chapter 2 (2014) mgt 153
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mgt 153TRANSCRIPT
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CHAPTER 2
INFLUENCE OFECONOMICS IN
BUSINESS
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Chapter 2
• 2.1 Introduction to economics
• 2.2 Economic systems
• 2.3 Basic market models
• 2.4 Business environments
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Economics: study of how wealth is created and distriuted ymen
!s anythin" that is of value to people
# Includes any kind of goods$ services
that are producedand sold to customers
!nythin" that a customer wants or needsInclude food$ houses$ clothin"$ lu%ury ite
INTRODUCTION TOECONOMICS
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&herefore$ in understandin" an 'economictheory( people)usiness is re*uired to
answer 3 important *uestions
1. +hat
2. ,ow
3. -or +hom
3 IMPORTANT QUESTIONS
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3 IMPORTANT QUESTIONS
1. +hat/ producers have to think what kinds of
"oods and services are to e produced.
0roducers would usually produce "oods
that are demanded y society
E": to satisfy peoples needs of food$
many usinessman operate
restaurants to sell variety of foods
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2 How/
0roducers would need to determine how much of
each type of "oods and services to produce
&here is a need to think how will these "oods and
services e produced$ which means: who will
produced them
!nswerin" asic *uestion of how much of "oods to e
produced will re*uire a usiness to determine a rou"h
estimate of the numer of people needin" them$ andmakin" sure they employ the ri"ht people to produce
the "oods
3 IMPORTANT QUESTIONS
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3. -or +hom/
+ho will "et the "oods and services
produced y usiness/
&herefore$ usinessman who aim to
make as much prot must ensure
they know the "roup of people that
will uy the "oods and services they
produce.
3 IMPORTANT QUESTIONS
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EC5657IC 898&E7
• Economic system is dened as the
mechanism y which laor and other
economic resources are rou"ht to"ether
to produce and distriute the "oods and
services to serve people need and wants.
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Can e dened as a nation system forallocatin" resources amon" its citien.
Basically$ it deals with allocatin" its limitedresources to fulll unlimited wants of
individuals. !s human needs are unlimited$ every
economic system has to deal with thescarcity of factors of production ;economicresources<
ECONOMICS!STEM
=6atural resources
=>aor=Capital resources=Entrepreneur
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1?
1. 6atural resources
2. >aor
3. Capital or capital "oods
4. Entrepreneurs
8ince all the aove factors are limited and there are limits to
what
can e produced$ who will produce them$ and what resources
will
e used$ asic choices must e made
@iAerent choices to the aove *uestions result in diAerent
types of
economic systems
FACTORS OF PRODUCTION
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1. 6atural resources
– Include all resources such as raw materials$water$ land$ minerals
2. >aor
– Consist of people who perform the work in
producin" the "oods and services3. Capital or capital "oods
– Includes all uildin"s$ machinery$ tools$ and
e*uipments used in actual production of
"oods and services
4. Entrepreneurs
– 0eople who start the usiness and make
decisions and ensure all resources are used
eAectively and the "oals of the or"aniation
are achieved
FACTORS OF PRODUCTION
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TYPES OF ECONOMIC SYSTEM1. Capitalism
• An economic system based on the private onership here a!!economic decisions are ta"en by individ#a! ho#seho!ds and $irms
ith no %overnment intervention& It a!so "non as !aisse'($aire&
• Individ#a!s have ri%ht to acc#m#!ate ea!th ) ma*imi'e their
potentia!&
• +or" hard (, %et reards&
• Individ#a!s have - basic ri%hts.
/0 To on private property
10 To on a b#siness ) "eep a!! its pro$its a$ter ta*es20 Freedom to compete in ea!th acc#m#!ation ) cons#mption o$
%oods ) services
-0 Freedom o$ choice based on the abi!ity to pay
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Characteristics o$ Capita!ism Economic System
" B#s$%ess ow%e&sh$' P&$(ate ow%e&sh$' o) '&o'e&t*
2. @e"ree of centralcontrol
elatively low with products. 0ricin"determined y competition.
