FUNDAMENTALS OF BUSINESS ECONOMICS EBOOK
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Less Destructive Since traditional economy is more on the culture and belief systems of the people, it will always sustain an environment friendly surrounding that aims to give the people their needs effectively and accordingly without affecting the nature of the environment.
For example in some regions, key virgin forests, rivers, eco-systems have been kept intact because of cultural belief systems that prevent local folks from exploiting such natural resources for economic gains.
Harmony among the People A traditional economy promotes cooperation and harmonious relationships. It provides people with equal opportunities to practice working with other people harmoniously and with utmost cooperation. The economy is just not ready to counter external economic shocks and also take advantage of advances in global technology.
CIMA Fundamentals of Business Economics -Study Text
This greatly affects the supply of foods and services to the people. As this economy continues to become vulnerable, there would be a greater possibility of shortages in the supply of foods and services.
All the aspects that were just taught by some of their ancestors would be the only important things that people would be using. They will no longer adopt new aspects in the society for their own improvement. Lower Standards of Living of the People People in the traditional economy are not highly specialized in living a wealthy life.
The low standards that they practise can be seen when people get hooked on to menial occupations and jobs even when there are bigger opportunities for them to take on highly skilled and rewarding jobs.
The people see such jobs to be beyond their skill, capabilities and cultural heritage. In this system, it is the price mechanism which allocates resources to various uses.
United States of America is an example of a capitalist economy. The state owns just a little part. The decision to produce which or good or service is determined by demand. The goods or services in demand get produced whiles those not in demand are discarded. In other words, private individuals use their resources to produce goods demanded and not goods needed by society in general.
Here, the business of government is not to do business but to create a stable political and infrastructural environment for private businesses to thrive. There is free and open competition by all firms in the economy. Prices are not determined by government or any single seller or buyer but by demand and supply. Free competition promotes the production of quality goods and services for society. Resources are efficiently allocated in a perfect competition.
Demand and Supply Determine Price This is the most important feature. Price of a commodity or service is determined by the free interplay of demand and supply. The government plays the minimal role of creating a conducive environment for demand and supply forces to operate freely. It is what the consumer demands that gets produced.
We therefore say there is efficient allocation of resources in a market economy. Resources are not used to produce goods not demanded. Consumer sovereignty is the basic principle of a marketing oriented company. The desires of the consumer are incorporated into the manufacturing or designing of the product before it comes out.
There is a Wide Income Gap There is a wide income gap between the rich and the poor. The motive for production is profit and not social welfare.
When demand rises, it is the rich who are able to buy the factors of production needed to produce the good in demand. Having produced the goods, they make profits and rechannel some of them to produce goods in demand. They make more profits again and the process goes on and on.
The poor are not able to assemble resources to engage in production. The rich get richer and the poor get poorer. A social gap is created between the elitist rich and the poor or downtrodden. This is because producers supply what consumers want. Resources are not made to lie idle. There is efficient resource allocation.
In a free market system, the invisible forces of demand and supply interact to determine what to produce, how to produce, when to produce and for whom to produce. All these are achieved without any cost to government or society. Optimal Satisfaction from Income In a capitalist economy, consumers are able to distribute their income optimally to maximize their consumption.
That is, given the market price of the commodities, consumers are free to decide how much of each commodity to buy depending on their income level. They achieve this by drawing a budget which meets the satisfaction level to be derived from a combination of goods or services. A wide variety of commodities are produced in a Capitalist Economy Producers are free to enter into the production of any good which they believe consumers would patronise. With the greater variety of commodities, consumers have a wide range of choice to enhance their welfare.
The power of choice helps consumers to maximize satisfaction given their limited income. Resources are used to produce only what the consumer wants or demands and not what the society as a whole needs. Entrepreneurial Initiatives are Enhanced Private initiative and creativity are encouraged which also lead to inventions and technical innovations.
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It promotes self-confidence and enables business-minded people to channel resources into starting their own business rather than wait to be employed by government or others. The capitalist economy therefore leads to the creation of more self-engaged jobs thereby reducing significantly the problem of unemployment.
