lecture_4 dynamics of business and economics_88672

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UNIVERSITY OF THE CENTRAL PUNJAB

Faculty of Commerce

M. Com (Fall 2011)

The Dynamics of Business and Economics

Instructor: Muzaffar Asad


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Learning Objectives

1. Define what business is and identify four key social and economic roles thatbusinesses serve.

2. Differentiate between goods-producing and service businesses and list fivefactors that are contributing to the increase in the number of service

businesses3. Differentiate between a free-market system and a planned system4. Explain how supply and demand interact to affect price5. Discuss the four major economic roles of the government6. Explain how a free-market system monitors its economic performance7. Identify five challenges that businesses are facing in the global economy

Brief Lecture Outline

I. What is a Business?A. Business serves many functions in society and the economy.B. Profit vs. Not-for-Profit OrganizationsC. Businesses generally fall into one of two categories:

1. Goods-producing businesses2. Service-producing businesses

II. Growth of the Service SectorA. Five key factors for this continued growth:

1. Consumers have more disposable income2. Changing demographic patterns and lifestyle trends3. Increasing number of complex goods and new technology4. Greater need for professional advice5. Barriers to entry are low for Service Businesses

III. What is an Economic System?A. Three basic questions:

1. What to produce?2. How much to produce?3. Who gets what?

B. Factors of Production:1. Natural resources2.

Human resources

3. Capital4. Entrepreneurs5. Knowledge

C. Types of economic systems:1. Free-market system

a. Capitalismb. mixed capitalism

2. Planned Systema. Communismb. Socialism

D. Privatization.


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IV. How Do Free Market Economies Work?A. Supply and demand interact to determine prices and how much to produce:

1. Demand2. Supply3. Equilibrium price

B. Competition in free-market economies1. Pure Competition2. Monopoly3. Oligopoly4. Monopolistic competition5. Competitive advantage

C. Governments role in free-market economies1. Enacts laws and creates regulation to foster competition.2. Regulated v/s Deregulated Industries3.

Protects stakeholders rights

4. Contribute to economic stabilitya. Economic expansionb. Economic contractionc. Business Cyclesd. Fiscal and Monetary Policy

V. How do Economists know if the system is working?A. Testing the effectiveness of an economics system

1. Economic indicators2. Leading indicators3. Lagging indicators.

B. Watching Economic Indicators1. Unemployment statistics2. Housing starts3. Durable goods orders

C. Measuring Price Changes1. Inflation2. Deflation3. Consumer Price Index

D. Measuring a Nations Output:1. Gross domestic product (GDP)2. Gross national product (GNP)

E. Challenges of a Global EconomyLecture Notes (and Expanded Outline)

I. What is a Business?

A. Business serves many functions in society and theeconomy to:

1. Provide us with crucial goods and services such asfood and housing, to name a few.

2. Create and foster prosperity


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3. Generate taxes for public education,transportation, etc.

4. Reinvest profits in the economy, which in turnraises our standard of living and improves ourquality of life.

B. Profit vs. Not-for-Profit Organizations1. Profit organizations earn the difference between

production and marketing costs and product price.

2. Not-for-Profitorganizations provide goods andservices, breaking even in the process; they still

must run effectively and efficiently, however, tocontinue to serve their customers.

Efficiency is doing something with the least possible

expenditure of resources (such as time, energy, etc.)

Effectiveness is doing it well, doesn't matter what ittakes.

..

C. Businesses generally fall into one of two categories:1. Goods-producing businesses may pursue activities

such as manufacturing, construction, mining, andagriculture in order to produce goods.

a. Most goods-producing businesses aregenerally Capital-intensive businesses.

Capital- intensive: require lots of capital, andraw material. Example: airline industry;automobile

manufacturers

2. Service-producing businesses provide intangibleproducts such as finance, insurance,

transportation, etc.

a. Most service businesses are labor-intensivebusinesses. Laborintensiverely mainly onworker skill and knowledge. Example:consulting firms

II. Growth of the Service SectorSince the mid-1980s, service has been the primary areaof growth for the US economy. Currently, about half of

the 1,000 largest US companies are service-based.Economists project that the growth in the service sectorwill continue to increase.