3. E%tent of mana"erialdecision makin"
>imited role of "overnment privatemana"erial initiative
4. 0roducts prices andavailaility
0rices are determined y supply anddemand
. 5ccupational choice Individual free to choose Dos they like
. Incentive 0rot motive
Individuals can keep prot and use itwhenever they want
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2 So+$al$s,
!n economic system which the asic industries areowned either y the "overnment itself or y privatesector under stron" "overnment control.
overnment or the Central !uthority makes the maDoreconomic decisions re"ardin" production anddistriution of "oods and services to ensure wholesociety "ets the enets.
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Characteristics o$ Socia!ism Economic System
" B#s$%ess ow%e&sh$' P#-l$+ ow%e&sh$' o) -as$+
$%d#st&$es
2. @e"ree of centralcontrol
7aDor "oals of economic set y"overnment
3. E%tent of mana"erialdecision makin"
7ana"ers of maDor rms must followthe "overnments central plan
4. 0roducts prices andavailaility
0rices are determined y supply anddemand
. 5ccupational choice Individuals may own small usinessesand choose Dos within the state#controlled economy
. Incentive 7any non#monetary incentives
0rots from "overnment ownedindustries "o ack to "overnment
0rot from small usiness reinvested
in the usiness.
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• !n economic system which all economic resourceswould e owned collectively y the state rather thany individuals.
• 0eople receive the economic enets ased in their
needs$ they work accordin" to their ailities and wouldreceive "oods and services accordin" their needs.
• esources are fairly distriuted amon" the memersof society.
• 6ot encoura"e entrepreneurs to e creative F
capitalie their ma%imum potential.• Even work hard not e rewarded.
COMMUNISM (CENTRALLY PLANNED SYSTEM)
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Characteristics o$ Comm#nism Economic System
" B#s$%ess ow%e&sh$' P#-l$+ ow%e&sh$' o) ($&t#all* all'&od#+t$(e a+t$($t$es
2. @e"ree of centralcontrol
Central determination of allproductive activities.
3. E%tent of mana"erialdecision makin"
7ana"ers selected throu"h statepolitical party and hi"hlyureaucratied.
4. 0roducts prices andavailaility
0rices are usually hi"h. Consumershave limited choice of "oods.
. 5ccupational choice overnment owns all usiness and
Dos are prescried y state. >ittlechoice in choosin" career.
. Incentive E%cess prot "oes to "overnment.
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• Economic decisions are made partly y the "overnment Fpartly throu"h market.
• -reedom of individual choice F decisions to ma%imie theirsatisfaction.
• 7arket is allowed to operate freely as lon" as it does not fail.
• 7arkets fail$ the "overnment will intervene.
• eco"nie individual interest F freedom of competition amon"individuals F rms.
• !ddress social issues such as ine*uality of income distriutionF e%ternalities such as the cost of pollution as the economy
"oes throu"h industrialiation.• overnment stron"ly supports privatiation$ it often intervenes
in pricin" decisions$ especially those of monopolists.
MIXED ECONOMIC SYSTEM
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1G
In analyin" usiness environment$ we must
e%amine the
types of market situations that e%ist there
are 4 asic
models ) 4 diAerent de"ree of competition
1. 0ure monopoly
2. 5li"opoly3. 7onopolistic competition
4. 0ure)perfect competition
BASIC MAR.ETMODELS
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• 8ituation in which a sin"le company owns all or
nearly all of the market for a "iven type of productor service.
• &here is a arrier to market entry into the industrythat allows the sin"le company operate withoutcompetition.
• 5nly one seller or producer
• &here are many uyers
• 6o sustitute for the products
• &hey have a power to inHuence the market price.
MONOPOL!
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• !n oli"opoly is a market or industry is dominated y asmall numer of sellers.
• ! "eneral lack of competition can lead to hi"her costs forconsumers.
