This is a solution of Unit 1 Business Environment Lecture Note Six in which we discuss Developing business

Unit 1 Business Environment Lecture Note Six

Lesson Aim: AC 2.1b: Economic systems
Links to other units:With all other management units within the HND specification
Learning objectives:Detail of objectives:Assessment Strategies (tick as applicable)
All willExplain how economic systems attempt to allocate resources effectively(concluding part)Question & Answer —quizü
Revision Exercise
All willIndividual Learning Review.ü
All willGroup/ Individual Presentationü
Assignment / homeworkü
Tests / exercises
Teaching and Learning Techniques Planned (tick as applicable)
Whole class teachingüPractical demonstration
Pair / group worküUsing video / TV
Individual project workRadio / audio tapes
Role-play exercisesData projectorü
Case studyWhiteboardü
PresentationComputer / ITü
Practical exerciseüFlip chartü
Other generic issues to be addressed – None
Health & Safety Risk Assessment:None, but the basics were explained.
Inclusion / differentiation / Diversity
Needs:Differentiated learning activity: Separate worksheet for dyslexic learner









Teaching Methods


Student Activity

Method of              Assessment 



Key Skills





To create an active environment 

Whole class


Case study


Q & A


White board

Problem solving




To ensure understanding of last lesson 


white board

Question for Tutor from last lesson 



White board






Discussion on-

Understanding of how to access information and knowledge needs

AC 2.1bExplain how economic systems attempt to allocate resources effectivelyLecture notes on the white board


-PowerPoint presentation





Question for Tutor from this lecture




Q & A










11:30-12noon Break Break Break Break Break Break Break
12noon-12:35pmGroup activities/Group discussionsHow information can be gatheredPowerPoint presentationQuestions from learners 

Group work


PPT slides



12:35-13:25Lecture/Discussions on LO 2Group ActivityGroup workGroup feedbackFlip chartTeam work
13:25-13:40 Short Quiz
13:40-13:45Open sessionFor questionsOn the two

AC 2.1

13:45-14:00 [Summary and Guided learning/reading for next lesson]

End of Session



Homework: To do some basic reading on AC 2.1Tutors session evaluation

AC 2.1b: Explain how economic systems attempt to allocate resources effectively

The concluding part of AC 2.1

Resources: Inputs and Outputs

Economics is the study of the production, distribution, and consumption of goods and services. Resources are the inputs used to produce outputs. Resources may include any or all of the following:

  • Land and other natural resources
  • Labour (physical and mental)
  • Capital, including buildings and equipment
  • Entrepreneurship

Resources are combined to produce goods and services. Land and natural resources provide the needed raw materials. Labor transforms raw materials into goods and services. Capital (equipment, buildings, vehicles, cash, and so forth) are needed for the production process. Entrepreneurship provides the skill and creativity needed to bring the other resources together to produce a good or service to be sold to the marketplace.

Because a business activities uses resources to produce things, we also call these resources factors of production. The factors of production used to produce a shirt would include the following:

  • The land that the shirt factory sits on, the electricity used to run the plant, and the raw cotton from which the shirts are made
  • The laborers who make the shirts
  • The factory and equipment used in the manufacturing process, as well as the money needed to operate the factory
  • The entrepreneurship skill used to coordinate the other resources to initiate the production process and the distribution of the goods or services to the marketplace

Input and Output Markets

Many of the factors of production (or resources) are provided to businesses by households. For example, households provide businesses with labor (as workers), land and buildings (as landlords), and capital (as investors). In turn, businesses pay households for these resources by providing them with income, such as wages, rent, and interest. The resources obtained from households are then used by businesses to produce goods and services, which are sold to the same households that provide businesses with revenue. The revenue obtained by businesses is then used to buy additional resources, and the cycle continues. “The Circular Flow of Inputs and Outputs”, which illustrates the dual roles of households and businesses:

  • Households not only provide factors of production (or resources) but also consume goods and services.
  • Businesses not only buy resources but also produce and sell both goods and services.

The Circular Flow of Inputs and Outputs

This is what happens to your income

The Questions Economists Ask

Economists study the interactions between households and businesses and look at the ways in which the factors of production are combined to produce the goods and services that people need. Basically, economists try to answer three sets of questions:

  1. What goods and services should be produced to meet consumers’ needs?In what quantity? When should they be produced?
  2. How should goods and services be produced?Who should produce them, and what resources, including technology, should be combined to produce them?
  3. Who should receive the goods and services produced?How should they be allocated among consumers?