A. Five key factors for this continued growth:1. Consumers have more disposable income

a. Baby Boomers (people born between 1946 and1964) are in their peak earning years with

disposable income earmarked for

investment, travel, and relaxation.

2. Changing demographic patterns and lifestyletrends

a. Because the US has more elderly, single, two-career households, and single parents than


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ever before, growing need for services such aschildcare, food service, and home

maintenance.

3. Increasing number of complex goods and newtechnology

a. As we continue to use technological goodssuch as computers in our homes, the need forspecialized maintenance, repair, and supportservices increases, creating a market for suchservices.

4. Greater need for professional advicea. Consultants are often used to cut costs, refine

processes. Increased Internet creates moreinternational support services.

b. E-commerce is the activity of buying andselling over the Internet.

5. Barriers to entry are low for Service Businesses

III. What is an Economic System?A. An economic systemallocates a nations resources to

satisfy the needs of its citizens. An economic systemseeks to answer three basic questions:

1. what to produce2. how much to produce3. who gets what

B. Factors of Production: the basics used to producegoods and services are called factors of production.

Businesses rely on five factors of production tooptimize profits:

1. Naturalresources: assets useful in their naturalstate (land, minerals, water, and forests).

2. Humanresources: anyone involved in theproduction of goods and services

3. Capitol: resources such as money, equipment,and buildings necessary for production of goodsand services.

3. Entrepreneurs: innovative risk-takers who createand operate new businesses

4. Knowledge: the collective intelligence of anorganization

C. Types of economic systems:The degree to which governments control a countrysresources has spawned a continuum:

1. Free-market system: private individuals

determine what to produce, how and when toproduce, for whom, and at what price.

a. Capitalism: Capitalism is a free-market systembased on freedom and competition Theories of

capitalism are based on the ideas that:

capitalism requires no outside regulation(laissez faire)


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markets produce goods in proportion tosocietys wants

b. Mixed capitalism (limited intervention): US Canada Germany Japan

2. Planned System: government controls all or partof a societys resources and limit the freedom ofchoice in order to accomplish government goals.

a. Communism is the most restrictiveplannedeconomy (Cuba, North Korea)

Almost all resources are under governmentcontrol

Private ownership is restricted to personaland household items

Resource allocation is handles throughrigid centralized planning by a handful ofgovernment officials who answer the fourbasic economic questions.

b. Socialism lies somewhere between capitalismand communism in the degree of economicfreedom that it permits. Socialism involves:

a high degree of government planning, some government ownership of land and

capital resources

high taxes for extensive coverage of socialservices.

little private ownership and profit(restricted to industries less vital tocommon welfare)

D. The trend toward privatization.1. Privatization: a trend towards free-market

enterprise systems.

Example: China prepares to turn more than60% of its state-owned industries by 2005.

IV. How Do Free Market Economies Work?

A. Supply and demand interact to determine prices andhow much to produce:

1. Demand: the amount of a good or service thatconsumers will buy at a given time at various

prices (buyers behavior).

2. Supply:the quantities of a good and service thatproducers will provide at a particular time atvarious prices (sellers behavior). People get whatthey want and producers profit by keeping up withdemand.

3. Equilibriumprice: point at which quantity suppliedequals quantity demanded.


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B. Competition in free-market economies. Competitionis a situation in which two or more suppliers of a

product are rivals in the pursuit of the samecustomers. Four types of competition are:

1. Pure Competition: multiple buyers choose fromhighly similar products or services and multiple

sellers freely enter and exit the market (lowbarriers to entry). No single seller is powerfulenough to set prices.

