Page 36 - Introduction to Business

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10 PART 1 The Nature of Contemporary Business

Types of Economic Systems and Their Impact on Business

economic resources Land, labor, Economic resources (land, labor, capital, and technology) are scarce, and no mat-
capital, and technology that are scarce ter how much we have of them, we continue to face a shortage—the inability to
have as much as we want at a price that we are willing to pay. Countries have
adopted different approaches to allocate these scarce resources among competing
demands in order to generate economic growth. The economic system adopted by
any particular country depends basically on the following factors:
• Ownership of the factors of production (private versus government)
• Method of resource allocation
• Transparency of economic policies
• Availability of functioning institutions
These factors have a profound effect on the efficiency of resource allocation,
business development, economic evolution, and growth. The country with the
most open (ease of entry into and exit out of industry) type of economic system will
tend to have the most efficient system of resource allocation and rapid business
growth.

The Free Enterprise, or Capitalist, System

LEARNING OBJECTIVE 3
Explain the fundamental features of the free enterprise, or capitalist, system that
make it efficient and dynamic.
capitalism The economic system that is The economic system practiced in the United States is capitalism (also called the
based on private property rights, the free enterprise or free market system), which is based on private property rights, a
free market system, the pursuit of self-
interest, the freedom to choose, and the free market system, the pursuit of self-interest (profit or wealth maximization), the
ability to borrow money freedom to choose, and the ability to borrow money. Far from the popular image of
a haven for “corporate fat cats,” a capitalist economy crowns the consumer as king,
and the system provides for the public’s well-being. 4
In the free enterprise system, the key players are consumers and producers.
Consumers like you and me are in the market to buy all sorts of goods (books,
clothes, toiletries, food, etc.) and services (airline tickets, concert tickets, season
passes for ball games, etc.). Some of these goods and services that we purchase may
be imported (e.g., Heineken beer from Holland or a Singapore Airlines ticket). In the
free market system The economic free market system, consumers demand certain products or services and are will-
system in which consumers demand ing to pay a certain price for them based on their usefulness and the consumers’
certain goods and services and are
budget. The producer, on the other hand, is willing to supply the goods or services
willing to pay a price based on their
budget, and producers are willing to to the consumer at some price, which will depend on the cost of the inputs used in
supply the goods and services on the producing the goods or services and a profit margin. The United States is the largest
basis of a price that will cover their
economy in the world and essentially practices a free market system. Most Euro-
costs and provide a profit margin
pean countries, as well as other industrialized countries and regions like Japan,
South Korea, Taiwan, Singapore, Hong Kong (now a Special Administrative Region
of China), Chile, and so on, are also essentially free enterprise systems. The rela-
tionship between the economic system and business is very close, and unless you
understand how a particular economic system works, you may not be able to con-
duct business in that country successfully. This section explains the fundamentals
of the free market system, which show how private investors identify opportunities
for profits on the basis of a simple demand and supply analysis and the degree of
competition in a market.

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