UNDERSTANDING ECONOMICS AND

HOW IT AFFECTS BUSINESS

Introduction to Business
Lecture 2
President University
 CONTENTS
How Economic Conditions Understanding
Affect Businesses Communism

Understanding Indonesian
System

Understanding Free- The Trend Toward Mixed

market Capitalism Economies
Understanding Socialism
How Economic Conditions Affect
Businesses
01
How Economic Conditions Affect Businesses
Which one is the wealthier country?

U.S.A vs. Mexico North Korea vs. South Korea

Economics

Global Politics Economic Systems

Global Economics Political System

Social Climate Economic Climate

 How Economic Conditions
Affect Businesses
What is Economic?
Major branches:

Economics → Macroeconomics → Microeconomic →

the study how society chooses to looks at the operation of a nation’s looks at the behavior of people and
employ resources to produce goods economy as a whole (the whole country) organizations in markets for particular
and services and distribute them for (e.g. GDP, unemployment, national debt) products or services
consumption among various (e.g. customer behavior)
competing groups and individuals.
How Economic Conditions
Affect Businesses
How Businesses Benefit the Community
The Secret to Creating a Wealthy Economy
Macroeconomy issue: The effects of population
growth on the economy
Educated population → valuable resources

Invisible hand (by Adam Smith) →

the process that turns self-directed gain into
social and economic benefits for all.
Adam Smith and the Creation of Wealth
Freedom is vital to the survival of any economy
(e.g. to own, to keep the profits, to run business)
UNDERSTANDING FREE-MARKET
CAPITALISM
02
 Understanding Free-market Capitalism
No country is purely State capitalism →
capitalist a combination of freer
(i.e. determining minimum markets and some
wages, setting farm prices, government control (e.g.
and lending money to some China, freer market but with
failing businesses) govt. control)

Capitalism →
An economic system in which Disadvantage →
all or most of the factors of income inequality
production and distribution
are privately owned and
operated for profit.
 Understanding Free-market Capitalism
The Foundations of Capitalism
Basic Right:

The right to own private

property (buy, sell, and use land, The right to freedom
buildings, machinery, inventions, of competition
and other forms of property)

The right to freedom of choice

The right to own a business and
(e.g. where they want to work and
keep all that business’s profits
what career they want to follow)
 Understanding Free-market Capitalism
How Free Markets Work How Prices Are Determined

A free market →
one in which decisions about what
and how much to produce are
made by the market—by buyers
and sellers negotiating prices for
goods and services. Prices are determined by buyers
and sellers negotiating in the
marketplace
The price tells producers how much
to produce.
 Understanding Free-market Capitalism

The Economic Concept The Economic Concept The Equilibrium Point,

of Supply of Demand or Market Price
Equilibrium point or
Supply → Demand →
equilibrium price →
the quantities of products the quantity of That crossing point of the
manufacturers or owners products that people quantity of goods/services
are willing to sell at are willing to buy at demanded and the quantity
different prices at a
specific time
different prices at a supplied are equal
specific time. Market price →
The price determined by
supply and demand.
 Understanding Free-market Capitalism
Competition within Free Markets
Four different degrees of competition:
Perfect competition →
when there are many sellers in a Monopoly →
market and none is large enough one seller controls the total supply
to dictate the price of a product of a product or service, and sets
Sellers’ products appear to be the price (e.g. electric power)
identical
(e.g. agricultural products)
There are no true examples of
perfect competition.

Oligopoly →
just a few sellers dominate a
Monopolistic competition → market (e.g. tobacco, gasoline,
a large number of sellers produce automobiles)
very similar products that buyers Reason →
nevertheless perceive as different the initial investment required to enter
(e.g. sodas, personal computers) the business often is tremendous
Product differentiation →
the attempt to make buyers think similar
products are different in some way
 Understanding Free-market Capitalism
Benefits and Limitations of Free Markets
Benefits: Limitations:
It allows open competition among companies. It has brought inequality

It provides opportunities for poor people to work Some people let greed dictate how they act.
their way out of poverty.

