumer

goods b/c of a focus on capital formation

5. Does not permit ownership of property

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Checkpoint!

Discuss three economic systems and three economic-political systems.

Explain why a business considers the economic-political system of a country.

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Lesson 3.3 Fundamentals of Capitalism

Goals

Describe why private property is important to capitalism.

Describe how prices are set in a capitalistic system.

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3.3 Fundamentals of Capitalism

1. Private property – individuals can own land,

hire labor, own capital goods, use resources to

produce goods and services, own the products, sell them and keep the profits

Profit – often overstated by societyAverage profit is 5% of total receipts

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If a motel had yearly receipts of $500,000, and the profits amount to 5%, what was the profit for the business?

.05 x 500,000 =

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2. Price settinga. Demand – NOT the same as a WANT

b. Relationship between price and demand (Usually – the lower the price, the higher the demand)

c. Supply – Relationship between price and demand (When supply is low, the price is higher)

d. Read examples on page 64

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SUPPLY AND DEMAND

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3. Competitiona. Benefits to society and country:

1. Improved quality2. Development of new products3. Efficient operations (keeps prices low)

b. Price competition – a firm takes business away from its competitors by lowering prices for identical goods

c. Nonprice competition – competing on factors OTHER THAN price

1. Quality of products2. Selection of products3. Customer service4. Advertising

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When iPods were first released, what color were they made in?

When Apple started producing them in a variety of colors and sold them at the same price, is this an example of non-price competition?

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Can a competitor maintain quality and lower a product’s price if it:

A. Manufactured the product in a third-world country?

B. Used higher-quality materials?

C. Changed the product color?

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4. Income distributiona. In a free enterprise system, the share of

goods an individual receives depends on the amount of money he/she has

b. People receive income by contributing their labor to the production of goods

and servicesc. Amount of wages paid for a kind of labor is affected by the supply of and demand for that kind of labor

1. Unskilled workers2. Brain surgeon

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Think about professional athletes. Are they paid too much? Would you set a limit on a single player’s salary for a season?

Think about professional athletes in terms of supply and demand. Do better players bring in more money for the team?

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Checkpoint!

Describe why private property is important to capitalism.

Describe how prices are set in a capitalistic system.

Complete Assessment 3.3 on page 67 and Focus On… on page 68

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Lesson 3.4 Managing the Economy

Goals

Explain how economic growth can be promoted and measured.

List basic economic problems that exist and state what government can do to correct the problems.

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3.4 Managing the Economy

1.Promoting economic growth – when a country’s output exceeds its population growth

Increase # of ppl in the labor forceIncrease productivity by improving human capital through education & trainingIncrease supply of capital goodsImprove technologyRedesign work processes to improve efficiencyIncrease sales to foreign countriesDecrease buying from foreign countries

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2. Measuring Economic Growth

Gross domestic product (GDP) – total of goods and services producedConsumer Price Index (CPI) – inflation at the retail levelIndex of leading economic indicators – the economy’s strength for the next six to nine months Employment – the jobless rate and # jobs availableRetail sales – consumer spendingPersonal income and consumption – growth in personal income and consumer spending

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Which indicator would provide…

1. Unemployment statistics?

2. Amount of goods sole by stores in a region of a country?

3. The business outlook for later this year?

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3. Identifying economic problems

A. Recession – decline in GDP for 6+ months, demand is less than supply

B. Inflation – consumers want to buy goods that are not readily available – prices INCREASE QUICKLY

- inversely related to purchasing power

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4. Correcting economic problems

A.Business cycles – last about 5 years and pass through 4 phases:

Expansion – modest rise in GDP, profits, and employment

Peak – growth reaches its highest level

Contraction – growth begins to decline

Trough – Lowest point in the cycle with increased unemployment

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B. Corrective Actions

1. Recession / Inflation period (expansion /

contraction)

a. Taxes – raised to slow growth, lowered

to encourage growth

b. Gov. spending – increase to stimulate

a slow economy, reduce to slow down

the growth

c. Interest rates – lower rates encourage

more people to borrow

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2. In free enterprise, keep interventions to a minimum

3. Results cannot be seen in short run

4. No set time for how long control mechanisms should be in place

5. Depression – destructive runaway inflationary period (affects foreign countries, too!)

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Think about it…

Why should retirees have pension funds and other investments earning interest as great as or greater than the inflation rate?

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Checkpoint!

Explain how economic growth can be promoted and measured.

List basic economic problems that exist and state what government can do to correct the problems.