• Because there are few sellers$ each oli"opolist is llikely to
e aware of the actions of the others.• &he decisions of one rm inHuence the decisions of other
rms.
• &he product either homo"eneous or diAerentiate from oneanother
;e." :each rm attempts to have diAerentiation of astandardied product.
&heir "oods are very similar in nature and the rms wouldtry to distin"uish their products from those of theircompetitors<.
OLI/OPOL!
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• ! type of imperfect competition such that manyproducers sell products that are diAerentiated from oneanother ut not perfect sustitutes ;such as fromrandin"$ *uality or location<.
• &here are lar"e numer of uyer and seller.
• Easy to enter and leave the industry.
• 8eller try to diAerentiate their product from their rivaly rand names$ desi"n or advertisin".
756505>I8&IC C570E&I&I56
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• &his is market structure where there are many independentsellers$ each oAerin" its products in the same asic way.
• !ll of the products are standardied i.e. there are almostidentical and uyers are in diAerent to which one they purchase.
• Each rm has no si"nicant control over the products priceecause none of them is supplyin" more than a small fraction ofthe total output ein" demanded.
• -irms can enter or leave the industry easily.
• &here is no use of non#product competition$ as the product isstandardied.
• In pure competition$ sellers and uyers must accept the "oin"price. &he price of each product is determined y the actions ofall uyers and sellers to"ether$ throu"h the forces of supplyand demand.
COMPETITON
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COMPARISON IN MAR.ETSTRUCTURE
Cha&a+te&$st$+s
Pe&)e+tCo,'et$t$o%
P#&eMo%o'ol*
Mo%o'ol$st$++o,'et$t$o%
Ol$go'ol*
6umer of7arket
7any 5ne7any$ ut fewer
than perfectcompetition
-ew
!ility to Control0rice 6one ,i"h 8ome 8ome
Barriers &o Entry 6one8uDect to
"ovt.re"ulation
-ew 7any
0roduct@iAerentiation
ery little
6o product
thatcompetedirectly
Emphasis on
showin"perceiveddiAerences in
product
8omediAerences
E%amples
-arm products
such as wheatand corn
Jtilities suchas "as$water$
etail specialtyclothin"
8teel$automoiles$
airlines$aircraft
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Business: must aware of chan"es and e responsive to many e%($&o%,e%tal
)a+to&s chan"e and adapt to the chan"es
1. ,istorical2. 6atural#physical
3. 0olitical and le"al
4. 8ocial and cultural
. Economic. International
. &echnolo"ical
BUSINESSEN1IRONMENT
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ISTORICAL
Consists of records of events and activities that
have taken place daily # provides ack"round for
all the other environments
Business need to look at historical records of
various companies performance # useful "uide to
run usiness eAectively F eKciently
By e%aminin" its historical past$ a usiness is
etter ale to anticipate new developments and
plan for them
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NATURAL P YSICAL ENVIRONMENT
Consists of all natural resources ;water$ oil$ "as$ iron<
and many other raw materials
Business is restricted y its natural environment
whenever it relies on the availaility of natural
resources to produce "oods resources ecome
reduced as we produce more and more "oods F
sometimes not replaceale
0rolems of pollution would arise and have a very
serious usiness impact on the e+olog* is the
study of relationship etween people and
environment
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5ther depressin" situations related to pollution of
the water$ noise and waste cost of cleanin" up the
environment has to e orne y usiness
or"aniations and societies
&herefore$ usiness needs to e innovative and
proactive in its eAort to develop its usiness
production of "oods and services usin" natural#
physical resources may have to e reduced with
