Business & Marketing Unit 2: Economics Chapter 3: Political and Economic Analysis.

Business & MarketingUnit 2: Economics

Chapter 3: Political and Economic Analysis

Chapter 3:Political and Economic Analysis

Section 3.1: What is an Economy?

What is an Economy? -- Ch 3 Sec. 1

• What is meant by the term economy• The factors of production• The concept of scarcity• The difference between a traditional, a

market, a command, and a mixed economy

What you’ll learn . . .

Economy

• The way in which a nation makes economic choices.

• Also called an Economic System

Resources = Factors of Production

• Resources are all the things used in producing goods and services.

• The technical term for it is factors of production.


• Factors of Productions comprise four categories:1.Land2.Labor3.Capital4.Entrepreneurship


• Land -- everything on the earth that is in its natural state, or the Earth’s natural resources.


• Labor -- all the people who work in the economy


• Capital -- includes money needed to start and operate a business.

• It also includes the goods used in the production process.

• Factories, office buildings, computers, and tools are all capital resources.


• Entrepreneurship -- the skills of people who are willing to risk their time and money to run a business.

Economic Systems are needed because:

• Scarcity is the difference between wants and needs and available resources.

• No one country has enough resources to supply everything that is needed or wanted which creates scarcity.

• Scarcity forces nations to make economic choices.

Three Economic Questions

• Nations must answer three basic questions when deciding how to use their limited resources.

1. What goods and services will be produced?2. How should goods and services be produced?3. For whom should the goods and services be

produced?

Types of Economic Systems

• Traditional Economy – Traditions and rituals answer the basic questions. Answers are often based on cultural or religious practices and ideals that have been passed down for generations.

• Market Economy – In a pure market economy there is no government involvement in economic decisions.

• Command Economy – A system in which the government controls the factors of production and makes all decisions about their use.

• Mixed Economies –All economies in the world today (including the Free Enterprise System in the U.S.) are mixed with varying degrees of government regulation

Types of Mixed Economies

• Capitalism -- Characterized by private ownership of businesses and marketplace competition.

Political Foundations of Capitalism

• The political system most frequently associated with capitalism is democracy.


• Socialism – there is increased government involvement in people’s lives and the economy.– Tend to have more social

services to ensure a certain standard of living for everyone

– Government runs key industries and makes economic decisions


• Communism – Countries have a totalitarian form of government, which means that the government runs everything.– All who are able to work are

assigned jobs– Housing and schooling are

decided by the government


• Economies in Transition – the breakup of the former Soviet Union probably provides the best examples of societies making the difficult change from command to market economies.

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Command Economy

Socialism

Market Economy

Communism Capitalism

If you place economic systems on a continuum, they would look something like this.

What Is an Economy? Chapter 3 Political and Economic Analysis

• Section 3.1 What Is an Economy?

•Section 3.2 Understanding the Economy

Marketing Transition 3-2With a partner answer the following:1. What do you think constitutes a

healthy economy?2. What is state of our economy

today?3. How can the economy be fixed?

What Makes a Healthy Economy?

• Low unemployment• Fair and stable prices• Good productivity• Good sales

What Is an Economy? Chapter 3 Political and Economic Analysis

• Section 3.1 What Is an Economy?

•Section 3.2 Understanding the Economy

Understanding the Economy

Objectives•List the goals of a healthy economy•Explain how an economy is measured

•Analyze the four key phases of the business cycle

Marketing Essentials Chapter 3, Section 3.2

The Economy and Marketing

If you are a marketer and you want to perform a useful SWOT (Strength, Weakness, Opportunities, Threats) analysis, you need to consider the economic factors that will influence your marketing planning such as:•Economy•Consumers•Businesses•Government


When Is an Economy Successful?

A healthy economy has three goals:1. Increase productivity2. Decrease unemployment3. Maintain stable prices


When Is an Economy Successful? By analyzing their economies, nations keep track of

how well they are doing. The key economic measurements used to determine

economic strength are:1. Labor productivity2. Gross domestic product (GDP)3. Gross national product (GNP)4. Standard of living5. Inflation rate6. Unemployment rate


Productivity is output per worker hour that is measured over a defined period of time, such as a week, month, or a year. Businesses can increase productivity by:• Investing in new equipment or facilities for

higher efficiency•Providing additional training or financial

incentives for workers•Reduce their work force and increase the

responsibilities of those who remain



Two key concepts related to increasing productivity are:•Specialization•Division of labor

One example of specialization and division of labor is an assembly line, where each part of a finished product is completed by a different person.



Gross domestic product (GDP) is the output of goods and services produced by labor and property located within a country. The GDP is made up of:• Private investment• Government spending• Personal spending• Net exports of goods and services• Change in business inventories



Here is the calculation for GDP1. Add private investment,

government spending, and personal spending

2. Add a trade surplus or subtract a trade deficit

3. Add expanding inventories or subtract shrinking inventories



Gross national product (GNP) is the total dollar value of goods and services produced by a nation, including the goods and services produced abroad by U.S. citizens and companies. Notice that with the GNP, it is not where the production takes place but who is responsible for it. The U.S. used to measure its economy by the GNP, but switched to using the GDP in 1991.



A country’s standard of living is a measurement of the amount and quality of goods and services that a nation’s people have. To calculate the standard of living:Divide the a country’s GDP or GNP by its population to get the per capita GDP or GNP



Inflation refers to rising prices. A low inflation rate (one to five percent) is good because it shows that an economy is stable. A double-digit inflation rate devastates an economy. The higher the inflation rate, the less that country’s money is worth. To combat inflation, governments raise interest rates to discourage borrowing money and slow economic growth.



Other indicators are:•Wages•New payroll jobs

Other Economic Indicators & Trends


The cycle of economic growth and decline is called the business cycle.

The business cycle consists of four phases:

1. Expansion2. Recession3. Trough4. Recovery

The Business Cycle


Expansion is a time when the economy is flourishing, characterized by:•Low unemployment•High output of goods and services•High consumer spending

The Business Cycle


Recession is a period of economic slowdown that lasts for at least six months. This time is characterized by:• Reduced workforces and higher unemployment• Lower consumer spending• Low production of goods and services

A trough is when the economy reaches its lowest point, then begins to rise.

The Business Cycle


A depression is a period of prolonged recession. •Businesses shut down•Consumer spending is very low•Production of goods and services is down significantly

The Business Cycle


Recovery is the term used to signify a period of renewed economic growth following a recession or depression. This time is characterized by:•Increasing GDP•Increasing sales•Decreasing unemployment•Increased consumer spending

The Business Cycle


The business cycle can be affected by the actions of:•Businesses•Consumers•GovernmentThese things are, in turn, affected by the business cycle.

The Business Cycle


Business & Marketing Unit 2: Economics Chapter 3: Political and Economic Analysis.

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