Production of Quality Goods A free market economy brings about production of quality goods because of free competition among producers. Competition leads to the development of state of the art technology in production which results in the creation of high quality goods and services all to the benefit of the consumer. The poor are unable to secure productive resources.
They thus fall out of industry and production. Having obtained profit, the rich will still go ahead to produce goods in demand.
The rich therefore get richer and the poor get poorer. There could be Price Instability In a capitalist economy, prices are determined by demand and supply. Demand is not static but changes due to changes in taste and fashion, population size, etc.
Thus prices could change every now and then leading to unpredictability and instability in prices. Private Benefits come at a Social Cost Private individuals may produce goods and services for profits but this could be at a cost to society. For example, an increase in demand for meat may lead to hunters setting fire to bushes and destroying arable farm lands.
The continuous rise in the price of gold has led to many mining firms depleting and wasting natural environments without let. The society loses! It may lead to Wastage of Resources Certain basic goods and services may not be produced because producers are profit motivated.
The production of major food crops like yam, maize, etc may fall drastically in the coming years. Resources may therefore not be optimally allocated. The profit motive may seriously harm society.
China, North Korea and Cuba are best examples of socialist economies.
Individuals own just a little part. The state determines the allocation of resources in the production of goods and services. It is what the state deems needed by society that is produced. There is a Central Planning Committee The government always appoints a central planning committee at a high cost.
This committee fixes the prices of goods and services and determines the allocation of resources. The central planning committee advises government on major economic decisions. The government strives to distribute the national cake so that everyone is catered for so that poverty is reduced to the minimum.
This is hardly achieved because the public services become inefficient and corruption creeps into the central administration system. There can be Lack of Competition There is no free competition in the system. Innovation is stifled since the government takes control of the system and individuals become onlookers.
The quality of and quantity of output can be reduced, unless the government encourages foreign direct investment. This situation saves the economy from continuous economic instability. Economic stability will attract further investment from foreign companies. Perhaps this explains why China has attracted lots of foreign investment.
Fair Distribution of Income Unlike the capitalist economic system where unfair income distribution exists, there is a fair distribution of income in the socialist economy. This is because the distribution of resources is carried out by the central planning committee and it is usually done in such a way that income is redistributed in favour of the poor. The income gap is therefore bridged. Reduction in Wastage of Resources Another advantage of the socialist economy is that wastage of resources is reduced because duplication of effort is controlled.
It makes sure that resources are used in production to meet the needs of all sections of society. Resources are not used in repeat production of highly demanded goods. They are also used for other goods and services needed by the disadvantaged in society.
High rate of Economic Growth A centrally planned economic system can be associated with a higher rate of economic growth.
CIMA BA1 Fundamentals of Business Economics
A higher growth rate usually requires political direction and heavy investment in particular sectors of the economy which are possible under central planning. The governments of social democratic states like Sweden, Norway and Switzerland pay heavily for education and research at all levels. These economies have seen consistent economic development over the years. Less Exploitation of Consumers The consumer is not exploited since commodities are offered to him at affordable prices.
This is possible because of the absence of profit motives.
The needs of the greater part of consumers, especially lower and middle income earners are served, and not just a few rich consumers who have higher demand levels. This could drain the coffers of the economy. The basic right and welfare of the consumer might be compromised. Resources are owned by the state and this can curb personal initiative, creativity and enterprise.
Political leaders and public official may rather channel resources to their areas of interest and neglect other important areas. Typically, communist states are characterized by unbalanced regional development. This is because public officials who manage the state and public institutions feel accountable to no one and amass wealth meant for the people.
At the end of the day, the ordinary masses in society rather become poorer. In reality, most countries have assumed mixed economic status since both government and individuals own productive resources in the modern economy.
The United States has now evolved to become in reality a dual economy as the state sponsors some aspects of education, transportation and distribution. We discuss these features with specific reference to Ghanaian economy. The government is not solely responsible for production and investment The government and private individuals run in tandem transport services, broadcasting services, hospitals, schools, etc.
