Unit (6) - The are not enough resources to satisfy all consumer's needs and wants. - This is known as the basic economic problem. - Business when allocating.

Unit (6)

- The are not enough resources to satisfy all consumer's needs and wants.

- This is known as the basic economic problem.

- Business when allocating scare resources between different user.

- Economics is the study of how resources are allocated in situation where they have different uses.

Business and the economic system

The opportunity cost :Opportunity cost refers to the benefit lost from given up or foregone alternatives.- What is an economy?- An economy is a system which attempts to solve the basic economic problem.- The function of an economy, is to allocate scarce resources among unlimited wants.

The basic economic problem is broken down into three questions :( 1 ) What should be produced ?- The economic system must decide which resources will be used to produce which products.- Should resources be used for military purposes? Should resources be used to generate wealth.- In less developed countries the decision about what to produce may be simpler, Because the choices available are limited.

( 2 ) How should it be produced? - The way in which goods and services are produced.( 3 ) For whom should it be produced?- An economy has to determine how the final goods and services will be allocated amongst competing groups. The way in which the previous three questions are answered depends on the type of economic and political system .

Market economies :- Is known as capitalist economies or free enterprise economies.- Resources are allow canted through markets.- The role of government in a free market system is limited.

The main functions of the government in the market economy:( 1 ) To pass laws which protect the rights of businesses and consumers and punish offenders.- To issue money and make sure that the monetary system operates will so that the monetary system operates well so that the markets work efficiently.- To provide certain products and services that would not be provide by firms.- To prevent firms from dominating the market and to restrict the power of trade unions.

What to produce?- Businesses will only produce good and services if consumers will buy them.- Firms must identify consumers needs and respond to them.- Resources will be used to produce goods and services which are profitable for businesses.

How to produce?- In market economies, firms decide this.- Businesses aim at making profits.- They will choose production methods that reduces costs.- Competition forces firms to keep costs and prices tow.- Consumers will prefer to buy their goods from firms which offer lower price.

How are goods and services allocated?- Firms produce goods and services which consumers purchase with money.- Workers earn wages from selling their labor.- Owners of capital receive interest, owner of business receive profit, and the owner of land receive rent.- All of these can be spent on goods and services.- Individuals with the most money can buy the most products.

Implications of market economies :- Resources are allocated automatically by the forces of demand and supply.- Resources are not wasted in the production of unwanted goods.- There should be a wider choice of goods and services.- Individuals are free to set up business and to choose how to spend their income.- Competition should lead to lower cost and improve quality as firms try to impress consumers.- There is often unequal distribution of income, greens that can not be involved in business activity, such as the old or the ill, may have a little or no income.

- Market imperfections often occur, large companies may dominate an industry, and exploit consumers.- Some goods are not provided by private sector like defiance.- A lot of time and money is wasted when businesses collapse.- Resources are often very slow to move from one use to another.- Consumers may lack information to make choices when buying products.- In order to keep costs low, firms may choose pollute the environment.

Planned economies :- Many countries could be described as planned or command economies.- Government has a vital role in a planned economy.- Government plans, organizes and co-ordinates the whole production process.- In the market economies planning and organizing carried out by firms.- The resources in the planned economy belong to the state.- Individuals are not permitted to own property, land and other non-labor means of production.

What to produce?- The decision is made by government planners.- They decide the type and mix of goods and services to be produced.- Planners make assumptions about consumer's needs.How to produce?government tells producers, how to produce.Input- out put analysis is often used to make plans.How are goods and services allocated?- Services and goods and services with money these earn state outlets.- People purchase goods and services with money they earn.- Prices are set by the planners and could not be change without state instruction.

Implications of planned economies :How does a planned economy affect the business and consumer that operate in ?- The planned economy tends to be more equal distribution of wealth and income.- The state provides people a minimum level of payment to all individuals.- People are not allowed to own property, so wealth can not be accumulated by private sector.

- Resources are not duplicated, There is no competition in the supply of a service.- Production is for need rather than profit, so as resources are not wasted through businesses producing unwanted goods.- Long term plans can be made taking into account the future needs.- Many resources are used up in the planning process, This situation may lead to vast bureaucracy.

- People tend to be poorly motivated.- Planners encourage the production of standardized goods with poor variety and choice for consumers.- Planners may estimate needs wrong, This can lead to shortage or surpluses in goods and services.- Shortage results in long queues, then the black markets could appear.- The standard of living may decrease comparing with countries that use other economic system.

Mixed economies :- No country has an economy which is entirely planned or free market.- Most economic system around the world have elements of each system.- In the mixed economies, some resources are allocated by governments and the rest by the market system.- All western European countries have mixed economy system.- In mixed economies, the public sector is responsible for supplying the public goods and merit goods.- The decision a bout allocating resources are made by central or local government.- In the private sector, production decisions are made by firms in response to the consumers need.In the public sector, public goods and merit goods are provided free and are paid for by taxes.

- In the mixed economies, governments responsible for providing a minimum standard of living for those who unable to work.- In the public sector, governments own a significant proportion of production factors.- In the private sector, individuals are allowed to own the means of production.- Firms are set up by individuals to supply a wide variety of goods and services.- The main role for government is to ensure that there is fair competition in the private sector.

What should be the degree of mixing in this type of economy?- The government will decide, how much business activity there will be in the private sector, and how much in the public sector.- Some countries like Sweden, allow the government to play a major role in the supply of goods and services than others like UK.- In countries where the government plays an important role, social provision will tend to be greater.- In countries where the private sector plays an important role, social provision will tend to be lower and the distribution of wealth and income less equal.

Problems of changing systems :- The former communist regimes were overthrown and replaced by democracy regimes.- Many problems have arisen as a result of these changes.- Business in these countries have had to change to cope with the new demands.

Implications of changing systems :( 1 ) Inflation, is known as a rise in the general price level :- Most countries have experienced inflation.- In the planned economies, where the prices were set by the state, inflation did not exist.- Inflation erodes the functions of money.In some countries businesses have reverted to barter system.

( 2 ) Establishing the system :- A change to a market economy will not take place overnight.- The institutions in the former planned economies will take time to be developed and operate.- Business may have problems in raising finance due to alack of banks.- There is no stock markets where shares in a company can be sold to raise finance.- This can result in late deliveries, a lack of information and a restriction in selling.

( 3 ) Competition :- Business in former planned economies now face competitions from both within the country and from a broad. ( 4 ) Unemployment :- In a planned economies, unemployment should not be exist.- The state provides work for all individuals and makes sure that they have minimum living standards.- After implementing market economy, the unemployment started appearing.

( 5 ) Running the business :- By the end of 1991, after a market system was introduced, most of businesses have no experience to how the business should be operated.- They face the fact of making a profit or going out of business.( 6 ) Transfer of ownership :- Changing from a planned to a market system, need to address the transfer of ownership.- In a planned economy, all resources and firms were owned by state, and now have to be passed on to employees and managers.