2. Monopoly: a single seller controls the supply ofgoods or services and the price.

3. Oligopoly: A few providers dominate the marketplace (e.g., power companies).

4. Monopolisticcompetition: a large number ofsellers, none of whom dominates the market,offer products distinguishable from one another insome way. Firms seek to establish

competitive advantage.

5. Competitiveadvantage: using an area ofcompetition to appeal to particular customers:

a. priceb. servicec. qualityd. innovation

C. Governments role in free-market economies:Sometimes governments intervene to:

1. Enacts laws and creates regulation to fostercompetition.

a. Federal antitrust laws, for example, prohibitharmful monopolies. Example: recent

Microsoft court battle

2. Regulates and deregulates certain industriesa. In a regulated industry, close government

control is substituted for free competition andcompetition is either limited or eliminated.

b. Deregulation of certain industries may allownew industry competitors to enter the market,

create more choices for consumers and kepthe price in check. Governments relax orremove existing laws that impede healthycompetition. Example: airlines, trucking;

banking.

3. Protects stakeholders rightsa. Stakeholders are groups that are affected by a

businesss operations including colleagues,employees, supervisors, investors, customers,suppliers, and society at large.

4. Contribute to economic stabilitya. Economic expansion occurs when the economyis growing and people are spending more


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money. Consumer purchases stimulatebusinesses o produce more goods and

services, which in turn stimulatesemployment.

b. Economic contraction occurs when suchspending declines. Business cut back on

production, employees are laid off, and theeconomy as a whole slows down.

c. Businesscycles: ups and downs in theeconomy

Recession is a downward trend thatconsists of two consecutive quarters ofdecline in Real Gross Domestic Product.

d. Fiscal and Monetary Policy:

Monetary policy: adjusts the nationsmoney supply by increasing or decreasinginterest rates pr the money supply to help

control inflation.

Fiscal policy: government plans to collectand spend tax revenues and expenditures

to stimulate or slow down the economy.

To manage business cycles, governmentscan:

levy new taxes raise or lower current tax rates raise or lower interest rates regulate the amount of money

circulating in the economy

V. How Do Economists Know if the System is Working?

A. Testing the effectiveness of an economics system:Economists monitor statistics on employment,interest rates, and price changes to measure theefficiency of our economic systems.

1. Economic indicators: statistics pointing towardmajor trends in our economic system.

2. Leading indicators: statistics pointing toward

future trends. Example: unemployment showsfuture cutbacks in spending.

3. Lagging indicators: statistics that show a swing inthe economy after the movement has begun.

B. Watching Economic Indicators

1. Unemployment statistics: signal future changes inconsumer spending. Example: Whenunemployment rises, people have less money to

spend, and the economy suffers.

2. Housing starts: show where several industriesare heading. Example: Housing is very sensitive

to interest rates. If mortgage rates are high,

fewer people can afford to build new homes.


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3. Durable goods orders: orders for goods thattypically last for more than three years. Example:

A rise in durable goods orders if a positiveindicator that business spending is turningaround.

C. Measuring Price Changes

1. Inflation is a stead rise in the prices of goodsands services throughout the economy.

2. Deflation is the sustained fall in the general pricelevel for goods and services.

3. Consumer Price Indexmeasures the rare ofinflation by comparing the change in prices of arepresentative basket of goods and services such

as clothing, food, housing, and utilities over time.

D. Measuring a Nations Output:

1. Gross domestic product (GDP):measures acountrys production, distribution, and use ofgoods and services during a specific period of time(usually a year).

2. Gross national product (GNP): excludes profitsfrom foreign-owned businesses. By comparingoutput with other nations or previous years, wecan discover whether our economy is holding

steady, growing, or faltering.

E. Challenges of a Global Economy

1. Globalization: the increasing tendency of theworld to act as one market instead of a series of

national ones---open new markets for acompanys goods and services.

