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Macro Economic Environment

Macro Economic Environment - Economic Environment of...

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Economic Environment of Business
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Economic Systems Society has needs for resources Resources are scarce Thus, people have to make choices and prioritize, leading to opportunity cost Due to scarcity, three problems arise: What to use the available resources for? How best to use the resources? How to distribute the resources? The approach to this resource allocation leads to economic systems
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Centrally Planned Economic System Key decisions of production are made by the central planning authority or their agencies Under this system, the state typically: Owns and/or controls resources Establishes priorities in the use of those resources Set output targets for (usually for 5 years) businesses which are largely state-owned Direct resources to try to achieve those targets Seeks to coordinate production such that input-output demands are consistent Focus shifts from efficiency to meeting targets
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Free Market Economy The key economic agencies are private individuals and firms who interact in free markets through a system of prices to determine the allocation of resources Key features: Resources are privately owned and individuals are free to use them as they wish Firms are free to make production choices without state interference No plan for direct production and consumption Resource allocation depends upon market and price forces that are automatically coordinated The consumer dictates the pattern of supply
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Level of Analysis Microeconomic analysis: Concerned with the study of economic decision-taking by both individuals and firms Macroeconomic analysis: Concerned with the interactions in the economy as a whole
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“Flows” of Economic Activity Real flows: Flow of resources and goods and services into the economy Income flows Flow of expenditures that give rise to income for firms
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