Economic Systems

The answers to these questions depend on a country’s economic business system—the means by which a society (households, businesses, and government) makes decisions about allocating resources to produce products and about distributing those products. The degree to which individuals and business owners, as opposed to the government, enjoy freedom in making these decisions varies according to the type of economic system. Generally speaking, economic systems can be divided into two systems: planned systems and free market systems.

Planned Systems

In a planned system, the government exerts control over the allocation and distribution of all or some goods and services. The system with the highest level of government control is communism. In theory, a communist economy is one in which the government owns all or most enterprises. Central planning by the government dictates which goods or services are produced, how they are produced, and who will receive them. In practice, pure communism is practically nonexistent today, and only a few countries (notably North Korea and Cuba) operate under rigid, centrally planned economic systems.

Under socialism, industries that provide essential services, such as utilities, banking, and health care, may be government owned. Other businesses are owned privately. Central planning allocates the goods and services produced by government-run industries and try to ensure that the resulting wealth is distributed equally. In contrast, privately owned companies are operated for the purpose of making a profit for their owners. In general, workers in socialist economies work fewer hours, have longer vacations, and receive more health care, education, and child-care benefits than do workers in capitalist economies. To offset the high cost of public services, taxes are generally steep. Examples of socialist countries include Sweden and France. See more about : HNCB 038 Hydraulic Principles And Applications

The Reality of Economic Systems suggests the spectrum of economic systems. Market capitalist economies lie toward the left end of this spectrum; command socialist economies appear toward the right. Mixed economies lie in between. The market capitalist end of the spectrum includes countries such as the United States, the United Kingdom,and Chile. Hong Kong, though now part of China, has a long history as a market capitalist economy and is generally regarded as operating at the market capitalist end of the spectrum. Countries at the command socialist end of the spectrum include North Korea and Cuba.

Economic Systems

Some European economies, such as France, Germany, and Sweden, have a sufficiently high degree of regulation that we consider them as operating more toward the center of the spectrum.

Russia and China, which long operated at the command socialist end of the spectrum, can now be considered mixed economies. Most economies in Latin America once operated toward the right end of the spectrum. While their governments did not exercise the extensive ownership of capital and natural resources that are one characteristic of command socialist systems, their governments did impose extensive regulations. Many of these nations are in the process of carrying out economic reforms that will move them further in the direction of market capitalism.

The global shift toward market capitalist economic systems that occurred in the 1980s and 1990s was in large part the result of three important features of such economies.

First,the emphasis on individual ownership and decision-making power has generally yielded greater individual freedom than has been available under command socialist or some more heavily regulated mixed economic systems that lie toward the command socialist end of the spectrum. People seeking political, religious, and economic freedom have thus gravitated toward market capitalism.

Second,market economies are more likely than other systems to allocate resources on the basis of comparative advantage. They thus tend to generate higher levels of production and income than do other economic systems. Third, market capitalist-type systems appear to be the most conducive to entrepreneurial activity.

Market capitalist economies rely on economic freedom. Indeed, one way we can assess the degree to which a country can be considered market capitalist is by the degree of economic freedom it permits. Several organizations have attempted to compare economic freedom in various countries.

David Baron, “Facing-Off in Public,” Stanford Business, 2006, 2012).

Government in a Market Economy

The production possibilities model provides a menu of choices among alternative combinations of goods and services. Given those choices, which combinations will be produced?

In a market economy, this question is answered in large part through the interaction of individual buyers and sellers. As we have already seen, government plays a role as well. It may seek to encourage greater consumption of some goods and discourage consumption of others. In the United States, for example, taxes imposed on cigarettes discourage smoking, while special treatment of property taxes and mortgage interest in the federal income tax encourages home ownership. Government may try to stop the production and consumption of some goods altogether, as many governments do with drugs such as heroin and cocaine.

Government may supplement the private consumption of some goods by producing more of them itself, as many U.S. cities do with golf courses and tennis courts. In other cases, there may be no private market for a good or service at all. In the choice between security and defense versus all other goods and services, government agencies are virtually the sole providers of security and national defense.

Look more closely into the economic systems

Free market system

The economic system in which most businesses are owned and operated by individuals is the free market system, also known as capitalism. In a free market, competition dictates how goods and services will be allocated. Business is conducted with only limited government involvement. The economies of the United Kingdom, United States and other countries, such as Japan, are based on capitalism.

