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INFLUENCE OF
ECONOMICS IN
BUSINESS
Chapter 2
INTRODUCTION TO
ECONOMICS
Economics: study of how wealth is created and distributed by
men
3 IMPORTANT QUESTIONS
Therefore, in understanding an economic
theory people/business is required to
answer 3 important questions
1. What
2. How
3. For Whom
3 IMPORTANT QUESTIONS
1. What?
producers have to think what kinds of
goods and services are to be produced.
Producers would usually produce goods
that are demanded by society
Eg: to satisfy peoples needs of food,
many businessman operate
restaurants to sell variety of foods
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3 IMPORTANT QUESTIONS
2. How?
Producers would need to determine how much of
each type of goods and services to produce
There is a need to think how will these goods and
services be produced, which means: who will
produced them
Answering basic question of how much of goods to be
produced will require a business to determine a rough
estimate of the number of people needing them, and
making sure they employ the right people to produce
the goods
3 IMPORTANT QUESTIONS
3. For Whom?
Who will get the goods and services
produced by business?
Therefore, businessman who aim to
make as much profit must ensure
they know the group of people that
will buy the goods and services they
produce.
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ECONOMIC SYSTEM
Economic
system
is
defined
as
the
ECONOMIC
SYSTEM
Can be defined as a nation system for
allocating resources among its citizen.
Basically, it deals with allocating its limited
resources to fulfill unlimited wants of
individuals.
As human needs are unlimited, every
economic system has to deal with the
scarcity of factors of production (economic
*Natural resources
resources)
*Labor
*Capital resources
*Entrepreneur
FACTORS OF PRODUCTION
1. Natural resources
2. Labor
3. Capital or capital goods
4. Entrepreneurs
Since all the above factors are limited and there are limits to
what
can be produced, who will produce them, and what resources
will
be used, basic choices must be made
Different choices to the above questions result in different
types of
economic systems
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FACTORS OF PRODUCTION
1. Natural resources
Include all resources such as raw materials,
water, land, minerals
2. Labor
Consist of people who perform the work in
producing the goods and services
3. Capital or capital goods
Includes all buildings, machinery, tools, and
equipments used in actual production of
goods and services
4. Entrepreneurs
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1)
2)
3)
4)
Capitalism
An economic system based on the private ownership where all
economic decisions are taken by individual households and firms
with no government intervention. It also known as laissez-faire.
Individuals have right to accumulate wealth & maximize their
potential.
Work hard -> get rewards.
Individuals have 4 basic rights:
To own private property
To own a business & keep all its profits after taxes
Freedom to compete in wealth accumulation & consumption of
goods & services
Freedom of choice based on the ability to pay
Business ownership
2.
Degree of central
control
3.
Extent of managerial
decision making
4.
5.
Occupational choice
6.
Incentive
Profit motive
Individuals can keep profit and use it
whenever they want
2. Socialism
An economic system which the basic industries are
owned either by the government itself or by private
sector under strong government control.
Government or the Central Authority makes the major
economic decisions regarding production and
distribution of goods and services to ensure whole
society gets the benefits.
Business ownership
2.
Degree of central
control
3.
Extent of managerial
decision making
4.
5.
Occupational choice
6.
Incentive
Business ownership
2.
Degree of central
control
3.
Extent of managerial
decision making
4.
5.
Occupational choice
6.
Incentive
BASIC MARKET
MODELS
In analyzing business environment, we must
examine the
types of market situations that exist there
are 4 basic
models / 4 different degree of competition
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1.
Pure monopoly
2.
Oligopoly
3.
Monopolistic competition
4.
Pure/perfect competition
MONOPOLY
Situation in which a single company owns all or
nearly all of the market for a given type of product
or service.
There is a barrier to market entry into the industry
that allows the single company operate without
competition.
Only one seller or producer
There are many buyers
No substitute for the products
They have a power to influence the market price.
OLIGOPOLY
An oligopoly is a market or industry is dominated by a
small number of sellers.
A general lack of competition can lead to higher costs for
consumers.
Because there are few sellers, each oligopolist is llikely to
be aware of the actions of the others.
The decisions of one firm influence the decisions of other
firms.
The product either homogeneous or differentiate from one
another
(e.g :each firm attempts to have differentiation of a
standardized product.
Their goods are very similar in nature and the firms would
try to distinguish their products from those of their
competitors).
MONOPOLISTIC COMPETITION
A type of imperfect competition such that many
producers sell products that are differentiated from one
another but not perfect substitutes (such as from
branding, quality or location).
There are large number of buyer and seller.
Easy to enter and leave the industry.
Seller try to differentiate their product from their rival
by brand names, design or advertising.
PURE/PERFECT
COMPETITON
This is market structure
where there are many independent
sellers, each offering its products in the same basic way.
COMPARISON IN MARKET
STRUCTURE
Characteristic
s
Perfect
Competition
Pure
Monopoly
Monopolistic
competition
Oligopoly
Few
Number of
Market
Many
One
Ability to Control
Price
None
High
Some
Some
None
Subject to
govt.
regulation
Few
Many
Very little
No product
that
compete
directly
Emphasis on
showing
perceived
differences in
product
Some
differences
Barriers To Entry
Product
Differentiation
Examples
Farm products
such as wheat
and corn
Utilities such
as gas,
water,
Retail specialty
clothing
Steel,
automobiles,
airlines,
aircraft
BUSINESS
ENVIRONMENT
1. Historical
2. Natural-physical
3. Political and legal
4. Social and cultural
5. Economic
6. International
7. Technological
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HISTORICAL
26
27
28
29
30
31
Government as a customer
Government buys goods and services, ranging from office
machines, computers to war materials for defense purpose from
private firms
Government acts as owner and competitor by providing goods and
services in the market place. They also act as suppliers as they own
a great deal of the nations natural resources. Eg: land which is
occasionally sells to a business
Current MSC project launched in early 1997 will open up new
opportunities for many companies such as TELEKOM, HSBC, SAPURA
in providing related services, and providing other infrastructures
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ECONOMIC
33
Cont..ECONOMIC
34
INTERNATIONAL
35
INTERNATIONAL
36
Cont.. INTERNATIONAL
2. Capitalize in technology many US companies
established new businesses in the so-called
developing countries which have relatively low levels
of technology (Latin America)
3. Use inexpensive resources
Labor and land costs can vary significantly among
countries firms often attempt to set up
production at a location where land and labor are
inexpensive
Cost of labor is much higher in developed
countries (US, UK) than other countries (Mexico,
India)
Therefore, numerous US company has established
subsidiaries in those low cost labor countries
37
Cont.INTERNATIONAL
4.
38
Cont.INTERNATIONAL
39
TECHNOLOGY
40
HOW TO CONDUCT
INTERNATIONAL BUSINESS
1.
2.
3.
4.
5.
6.
7.
41
Importing
Exporting
FDI (foreign direct
investment)
Licensing
Strategic alliances
Franchising
Joint venture
1.
42
Importing
2. Exporting
43
3.
44
Justification:
4. Licensing
45
5. Strategic Alliances
46
6. Franchising
47
7. Joint venture
48