economics deals with three fundamental problem areas for any society what
should we pray how much how should we produce these
Goods and with what resources for whom should we produce these Goods although
the questions of what how and for whom are the same for a communist country or
a free enterprise system the way economic organizations deal with the
questions differ every business deals with these questions they form the basis
on which you start a business and the answers are guided by some fundamental
principles which we look at in the next sections the following reviews the
fundamental principles by briefly looking at the major economic systems
an economic system is simply a set of laws institutions and activities that
guide decision-making every economic system seems to answer the questions
about how to allocate scarce resources we summarize the different systems for
you here traditional economic system economies
that are based on farming and used simple barter trade have traditional
economic systems this system remains only in remote areas such as some parts
of tribal Africa pure market system this system is based on supply and demand
with little or no government control the ebay reverse auction system is a form of
a pure market system command economy this system is run by a strong
centralized government and focuses on industrial goods instead of consumer
goods the former Soviet Union had a command economy free enterprise system
most democratic nations have this economic form where individuals can make
economic choices this system is also called capitalism or market economy it's
characterized by competition and a profit motive entrepreneurs love this
competition comes in four flavors perfect competition you have a lot of
buyers and sellers and no one giant company can affect price monopolistic
competition many sellers produce differentiated product and their goal is
to dominate a niche in the market monopoly
a particular commodity has only one seller who controls supply and prices
free market economies don't like monopolies oligopoly there are a few
competitors that dominate an industry the automobile industry is a great
example of an oligopoly the United States and the European Union don't have
pure free enterprise systems they have mixed economies which means that they
combine the principles of market and command economies they have a
centralized government for things such as national security and regulations for
the common good but in business they generally display a free enterprise
system the law of supply and demand in a free
enterprise system or mixed economy the marketplace determines the price of a
product supply and demand interact to produce a price that customers are
willing to pay for the number of products that manufacturers are willing
to make in a nutshell supply and demand affects pricing in the following ways if
a product is in great demand but is in short supply the price will rise if
there is a large supply for a product and little demand for it the price will
go down prices stabilize when demand equals supply
the law of scarcity when you consider the three economic questions the
economic principle in play is the law of scarcity
that's because economic organizations wouldn't have to answer the questions if
they had unlimited resources because organizations don't have unlimited
resources they have to allocate their scarce resources between necessities and
luxuries your business certainly is an economic organization that must make
decisions about scarce resources which products or services to produce how to
produce them and for whom these will become key questions that you have to
answer before you can successfully negotiate the marketplace how do you
answer those questions you answer all three by answering this one who is your
customer your customers target or current tell you what to produce when to
produce it and how to get it to them in addition your suppliers and other
entities in your industry can help you choose the most cost-effective means to
produce the product bottom line to answer the questions pound the pavement
and talk to people in your industry the law of diminishing returns the law of
diminishing returns describes how much extra return you get on your output as
you add extra units of input suppose that you have a factory that produces
widgets as you add labor to the production process
your ability to produce more Goods increases to some point and then begins
to diminish this means that each person you add produces less than the previous
person maybe you can think of it this way the first taste of ice-cream is
always better than the last that's the law of diminishing returns
remember in business you need to figure out the point at which your most
productive that point determines when you achieve the biggest gains for your
efforts the knowledge economy the knowledge
economy is a modern concept that suggests that today much of the economic
focus is on the production and management of knowledge assets knowledge
assets are intangible assets not physical assets such as products land
and labour they come about when individuals and companies turn
information into proprietary knowledge know-how or intelligence today the
creation of value and economic performance is dependent on the
effective production exploitation and management of knowledge assets indeed
the modern business environment has experienced an explosion of knowledge
assets in organizations facilitated by modern information technology such as
computers software networks and telecommunications for example if your
company develops a new product it has created a physical asset that is subject
to basic economic principles such as scarcity and diminishing returns in the
production of that product however you often also develop a proprietary process
for producing the product a trade secret and know-how from your experience
producing the product that your competitors don't have that intangible
asset is knowledge and it gives you an advantage in the market because you and
you alone own it you can also replicate knowledge assets
without further cost to your company like software where the initial
development costs are high but replication costs approach zero
knowledge assets produce high margins and add value to the more traditional
physical assets the service economy for example relies on knowledge assets
remember although capital labor and land often are constrained remember the
concept of scarce resources the good news about knowledge assets is they
don't follow the traditional economic principle of scarce resources or
