International Business Management - Lecture No 07

1. Lecture No: 07
Course Facilitator: Khurshid Alam Swati
University of Swat, Swat
Email your query to:
Khurshidalamswati@yahoo.com
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