It encourages businesses to be more efficient so they

can successfully compete on price and quality

To overcome some of capitalism’s limitations, some countries have

adopted an economic system called
socialism
UNDERSTANDING SOCIALISM
03
 Understanding Socialism
Socialism

an economic system based on

the premise that some, if not Tax comparison:
most, basic businesses • Indonesia: 5 – 30%
(e.g., steel mills, coal mines, • US: 39.6%
and utilities) should be owned • Socialist countries: 75%
by the government so that (e.g. Sweden, Norway,
profits can be more evenly Finland, etc.)
distributed among the people.
 Understanding Socialism
The Benefits of Socialism The Negative Consequences of Socialism

Social equality It takes away some of business people’s

incentives (i.e. tax rates reached 83%)
Free education through college
Brain drain → loss of the best and brightest
Free health care people to other countries

Free child care Fewer inventions and less innovation

Longer vacations for workers

Work fewer hours per week

have more employee benefits

(e.g., generous sick leave)
UNDERSTANDING COMMUNISM
04
 Understanding Communism

Communism →
an economic and political system in which
the government makes almost all economic
decisions and owns almost all the major
factors of production.
Problems
The government has no way of knowing what
to produce, because prices don’t reflect supply
and demand as they do in free markets.
Shortages of many items
It doesn’t inspire businesspeople to work hard
because the incentives are not there

Example:
Five communist:
North Korea (starvation), Cuba (lack of goods and
services) Karl Marx, Friedrich Engels, Vladimir Lenin, Josef Stalin, Mao Zedong
THE TREND TOWARD MIXED
ECONOMIES
05
 The Trend Toward Mixed Economies
Trends

capitalist countries to move the long-term global trend is

toward socialism
(e.g., more government
02 toward a blend of capitalism
and socialism.
04
involvement in health care)

Mixed economies
socialist countries to move
exist where some
01 toward capitalism
(e.g. more private
businesses, lower taxes)
03 allocation of
resources is made by
the market and some
by the government.
 Exercise
• This exercise will help you understand
socialism from different perspectives.
• Form nine groups. Each group should adopt a
different role in a capitalist, socialist, and
communist economy
• On each economy system, form 3 groups:
one group will be the business owners,
another group will be workers, and another
will be government leaders.
• Within your group discuss and list the
advantages and disadvantages to you of
lowering taxes on businesses.
• Then have each group choose a
representative to go to the front of the class
and debate the tax issue with the
representatives from the other groups.
UNDERSTANDING INDONESIAN
SYSTEM
06
 Understanding Indonesian System
Key Economic Indicators

The Unemployment Rate Inflation and Price Indexes

Gross Domestic Product

 Understanding Indonesian System
Gross Domestic Product

The total value of final goods and services produced in a

country in a given year (both domestic and foreign-owned
companies)

If growth in GDP slows or declines, businesses may feel many

negative effects
Understanding Indonesian System
The Unemployment Rate

the percentage of civilians at least 15 years

old who are unemployed and tried to find a
job or still preparing a business
Understanding Indonesian System
The Unemployment Rate
the four types of unemployment:
frictional, structural, cyclical, and seasonal.
 Understanding Indonesian System
Inflation and Price Indexes

Inflation →
a general rise in the prices of goods and services over time (too many Rupiahs chasing
too few goods)

Deflation →
prices are declining (when countries produce so many goods that people cannot afford
to buy them all → too few dollars are chasing too many goods)

Disinflation →
occurs when price increases are slowing (the inflation rate is declining).

deflation would be an inflation rate of -1%, while disinflation would be a

change in the inflation rate from 3% one year to 2% in the next.

Stagflation →
occurs when the economy is slowing but prices are going up anyhow (a time of
stagnation - accompanied by a rise in prices, or inflation)

The consumer price index (CPI) consists of monthly statistics that measure
the pace of inflation or deflation.
 Understanding Indonesian System
The Business Cycle
The four phases of long-term business cycles
the periodic rises and falls that occur in economies over time.
(Joseph Schumpeter):

An economic boom→
business is booming
(Indonesia → mid 1970s)
Recession →
two or more consecutive quarters of decline in the GDP
(effect → high unemployment, increased business failures,
and an overall drop in living standards) (Indonesia → 1965)

A depression →
a severe recession,
usually accompanied by
deflation. (Indonesia →
A recovery → 1997)
the economy stabilizes and starts to grow.
 Understanding Indonesian System
Stabilizing the Economy through Fiscal Policy

Taxation →
Fiscal policy → high tax rates tend to slow the
the government’s efforts to keep the economy because they draw
money away from the private
economy stable by increasing or
sector and put it into the
decreasing taxes or government government.
spending.

Government spending →
highways, social programs,
education, infrastructure (e.g.,
roads and utilities), defense, and so
on.