Units 3 - Economic Environment.ppt

THE ECONOMIC ENVIRONMENT  Readings for the Session Worthington, et al. (2018) - Chapter 5  Objectives At the end of this unit, you will be able to:  Understand what the economic environment is as well as what it consists  Identify the economic factors such as economic systems, con...

THE ECONOMIC ENVIRONMENT  Readings for the Session Worthington, et al. (2018) - Chapter 5  Objectives At the end of this unit, you will be able to:  Understand what the economic environment is as well as what it consists  Identify the economic factors such as economic systems, conditions, policies, and market structures Explain the influence of economic factors and conditions on the operations of a business  What is the Economic Environment? ...refers to all those economic factors which have a bearing on the functioning of a business unit  …also consists of factors that affect consumer purchasing power and spending patterns  also depends on the economic environment to sell the finished goods  The Economic Environment cont/d.. We will focus on the following economic factors  Economic system  Economic conditions (such as interest rates, inflation, unemployment, etc.)  Economic policies  Market structures The Economic Systems Each country faces the problem of sharing resources equitably  The problem arises because of scarcity of resources  Three fundamental questions come up:  What is to be produced?  How are these goods to be produced? and  For whom are the goods to be produced? The Goals of an Economic System Stability - a condition in which the balance between money available and goods produced remains about the same  Full employment – ensures all those who want to work have jobs. Growth – is an increase in the quantity of goods and services produced by our resources. Types of Economic Systems The common ones are:  Market / Capitalist  Command / Planned and  Mixed Market / Capitalist Economic Sys. …individuals control all or most factors of production and make all or most production decisions …there is little Government intervention …markets decide what, when, and for whom to produce Market / Capitalist Economic Sys. Advantages  Disadvantages  Freedom of choice  Market forces if not  Encourages controlled can cause hardships competition  Profit motive can lead to  encourages harm professionalism  Disregards public goods  Speedy decision  Gap between rich and making poor widens Command / Planned Economic Sys. The government controls all or most factors of production and makes all or most production decisions  Two types are common: Communist and Socialist systems  Communist - all industries owned and run by central government  Socialist - main industries run by government while less crucial ones by individuals Command/Planned Economic Sys. Advantages  Disadvantages  provision of social  High inefficiencies in services operation  equitable distribution  positions are filled by of resources political appointments  resource utilization is  bureaucratic procedures planned and achieved common and hence delay for society in making decisions  avoids emergency of  high taxes because of monopolies emphasis on public goods Mixed Economic Systems  In most cases it is rare to have on type of system  Mixed economic systems combine elements of command and market economies  Most economies have mixed economic systems  What about Zambia? Economic Conditions  Economic conditions or factors that can affect businesses include:  Inflation - a persistent increase in prices of goods and services. Leads to an increase in costs and prices  Income - money available for spending after the major deductions (e.g. taxes and other deductions). Affects purchase behavior (and hence firm’s sales)  Exchange Rate - rate at which the national currency can be exchanged for other currencies (e.g. $ 1 = ZMW 9.8418). Dictates the prices of imported raw materials Economic Conditions cont/d...  Interest Rates - the cost of borrowing money, hence affects the costs of a business  Unemployment Levels - occurs when someone actively searching for work is unable to find it. Affects the spending power of individuals (hence firm sales) Market Structures  …or the degree of competition is also an important consideration as it affects prices, resource use, profit levels and efficiency  Common types are:  Perfect Competition - characterized by a very large number of small firms producing an identical product. Firms are price takers.  Monopolistic Competition – characterized by many sellers of slightly differentiated products  Oligopoly - characterized by a small number of very large firms that have the power to influence the price  Monopoly - exists when an industry or market has only one producer. Firm is price maker. Government Monetary and Fiscal Policies  The government also affects the economy by the deliberate policies that it comes up with  Monetary Policy - government attempts to influence economic activity by influencing money supply using interest rates  Fiscal Policy - entails the use of government expenditure and taxation to control the economy Economic Cycles  …refer to the general trends that occur in the economy leading to certain patterns that have an effect on business  Phases involved are as follows:  Prosperity  Recession  Depression and  Recovery Economic Cycles cont/d... Prosperity Business Growth Activities y Rece ver Reco ssion Depression Time  Summary Economic environment refers to all those economic factors which have a bearing on the functioning of a business unit The economic factors including economic systems, conditions, policies, and market structures can have an influence on the business operations The economic factors and conditions can have favorable / unfavorable influence on the business operations Questions ???