Business Environment

Economic SystemsHNC/HND Unit 1 International Group

You are required to produce an essay of no more than 3000 words (font size 12) which answers the following question:

“The market environment and the national environment in which an organisation operates shape the decision making, behaviour and activities of that organisation” Discuss using examples.

You will be expected to describe and evaluate the following in relation to your chosen organisation: ◦ The type of economic systems that exist (free market, closed

economy etc.)◦ Governmental policies regarding fiscal and monetary policies◦ Competition policy and regulatory practices. ◦ Different market types (monopoly, oligopoly etc.) ◦ Market forces (supply and demand, economies of scale etc.) and

organisational responses to these forces.

Task 2

Adam Smith

◦ The father of (free trade) economics

◦ An Inquiry into the Nature and Causes of the Wealth Of Nations (1776) commonly known as The Wealth of Nations

◦ The Wealth Of Nations was not just a study of economics but a survey of human social psychology: about life, welfare, political institutions, the law, and morality

Introduction to Economics

◦ In his day countries and communities sought to restrict buying from outside the community, although selling was seen as good

◦ They imposed heavy import taxes, subsidised local production and protected local industry

◦ A countries wealth was the total of the gold and silver that it had stockpiled

Adam Smith: The Wealth of Nations

Smith argued that free trade promotes wealth, nobody trades unless they benefit from it

Because trade benefits both sides it increases our prosperity just as surely as do agriculture or manufacture.

A nation’s wealth is not the quantity of gold and silver in its vaults, but the total of its production and commerce – what today we would call gross domestic product.

Adam Smith:The Wealth of Nations

Is the excess of human wants over what can actually be produced to fulfil these wants

Every state has to deal with the “economic problem” of finite resources and infinite wants

Absolute scarcity – less developed economies

Relative scarcity – developed economies

Economics Key term : Scarcity

These are productive resources◦ Labour

Physical and mental power of people

◦ Land and natural resources

◦ Capital Machinery, manufacturing plant, premises, offices,

infrastructure

Key term: Factors of Production

This is linked to scarcity and involves 3 key decisions:

◦ What goods & services to produce

◦ How will these be produced

◦ To whom will they be distributed

Key term: Allocation of resources

Opportunity cost measures the cost of obtaining one product or service in terms of the quantity of another product or service that could have been obtained instead◦ Food or clothes?

National or Governmental level◦ This can mean roads or hospitals, i.e. The amount

of hospitals not built in terms of hospitals per mile

Key term: Opportunity cost

There are different types of economic system to deal with scarcity

◦ Free market economy

◦ Command economy

◦ The mixed economy

Economic Systems

Often called “Capitalism”

Most decisions are taken via the market mechanism

Supply and Demand and ability to pay influence decision making

Very little government influence

Free Market Economy

Firms seek to maximise profit

Consumers seek greatest benefit for least cost

Workers seek to maximise wage relative to the cost of working

Individuals are free to make their own decisions

Prices are determined by supply and demand

Trend towards the “Equilibrium price”, where the amount consumers wish to buy equals the amount producers wish to supply

Free Market Economy : Assumptions

Discuss with those next to you, what are the limitations of the Free Market Economy?

Free Market Economy : Limitations

What price for “public” goods and services?

De-merit goods freely available◦ Drugs, tobacco, alcohol etc

Inequality of power in the market place◦ What is produced may represent what the richest can ensure are

produced rather than that for which there is greatest demand

Barriers to entry – Restrictive practices

Producers may ignore “externalities”◦ Climate change

Free Market Economy : Limitations

The state determines what, how and for whom products and services are produced

Associated with communism but can include any form of dictatorship

Three levels◦ Macro◦ Micro◦ Distribution of output between consumers

Planned or Command Economy

Discuss with those next to you, what are the limitations of the Command Economy?

Command Economy : Limitations

Lack of investment◦ Normally stimulated by competition

No incentive to productivity

Wastage of resources◦ Vast resources dedicated to planning◦ USSR Gosplan +- 12 million prices, 24 million

products

Black markets

Command Economy :Limitations

A mixed economy combines elements of both private enterprise and intervention by the state

Main types of intervention are:◦ Provision of public goods or prohibition of de-merit

goods◦ Subsidies and taxation◦ Regulation

The Mixed Economy

Remember you must think about these things in relation to your essay

“The market environment and the national environment in which an organisation operates shape the decision making, behaviour and activities of that organisation” Discuss using examples.

So far so good?