How Economic Systems Compare

In comparing economic systems, it’s helpful to think of a continuum with communism at oneend and pure capitalism at the other. “The Spectrum of Economic Systems”; as you move from left to right, the amount of government control over business diminishes. So, too, does the level of social services, such as health care, child-care services, social security, and unemployment benefits. Visit Now : Business Strategy Assignment Help-2

The Spectrum of Economic Systems

Mixed Market Economy

Though it’s possible to have a pure communist system, or a pure capitalist (free market) system, in reality many economic systems are mixed. A mixed market economy relies on both markets and the government to allocate resources. We’ve already seen that this is what happens in socialist economies in which the government controls selected major industries, such as transportation and health care, while allowing individual ownership of other industries.

Even previously communist economies, such as those of Eastern Europe and China, are becoming more mixed as they adopt capitalistic characteristics and convert businesses previously owned by the government to private ownership through a process called privatization.

The free market system was espoused by Adam Smith in his book The Wealth of Nations, published in 1776. According to Smith, competition alone would ensure that consumers received the best products at the best prices. In the kind of competition he assumed, a seller who tries to charge more for his product than other sellers won’t be able to find any buyers. A job-seeker who asks more than the going wage won’t be hired. Because the “invisible hand” of competition will make the market work effectively, there won’t be a need to regulate prices or wages.

Adam Smith, an influential economist of the 1700s, is responsible for at least some of the answers to these questions. He inspired much of our country’s current economic policies when he wrote the book The Wealth of Nations in 1776.

Adam Smith used the metaphor of the invisible hand to refer to the guidance and benefit society receives when individuals act in their own self-interest when trying to make money. According to Smith, when consumers are left to freely choose what they want to buy, and businesses are left to freely decide what they want to sell, the self-interest of both will lead to decisions that result in good prices and the right products in the economy and marketplace. As a result, Smith argued that no government intervention is needed. We simply have the invisible hand of economic self-interest to guide us. Let’s explore the theory more to help it all make sense.

Example of the Invisible Hand Theory

For example, if Business B charges less than other stores for a gallon of milk, the customer will then buy milk from Business B. As a competing business owner, you will have to then lower your price of milk or offer something better than Business B if you want to keep making money and selling products. Your own self-interest in staying in business will make you work to come up with better prices, services or products.

Adam Smith argued that an economy works best when the government leaves people alone to buy and sell freely among them. If businesses are allowed to pick their products, and price and trade them as they wish, self-interested owners who are trying to maximize profit will compete with each other, leading to lower prices and better product offerings.

Term used by Adam Smith to describe the natural force that guides free market capitalism through competition for scarce resources. According to Adam Smith, in a free market each participant will try to maximize self-interest, and the interaction of market participants, leading to exchange of goods and services, enables each participant to be better off than when simply producing for himself/herself. He further said that in a free market, no regulation of any type would be needed to ensure that the mutually beneficial exchange of goods and services took place, since this “invisible hand” would guide market participants to trade in the most mutually beneficial manner.

Almost immediately, however, a tension developed among free market theorists between the principle of laissez-faire—leaving things alone—and government intervention.

Adam Smith’s invisible hand theory set the foundation for laissez-fair economic philosophy, which argues that government intervention in the marketplace is unnecessary. Instead, changes in demand for resources automatically result in price adjustments without the need for regulation.

Bonded Rationality

Economists typically assume rationality of decision makers, which means that people can do the following:

  • evaluate the opportunities that they face
  • choose among those opportunities in a way that serves their own best interests

Is this a good assumption?Are people really as rational as economists like to think they are? We would like to know if people’s preferences do satisfy the assumptions that we have made and if people behave in a consistent way. If we could hook someone up to a machine and measure his or her preferences, then we could evaluate our assumptions directly.

Despite advances in neuro biology, our scientific understanding has not reached that point. We see what people do, not the preferences that lie behind these choices. Therefore, one way to evaluate the economic approach is to look at the choices people make and see if they are consistent with our assumptions.

For example:Imagine you have an individual’s data on download and chocolate bar consumption over many months. Also, suppose you know the prices of downloads and chocolate bars each month and the individual’s monthly income. This would give you enough information to construct the individual’s budget sets each month and look for behavior that is inconsistent with our assumptions.

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