2. Globalization creates tough competition andchallenges for new businesses:

a. Producing quality products and services thatsatisfy customers changing needs

b. Starting and managing a small business intodays competitive environment

c. Thinking globally and committing to aculturally diverse workforce

d. Behaving in an ethically and sociallyresponsible manner

e. Keeping pace with technology and electroniccommerce


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Summary of Learning Objectives

1. Define what a business is and identify four key social and economic rolesthat businesses serve.

A business is a profit-seeking activity that provides goods and services to satisfy

consumers needs. The driving force behind most businesses is the chance to

earn a profit; however, nonprofit organizations exist to provide society with asocial or educational service. Businesses serve four key functions: They provide

society with necessities; they provide people with jobs and a means to prosper;they pay taxes that are used by the government to provide services for itscitizens; and they reinvest their profits in the economy, thereby increasing anations wealth.

2. Differentiate between goods-producing and service businesses, and listfive factors that are contributing to the increase in the number of

services businesses.

Goods-producing businesses produce tangible goods and tend to be capitalintensive; whereas service businesses produce intangible goods and tend to belabor intensive. The number of service businesses is increasing because (1)

consumers have more disposable income to spend on taking care of themselves;(2) many services target consumers needs brought about by changingdemographic patterns and lifestyle trends; (3) consumers need assistance withusing and integrating new technology into their business operations and lifestyle;

(4) companies are turning to consultants and other professionals for advice toremain competitive; and (5) in general barriers to entry are lower for servicecompanies than they are for goods-producing businesses.

3. Differentiate between a free-market system and a planned system.In a free-market system, individuals have a high degree of freedom to decide

what is produced, by whom, and for whom. Moreover, the pursuit of private gainis regarded as a worthwhile goal. In a planned system, governments limit theindividuals freedom of choice in order to accomplish government goals, controlthe allocation of resources, and restrict private ownership to personal and

household items. The pursuit of private gain is nonexistent under a plannedsystem.

4. Explain how supply and demand interact to affect price.In the simplest sense, supply and demand affect price in the following manner:When the price goes up, the quantity demanded goes down but the suppliersincentive to produce more goes up. When the price goes down, the quantitydemanded increases, whereas the quantity supplied may (or may not) decline.

When the interests of buyers and sellers are in balance, an equilibrium price isestablished. However, adjusting price or supply to meet or spur demand does notguarantee profitability, as the airline example illustrates. The important thing to

remember is that in a free-market system, the interaction of supply and demanddetermines what is produced and in what amounts.

5. Discuss the four major economic roles of the government.The government fosters competition by enacting laws and regulations, byenforcing antitrust legislation, and by approving mergers and acquisitions, withthe power to block those that might restrain competition. It regulates certainindustries where competition would be wasteful or excessive. It protects

stakeholders from potentially harmful actions of businesses. And it contributes to


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economic stability by regulating the money supply and by spending for the publicgood.

6. Explain how a free-market system monitors its economic performance.Economists evaluate economic performance by monitoring a variety of economic

indicators such as unemployment statistics, housing starts, durable-goodsorders, and inflation. They compute the consumer price index (CPI) to keep aneye on price changesespecially inflation. In addition, economists measure theproductivity of a nation by computing the countrys gross domestic product(GDP)the sum of all goods and services produced by both domestic and foreigncompanies as long as they are located within a nations boundaries.

7. Identify five challenges that businesses are facing in the global economy.The five challenges identified in the lecture are (1) producing quality productsand services that satisfy customers changing needs; (2) starting and managing asmall business in todays competitive environment; (3) thinking globally andcommitting to a culturally diverse workforce; (4) behaving in an ethically andsocially responsible manner; and (5) keeping pace with technology and electroniccommerce.


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Assignment - Practice Your Knowledge

Select a local service business you are familiar with. How does that businesstry to gain a competitive advantage in the marketplace? Write a brief

summary, as directed to you in the class, describing whether the company

competes on speed, quality, price, innovation, service or a combination ofthese attributes. Be prepared to present your analysis to your classmates.

lecture_4 dynamics of business and economics_88672

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