CISI Introduction to Securities Investment Topic The economic

CISI – Introduction to Securities & Investment Topic – The economic environment (2. 1. 1) Economic activity cisi. org

Factors of Production There are four kinds of inputs in any economic activity. These are used to satisfy the needs of consumers: Land Labour Physical space required: § Fields for agriculture § Factory for manufacturing § Shop for retail § Office space The workforce: § Skilled workers § Unskilled workers § Mixture of skilled and unskilled workers Capital Enterprise Money invested in plant and equipment required: § Production machinery § Computer equipment The ‘know how’, knowledge or ability to use the other three factors of production. cisi. org

Managing the Factors of Production Questions/ Economy type Who controls the factors of production? Objective? Planned economy Market economy Mixed economy Open economy (Soviet Union) (USA) (UK) (Singapore) The Government Privately owned – businesses and individuals Economic activity is carried out according to a plan under government control Supply and demand allocates resources through the market (consumer goods, labour, money and capital goods ) The workforce is for the collective good of society, not for individual gain The Government and private sector Either the Government or the private sector or a combination A flourishing market economy Free Trade - an open but the government cushions relationship with outside the less able in society countries (welfare – benefits, care) Few barriers to trade The market clearing price is the Government also provides key controls or foreign exchange price consumers are willing to services e. g. defence and pay and what suppliers will education via taxation and accept for them borrowing Advantages? § National priorities taken into account § Government can make more informed decisions regarding investment and the allocation of economic resources § Provides greater choice § Increased economic § Competition drives down stability – laws protect prices consumers and financial § No taxation in a pure market help can be offered to economy businesses § Businesses innovate § Provides unprofitable § Businesses adapt and essential services e. g. NHS respond quickly § Regulates monopolies § Faster economic growth Disadvantages? § Increased chance of failure § Reduced individual § Prices rise if supply cannot choice meet demand § Increased bureaucracy § Businesses focus on profits § Less regard for individuals and the environment § Harmful products could be produced if profitable § Greater inequality § Disposable income reduced by taxation § Regulation means increased costs for businesses § Public sector organisations can mean inefficiencies § The best labour force § Specialisation § Imports provide products traditionally unavailable § Competition driving prices down and offers greater choice § Increased pollution § Exploitation of cheap labour § Competition – products are bought cheaper elsewhere § Disagreements – sanctions and protectionism (World Trade Organisation arbitrates) cisi. org

Managing the Factors of Production • Centrally controlled - rarely found today Planned economy • Associated with communist states e. g. former Soviet Union • North Korea is presently the most centrally planned economy Market economy • Supply and demand - pure market economies do not exist • Consumerism • Normally an element of government control in the real world Mixed economy • The most common form of economy • Government intervention can vary – provision of welfare, regulations and services provided deemed unprofitable to the private sector Open economy • Open trading relationships with other countries – Free Trade • No economy is ever completely open • Protectionism often occurs cisi. org