Page 68 - Introduction to Business

42 PART 1 The Nature of Contemporary Business

system, the government plans the production of goods goods. Finally, there is technology, which makes the pro-
and services on the basis of national goals and an elabo- duction process more efficient through the introduction
rate analysis of sources and uses of resources available of better and cheaper ways of getting things done.
to the economy. The government’s objectives are to uti-
lize as many domestic resources as possible, employ LEARNING OBJECTIVE 7
whoever is willing to work in order to solve unemploy- Discuss how business performance is measured in a
ment and poverty, and minimize income inequality capitalist system versus a socialist system and how
among workers by diminishing wage differentials. In so the objectives of for-profit businesses differ from the
doing it provides little choice to workers about where to objectives of state-owned enterprises and of not-
work and what type of work they can undertake. The for-profit organizations.
command economic system is based on the elimination In the free market system, businesses exist to meet spe-
of wasteful conspicuous consumption. The government cific consumer needs and to maximize profits. In addi-
decides how much of the goods and services that are tion, firms try to maximize shareholder wealth (divi-
produced consumers can purchase and at what prices. dends plus increase in stock prices) over time. Many
While the command economic system seeks to mini- socialist managers believe in a broader corporate
mize the exploitation of workers, it does so at great objective than just maximizing shareholder wealth.
expense to efficiency and consumer choice. These business leaders would like to maximize stake-
A mixed economic system is one that exhibits ele- holder wealth, which encompasses the welfare of all a
ments of both the capitalist and the planned (or com- business’s constituents: customers, management,
mand) systems. Not all services (e.g., defense and social employees, suppliers, and society.
welfare) will be provided in a purely capitalist system; In several developing countries, governments con-
in the mixed economic system the government plays a sider state enterprises a source of employment genera-
crucial role in providing these services while at the tion. A related objective of these governments is to
same time procuring goods (fighter aircraft, naval fleets, minimize income inequalities. In state enterprises,
ammunition, etc.) from private companies. The trend most employees are paid about the same.
these days in mixed economies is to gradually move The primary objective of not-for-profit organizations
away from state enterprises to private businesses. This is to serve society. They provide goods and services that
is being achieved through the sale of state enterprises would otherwise not be made available and without
to private entrepreneurs—a process called privatiza- which society as a whole would be worse off.
tion. In 1989, after years of state control of all produc-
tive assets, the Soviet Union broke up. This started LEARNING OBJECTIVE 8
market-oriented reforms in Russia and the former
communist economies of Central and Eastern Europe Explain the important role consumers play in deter-
mining corporate performance and show how busi-
and Central Asia. The move from central planning to nesses try to identify consumer needs.
market-oriented, open trade economies is called eco-
nomic transition and is aimed at ending the inefficien- Firms are in the business of providing goods and serv-
cies of central planning. ices to customers for profit. Without customers, busi-
nesses will cease to exist. Businesses constantly try to
LEARNING OBJECTIVE 6 identify consumer needs in order to develop products
Explain how the factors of production impact the and services that can be sold profitably. Given the cru-
supply of goods and services in an economy. cial role consumers play in an economy, businesses are
eager to know how positive consumers feel about
Every output of goods and services requires two or more themselves and their environment. Businesses also
inputs. Economists define inputs as factors of produc- spend significant amounts of money to research and
tion that are used by firms in their production processes. analyze consumer cultural diversity, demographics, and
Traditionally, the factors of production have been psychographics to identify the needs of specific con-
divided into four major categories. First there is land sumer groups and to study the minds of consumers to
and the natural resources beneath it. The quality of the influence their perception of those needs.
land and the resources beneath it determine how pro-
ductive it can be. Second is labor, which consists of
human time spent in productive activities. Entrepre- LEARNING OBJECTIVE 9
neurs play an important role in business creation and Discuss why and how national output is measured
development. Third is capital, which comes in two major and consider the rationale for using output based on
forms: money that is utilized to set up a business and purchasing power parity (PPP) when comparing
countries.
pay for its operation (paying salaries and buying raw
materials), and durable goods like machinery that are An important factor that impacts business perform-
produced by the economy in order to make yet other ance is income level, which when measured on a

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