sustitutes to e invented
Cont…NATURAL P YSICAL ENVIRONMENT
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2G
POLITICAL & LEGAL
Consists of law$ re"ulations$ and activities of
the "overnment and its a"encies which
restrict usiness activities and protect the
customers
overnment intervention into usiness
aAairs have een increasin" ecause need
to protect customers ri"ht from unfair
usiness practices$ preservation of theenvironment and to reduce discrimination in
the work place
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oles of "overnment in usiness areas are:
1. Government as a business regulator and promoter
By implementin" favorale ud"et policies$ "overnment
promotes usiness activities that stimulate economies By encoura"in" certain usiness activities$ "overnment can
tar"et the standard livin" of nations
overnment will also hand out certain "uidelines concernin"
price %in"$ advertisin"$ minimum wa"e and workin"
conditions which the usiness must follow
>e"islation directed towards improvin" and maintainin" the
nations physically *uality has een set up to re"ulate
usiness interaction with the environment
Cont….POLITICAL & LEGAL
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31
oles of "overnment in usiness areas are:
2. Government as a customer
overnment uys "oods and services$ ran"in" from oKce
machines$ computers to war materials for defense purpose from
private rms overnment acts as owner and competitor y providin" "oods and
services in the market place. &hey also act as suppliers as they own
a "reat deal of the nations natural resources. E": land which is
occasionally sells to a usiness
Current 78C proDect launched in early 1GG will open up new
opportunities for many companies such as &E>EM57$ ,8BC$ 8!0J!
in providin" related services$ and providin" other infrastructures
Cont…..POLITICAL & LEGAL
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SOCIAL & CULTURAL
• Includes de,og&a'h$+s and consumer preferences representsocial tendencies to which usiness is e%posed.
Characteristics of the human population or specic se"ments of the
population$ e": increase in the elderly population has led to an
increased demand for many prescription dru"s.
• chan"es in consumers demand may also aAect the demand for
products produced$ e": technolo"y advances: 8E! to
0>!98&!&I56$ N#B5N$ I@E5 to C@$ @@$ @ownload 7usic 5nline.
8ocietys values and customs have ecome "uidelines to many
or"aniations methods of operation.• 8ocial and cultural environment are made of eliefs$ attitudes$
customs and norms of every "roup in society.
• E": drive#thru of 7c@onald F M-C due to our usy lifestyle.
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ECONOMIC
,ave a stron" impact on the performance of each usiness
+hen company is st&o%g$ employment is h$gh and compensation
paid to employees is also h$gh
8ince people have "ood income under this conditions$ they
purchase lar"e amount of products
-irms that produce the products enet from the lar"edemand
+ill hire many employees to ensure that they can
produce a suKcient amount of products to satisfy the
demand
Can also aAord to pay wa"es to employees
E%pand their operations results in increased demand
for supplies$ materials$ construction services
In the end$ many workin" opportunity can e created
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Economy is wea rms tend to la* o4 some of their
employees
Cannot aAord to pay hi"h wa"es people will
receive low income 0eople will purchase small amount of product
aAect the producer
0roducer will facin" losses retrenched many
employees
Employees lose their Dos
Cont…..ECONOMIC
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INTERNATIONAL
International &rade transactions made
etween countries.
Include e%chan"e of "oods and services and
nancial Hows. It ecome possile due to diplomatic ties
estalished amon" the "overnments.