diminishing returns the economy isn't really in equilibrium
for very long it's subject to many changes in the form of business cycles
if the economy is in a period of prosperity and inflation of prices and
incomes it will eventually taper off and a contraction will take place during
which activity slows if the contraction lasts long enough the economy will slide
into a recession or collapse into a trough call to depression the slow
recovery from a trough is called expansion inflation inflation is simply
a period when prices rise sharply during times of inflation your dollar purchases
less in terms of goods and services not all prices rise but on average they do
so if you get a three percent raise and the price of the goods and services you
buy goes up seven percent for instance you won't be able to buy as much with
the same dollars two different scenarios cause inflation when there's too much
demand and too little supply prices rise this is known as demand pull inflation
it often happens when the government cuts taxes or when consumers save less
when production costs skyrocket cost push inflation occurs manufacturers
usually push the costs along to the customer in the form of higher prices of
course then workers demand higher wages so that they can pay for these higher
prices as a result unemployment typically is high during this time
because the higher costs aren't driven by demand so companies aren't hiring
recession or depression when the economy doesn't grow for a period of at least
six months it's said to be in a recession
both the 1980s and the 1990s started with recessions during a recession
people typically cut their spending a behavior that in turn causes the
recession to get worse because it slows down the economy even more a very bad
recession can turn into a depression which is when many businesses failed
prices drop and supply exceeds demand how can your business prepare for a
change in the economy here are some tips stay aware of what's going on by reading
newspapers and surfing the web the following websites are good places to
start The New York Times The Wall Street Journal Bloomberg the Department of
Commerce CNN Money watch for leading indicators for example
the leading index which consists of such things as the producer price index the
consumer confidence index and the manufacturer's order for durable goods
index declines for about nine months prior to the onset of a recession the
Consumer Price Index interest rates and unemployment typically declined for 13
months prior to the onset of a recession you'll also hear these indices referred
to regularly on national news programs so watch for them stay as liquid as
possible you want to be able to have cash on hand to expand in good times and
a cushion to help you survive the bad times
economists regularly measure the health of the economy during the year what they
find determines everything from whether the government raises interest rates to
whether you get a raise the sections that follow look at some of the more
common indicators of economic health gross domestic product the gross
domestic product also known as the GDP is the total dollar value of all goods
and services produced in the United States it's essentially a record of how
much workers produced for consumers to purchase the cost of living GDP looks at
only new goods for example new cars consumer price index the Consumer Price
Index also known as the CPI or the cost-of-living index represents the
change in price of a specific group of goods and services over time this group
of goods and services is called a Market Basket and it includes about 400 items
in such categories as food housing transportation clothing entertainment
medical care and personal care as a business owner you need to be aware of
the CPI because it affects the rent you pay on your facility or the wages you
pay your employees the CPI actually is a measure of inflation when you read that
inflation has gone up a certain percentage more often than not a change
in the price of things people typically buy has taken place
income income is a way of measuring how much money is available to be spent by
individuals and businesses national income includes such things as wages and
salaries self-employed income rental income corporate profits and interest on
savings and investments economists are most interested in disposable and
personal income personal income is all income received before taxes are paid
and disposable income is what's left over after taxes unemployment the United
States seems to take the issue of unemployment very seriously and why not
it represents the percentage of the labor force that's actively looking for
jobs if the number is low most everyone is happy but if the number is high
people start to get nervous about their own jobs from an economists point of
view the United States is at full employment when the unemployment rate is
less than six point five percent balance of trade in the current global economy
you hear a lot about things such as balance of trade because nearly every
business is affected by global conditions the difference between the
value of the United States is exports to other countries and its imports from
other countries is termed the balance of trade in an ideal situation a country
wants to bring in more money from exports than it spends on imports this
situation is considered a positive balance of trade or a trade surplus if
on the other hand a country spends more for imports than it takes in from
exports it has a negative balance of trade or a trade deficit if you have a
product that's suitable for exporting to other parts of the world the Department
of Commerce is ready and willing to help you actually far more ready and willing
than if you were wanting to import products go to the do-si website at do
see govt to find out what's available to you national debt the United States as a
whole hasn't done much better than its individual people about staying out of
debt for years the United States has been running a national debt in the
trillions of dollars which means that the government is spending much more
than its taking in the US government gets money to spend
not by earning it the way you and I do but by selling various types of bonds
perhaps you've even invested in some of these savings bonds and Treasury bonds
each time the government issues new bonds it adds to the national debt when
you purchase a bond you're actually lending the government your money and
the government agrees to pay you interest on that money over a specified
period of time so you'll get back more money than you put in
you