THE IMPORTANCE OF ECONOMIC UNDERSTANDING Management Principles Basic

THE IMPORTANCE OF ECONOMIC UNDERSTANDING Management Principles

Basic Economic Problem � � � SCARCITY People’s wants and needs are unlimited. Often – resources are limited. Example: producing a car requires a variety of resources, including glass, rubber, steel and plastic. BUT, each of those resources are in a limited supply. Unlimited wants and needs, combined with limited resources, result in scarcity.

Who makes the decisions? � All economies must answer 3 questions: 1. 2. 3. What goods and services will be produced? How will they be produced? For whom will they be produced? Economies are organized into different economic systems based on how these 3 economic questions are answered. The type of economic system determines who owns the resources.

Types of Economies � � � Controlled economy- the gov’t attempts to own and control important resources and to make the decisions about what will be produced and consumed. Free economy – (market economy) resources are owned by individuals rather than by gov’t. Mixed economy – some goods and services are provided by the gov’t and some by private enterprise.

America’s Private Enterprise Economy � � US economic system is often called a private enterprise or free enterprise system. Private enterprise – based on independent decisions by businesses and consumers with only a limited gov’t role regulating those relationships.

Characteristics of Private Enterprise � � � Resources of production are owned and controlled by individual producers Producers use the profit motive (use of resources to obtain the greatest profit) to decide what to produce. Individual consumers make decisions about what will be purchased to satisfy needs. Consumers use value (individual view of worth of a product/service) in deciding what to consume. Gov’t stays out of exchange activities between producers and consumers unless there is harm involved.

Consumers � � Def: individuals who purchase products and services to satisfy needs Often they have limited resources, or money, to satisfy their needs. Demand is a relationship between the quantity of a product consumers are willing and able to purchase and the price. EX: clothing is a basic need. Some consumers will sew their own clothes, others will buy basic and inexpensive clothes, while others will spend a large amounts of $ on expensive clothing.

Producers � � DEF: businesses that use their resources to develop products and services Their goal is to sell products and services to consumers for profit. Supply is the relationship between the quantity of a product that producers are willing and able to provide and the price. Producers gather information about the types of products/services consumers want so they can provide those that are most likely to be purchased.

Government � � Under ideal circumstances, gov’t allows consumers and producers to make decisions without any interference. However, there are times when consumers/producers are at a disadvantage/unfair treatment, or society will be harmed. In those situations, the gov’t enacts laws and regulations to help those who are treated unfairly.