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INTERNATIONAL
7ay aAect usiness directly or indirectly
1. !ttract forei"n demand
some companies unale to increase
their market share in J8 ecause of
intense competition within their
industry # try to nd forei"n marketwhere potential demand may e%ist
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2. Capitalie in technolo"y many J8 companiesestalished new usinesses in the so#called
developin" countries which have relatively low levels
of technolo"y ;>atin !merica<
3. Jse ine%pensive resources
>aor and land costs can vary si"nicantly amon"
countries rms often attempt to set up
production at a location where land and laor are
ine%pensive
Cost of laor is much hi"her in developed
countries ;J8$ JM< than other countries ;7e%ico$India<
&herefore$ numerous J8 company has estalished
susidiaries in those low cost laor countries
Cont.. INTERNATIONAL
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4. Jse ine%pensive resources
>aor and land costs can vary si"nicantly amon"
countries rms often attempt to set up
production at a location where land and laor are
ine%pensive
Cost of laor is much hi"her in developed
countries ;J8$ JM< than other countries ;7e%ico$
India<
&herefore$ numerous J8 company has estalished
susidiaries in those low cost laor countries
Cont….INTERNATIONAL
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3G
8ome rms rely on forei"n countries for raw materialssupply or sell their products in various countries
rms estalish susidiaries in forei"n countries where
they can produce and sell the products
Even if rm is not plannin" to sell its products in forei"n
countries$ it must e aware of the "loal environmentecause it may face forei"n competition when it sells its
products locally
-urthermore$ "loal economic conditions can aAect local
economic conditions if economic weaken in forei"n
countries$ the forei"n demand and sales for 7alaysianproducts will decrease
eneral income level for aAected rm will
decline F consumer will have less money to
spent
Co%t5INTERNATIONAL
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4?
TEC NOLOGY
Includes scientic and technolo"ical reakthrou"h
and advancement in industries as well as society
6owadays$ many or"aniations used hi"h level of
technolo"y to assist them in the process of
producin" "oods Companies are competin" with one another to
produce *uality products more eKcient and
eAective with the help of technolo"y
E": telecommunication industry$ constructionindustry
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HOW TO CONDUCT
INTERNATIONAL BUSINESS
1. Importin"
2. E%portin"
3. -@I ;forei"n directinvestment<
4. >icensin"
. 8trate"ic alliances
. -ranchisin"
. Ooint venture
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" I,'o&t$%g
– Buyin" of products or services fromanother country throu"h a supplier.
– E": 7alaysia consumers purchase
automoile$ clothin"$ cameras and other
products from J8.
– 7any rms import materials that are used
to produce products.
– Even if these rms sell the products locally$
they can enet from importin" materials.
– &hey import forei"n materials that are lesse%pensive or of a hi"her *uality than
alternative local supplies
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2 E6'o&t$%g
– 8ellin" of local products to another
country directly or throu"h third
parties such as tradin" companies.
– !dvanta"e in reducin" risks since it
allows the usiness to penetrate the
"loal market on a "radual asis ased
on the demand from the forei"n
customers.
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3 FDI 7Fo&e$g% D$&e+t I%(est,e%t8
– -orei"n#owned corporations that set up
their physical ase in a forei"n countrythrou"h direct investment.
– E": -ord 7otors$ ,onda$ has facilities in
various countries that produce automoiles
and sell them in those locations
– Oustication:
• To a(o$d t&ade -a&&$e&s9 rm that has
een e%portin" products is informed that
the forei"n "overnment will impose trade
arriers therefore$ rm estalishes asusidiary that can manufacture and sell
products in that country
• To &ed#+e la-o& +osts
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: L$+e%s$%g
– !n a"reement to produce F market
another companys product in
e%chan"e for a royalty or fee. – >icensin" allows a rm ;licensor< to
appoint a forei"n company as the
licensee to produce it prodcts.
– &he licensee pays royalty or fee to
licensor.
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; St&ateg$+ All$a%+es
– ! lon"#term partnership etween two or
more usiness entities estalished to help
each other to uild competitive market
advanta"es.
– &o reach their individual ut
complementary "oals$ these outts
normally share ideas$ e%pertise$ resources$
technolo"ies$ investment tools$ risk$
mana"ement as well as prots.
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< F&a%+h$s$%g – ! system where companies
;franchisee< are "ranted the ri"ht
to operate a usiness accordin"
to a special contract with parent
or"aniation. ;franchiser<.
– E": 7c@$ 0ia ,ut$ 8ecret
ecipe.
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4L
= >o$%t (e%t#&e
– !n a"reement etween two or
more parties to invent in a sin"le
usiness or property.
– In a Doint venture oth partieswould a"ree to create a new entity
y contriutin" in terms of e*uity$
revenues$ e%penses and control of
enterprise would e shared.