These compete freely with government bodies and it all ends up in improved quality of goods and services for the consumer. Ownership of resources is shared by the state and the private individuals Resources in the form of land, labour, capital and entrepreneurship are in the hands of both the government and private individuals.
The government of Ghana has sole ownership of some plots of lands, forest reserves, mineral reserves, etc. Government also owns a greater part of labour, having employed them under government pay-role in the public services. Private people also employ labour at specific wage rates different from what is offered by government.
Therefore, both government and private people own factors of production. Prices of goods and services are determined by government and market forces The government determines the prices of utilities like water and electricity provided by government companies like the Electricity Company of Ghana ECG and Ghana Water Company GWC. However, in the open market, the prices of both capital and consumer goods are not fixed. They are determined by the forces of demand and supply.
If market demand exceeds market supply, the item will be scare and price shoots up. Whiles prices of government utilities remain relatively fixed, the prices of goods produced by individuals keep fluctuating depending upon the interplay between demand and supply. The decision as regards how to produce is not dictated by the state Producers choose methods which minimize cost and maximize output.
The government normally chooses to invest in both labour-intensive enterprises and highly capitalized ventures which provides essential services to the people. Typical examples include the construction of roads and harbours. Private people tend to adopt labour-intensive or capital-intensive methods based on the costs of these methods and demand patterns.
If demand for a service is high and it requires a capital-intensive method of production, the private sector may go in to produce this service. It leads to an increase in capital formation within the country.
Freedom In a mixed economy, there is both economic and occupational freedom as found in capitalist system. Every individual has a liberty to choose any occupation of his choice. Similarly, every producer can take decisions regarding production and consumption. Optimum Use of Resources Under this system, both private and public sectors work for the efficient use of resources.
Public sector works for social benefit while private sector makes the optimum use of these resources for maximization of profit.
Competition and Efficient Production Due to competition between both private and public sectors, the level of efficiency remains high. All factors of production work efficiently in the hope of profit.
Social Welfare Under this system, the main priority is given to social welfare through effective economic planning. The private sector is controlled by the government. Production and price policies of private sector are determined to achieve maximum social welfare. Economic Development Under this system, both government and private sector join their hands for the development of socio-economic infrastructures, Moreover, government enacts many legislative measures to safe guard the interests of the poor and weaker section of the society.
Hence, for any underdeveloped country, mixed economy is a right choice. The private sector does not get the full freedom it requires because of government restrictions and regulations, hence it becomes ineffective. In a true sense, both sectors are not only competitive but also complementary in nature.
Delays in Economic Decisions In a mixed economy, there are always delays in making certain decisions, especially in the case of public sector.
These delays always lead to a great hindrance in the path of the smooth functioning of the economy. More Wastage Another problem of the mixed economic system is the wastage of resources. A part of the funds allocated to different projects in public sector goes into the pocket of intermediaries. Thus, resources are likely to be misused or misappropriated. Corruption and Black Marketing There is always corruption and black marketing in this system.
Political parties and self- interested people take undue advantage of the public sector. Hence, this leads to emergence of several evils like black money, bribe, tax evasion and other illegal activities.
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All these ultimately result in red-tape within the system. How the functions of the economic system are performed depends on the type of economic system. In a capitalist system, it is the price mechanism that performs the functions. In a socialist economy, it is the government that performs the functions. The government and the private sector come together to perform the functions in a mixed economy. The functions of an economic system are grouped primary functions and secondary functions.
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Fundamentals of Microeconomics. Key Essentials of Demand and Supply Analysis
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We will then contact you with the appropriate action.A capitalist government may allocate scarce revenue towards encouraging the setting up of private businesses whilst a communist government may allocate resources towards creating more public or government enterprises. This is a book of papers which endeavour to dispel the many misleading notions in respect of money creation.
But of course, human behavior can be unpredictable or inconsistent, and based on personal, subjective values another reason why economic theories often are not well suited to empirical testing. Therefore, both government and private people own factors of production. If market demand exceeds market supply, the item will be scare and price shoots up.
In a socialist economy the function of what to produce is determined by the government. If labour is cheap and efficient, labour intensive method will be used.