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International Business Management - Lecture No 07


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International Business Management - Lecture No 07

International Business Management - Lecture No 07

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  • 1. Lecture No: 07 Course Facilitator: Khurshid Alam Swati University of Swat, Swat Email your query to: Economics & Economic Systems
  • 2. Economics The science of production and distribution of wealth The branch of knowledge concerned with the production, consumption, and transfer of wealth Economics is the study of how people choose to use resources Resources include the time and talent people have available, the land, buildings, equipment, and other tools on hand, and the knowledge of how to combine them to create useful products and services It deals with scarce resources to get maximum satisfaction © Khurshid Alam Swati 2-2
  • 3. Factors of production Basic Resources are: Primary factors of production  Land – Raw Materials  Labor – Workforce Secondary factors of production  Capital – Equipment and machinery  Entrepreneurship – Skills and abilities © Khurshid Alam Swati 2-3
  • 4. Economics types 1. Theoretical economics  Macro economics  Micro economics 2. Applied economics  Involve Math © Khurshid Alam Swati 2-4
  • 5. How Does An Economy Work? Three issues/questions of economics Nations must answer 3 basic Economic question: a) What goods and services should be produced? b) How should the goods and services be produced? c) For who should the goods and services be produced? The way a nation answers these questions defines their economy. © Khurshid Alam Swati 2-5
  • 6. Economic System The way of addressing these questions is called economic system These three issues defines structure of economy I. Traditional economy – depend on beliefs II. Market economy – capitalist economy III. Planned economy (Command) – socialist economy IV. Mixed economy © Khurshid Alam Swati 2-6
  • 7. Economic System (Cont’d) The system of producing and distributing of goods and services and allocating resources in a society It includes the combination of the various institutions, agencies and consumers that comprise the economic structure of a given community It includes how these various agencies and institutions are linked to one another, how information flows between them, and the social relations within the system No economy can be purely market or purely command Elements of both economies are found in all systems this makes all economies mixed © Khurshid Alam Swati 2-7
  • 8. 1. Traditional Economy An economic system in which economic decisions are based on customs and beliefs People will make what they always made & will do the same work their parents did Exchange of goods is done through Bartering: Trading without using money Examples:  Villages in Africa and South America  The Inuit tribes in Canada  The caste system in parts of rural India  The Aborigines in Australia © Khurshid Alam Swati 2-8
  • 9. Traditional Economy (Cont’d) Who decides what to produce?  People follow their customs and make what their ancestors made Who decides how to produce goods & services?  People grow & make things the same way that their ancestors did Who are the goods & services produced for?  People in the village who need them © Khurshid Alam Swati 2-9
  • 10. 2. Market Economy - Capitalist No government involvement in economic decisions The government lets the people answer the three basic economic questions  What? Customers decide through their purchases  How? This is left up to the individual business  Who? People who have money can buy more – this encourages hard work and investments © Khurshid Alam Swati 2-10
  • 11. Capitalism (Cont’d) An economic system characterized by private ownership of businesses and marketplace competition The government is concerned about its people and takes care of those who cannot care for themselves The political system is a democracy with leaders elected by the people The United States and Japan are examples of a Capitalist Economy © Khurshid Alam Swati 2-11
  • 12. Advantages of Market Economy Adjusts to change based on consumer wants High degree of individual freedom Low levels of government interference Because individuals (with money) make the decisions, everyone (with money) has a voice in the way the economy runs Wide variety of available goods & services Many choices = high degree of consumer satisfaction © Khurshid Alam Swati 12
  • 13. Disadvantages of Market Economies Poverty: only those with money can participate Market does not provide for people’s basic needs. Governments must attempt to do this High degree of uncertainty people lose jobs, businesses fail Greed based system puts profit before people © Khurshid Alam Swati 13
  • 14. © Khurshid Alam Swati 2-14 3. Command Economy - Socialist The Government controls the factors of production and makes all the decisions The government is responsible for answering the three economic questions  What? One person ( a dictator) or a group of government officials (central planning committee) decide what is to be produced  How? The government owns all the factors of production and makes all the decisions about production  Who? The government decide who receives what is produced in the economy
  • 15. Socialism (Cont’d) Increased government involvement in people’s lives and the economy The main goal is to keep prices low for all people and to provide employment for many The government runs key industries and makes economic decisions More social services for all and free or low cost medical care Canada, Germany, Sweden, Australia and Great Britain are all examples of socialist economies © Khurshid Alam Swati 2-15
  • 16. How do Command economies answer the basic economic questions? 1) What to produce? Whatever the government says to produce 2) How to produce? However the government tells you to produce 3) For whom to produce? For whomever the government tells you to produce (ideally the entire society) © Khurshid Alam Swati 16
  • 17. Advantages of Command Economy Because the government has total control over production and its factors, these economies can change rapidly. Whatever is needed most will be produced. There is no uncertainty (people are told when and how to work) Free education, health care, and other public services © Khurshid Alam Swati 17
  • 18. Disadvantages of Command economy Economy designed to meet needs not wants No incentive to work hard (people don’t often lose their jobs, so they do the bare minimum to get by) Large bureaucracy means slow decision making, raises cost of production, lacks flexibility No reward for initiative which slows progress © Khurshid Alam Swati 18
  • 19. Communism The government runs everything (Totalitarian government) Only one political party, the Communist party, runs the government All people able to work are assigned jobs – there is virtually no unemployment The government assigns housing, schools, and occupations There is little to no economic freedom Cuba, North Korea, and China are examples © Khurshid Alam Swati 2-19
  • 20. 4. Mixed Economy A hybrid that blends some aspects of both market and planned economies Some government involvement through mandatory laws and regulations that businesses follow  Labor Laws, Minimum Wage The government provides social programs for those who need help  Medicare, welfare All economies are mixed they are classified based on how much the government is involved in the process © Khurshid Alam Swati 2-20