Economic System

Economic System
A means by which governments organize and
- societies or governments organize and
distribute available resources, services, and
distribute available resources, services,
goods across a geographic region or country
and goods across a geographic region
Economy or country.
- is a system of interrelated production - Regulate the factors of production,
and consumption activities that including land, capital, labor, and
ultimately determine the allocation of physical resources.
resources within a group.
Types of Economic Systems
- The production and consumption of
goods and services fulfill the needs of Economic systems can be categorized into
those living and operating within it. four main types:

TRADITIONAL ECONOMIES,
Market-based economies
- also called free market economies, are
self-regulated, allowing goods to be Traditional Economic System
produced and distributed in response
to consumer demand. - is based on goods, services, and work,
all of which follow certain established
Command-based economies trends.
- It relies a lot on people, and there is
- are regulated by a government body
very little division of labor or
that determines the goods produced,
specialization.
their quantities, and the price paid for
- very basic and the most ancient of the
them.
four types.
In the modern world, few economies are - Some parts of the world still function
purely market-based or command-based. with a traditional economic system.
- It is commonly found in rural settings in
Economic System
second and third-world nations, where
- governments organize and distribute economic activities are predominantly
available resources, services, and farming or other traditional income-
goods across a geographic region or generating activities.
country.
COMMAND ECONOMIES
Economic systems
Dominant centralized authority
- regulate the factors of production,
- usually the government – that controls
including land, capital, labor, and
a significant portion of the economic
physical resources.
structure.
- encompasses many institutions,
- Also known as a planned system,
agencies, entities, decision-making
- common in communist societies since
processes, and patterns of
production decisions are the preserve
consumption that comprise the
of the government.
economic structure of a given
- If an economy enjoys access to many
community.
resources, chances are that it may lean
WHAT ARE GLOBAL ECONOMIC SYSTEMS? towards a command economic
structure.
- The world economy or global economy - In such a case, the government comes
is the economy of all humans in the in and exercises control over the
world, referring to the global economic resources. Ideally, centralized control
system, which includes all economic covers valuable resources such as gold
activities conducted both within and or oil.
between nations, including - The people regulate other less
production, consumption, economic important sectors of the economy,
management, work in general, such as agriculture.
financial transactions and trade of
goods and services.
 - In theory, the command system works - In this way, the economic system
very well as long as the central grows to ensure a good competitive
authority exercises control with the market as well as social welfare and
general population’s best interests in economic equality.
mind.
- Rigid compared to other systems. 3. Freedom to choose occupation
- They react slowly to change because - private individuals are free to choose any
power is centralized. occupation and consume as per their
- That makes them vulnerable to choice.
economic crises or emergencies, as - The government put some restrictions on
they cannot quickly adjust to changing certain industries like Atomic Energy as per
conditions. needs but most of them are open to being
taken by the private sector.
MIXED ECONOMIES
- This is important to note though there is
- combine the characteristics of the economic freedom, private individuals do
market and command economic not have the right to exploit consumers.
systems.
- also known as dual systems. 4. Economic Planning
- Sometimes the term is used to describe - The government prepares long-term
a market system under strict regulatory plans and decides the roles to be
control. played by the private and public
• Many countries in the developed sectors in the development of the
western hemisphere follow a mixed economy.
system. - The public sector is under the direct
• Most industries are private, while the control of the government as such
rest, composed primarily of public production targets and plans are
services, are under the control of the formulated for them directly. The
government. private sector is provided
• Mixed systems are the norm globally. encouragement, incentives, support,
• Combines the best features of market and subsidies to work as per national
and command systems. priorities.
• Face the challenge of finding the right
Problems Faced by Mixed Economy
balance between free markets and
government control. 1. Limited Size of Private Corporations
• Governments tend to exert much more - As in the mixed economy, the
control than is necessary. government has a large portion of the
market under its control, this means
Benefits of Mixed Economy
that there is limited space available for
1. Balanced Economic growth corporates in reality in the market.
– A mixed Economic model leads to 2. Lack of Cooperation
balanced economic growth as on the - The biggest problem faced by the
one hand, the government focuses on mixed economic model is that both
social welfare, and on the other hand, private individuals and households, as
private individuals aim to earn profits. well as the government, need to
- In this way, private individuals provide coordinate for the effective working of
quality products and services to survive the economic system of the country.
in the competitive market and the 3. Competitive Environment
government prohibits the exploitation - As we know in these modal
of customers by regulating the prices of governments and privates are required
the product or service. to work in cooperation with each other
2. Speedy Development of the Country and with a complementary spirit
- This type of model leads to rapid towards the welfare of the society, but
economic growth because both in reality, they end up becoming
private individuals and government competitors of each other.
organizations are working together for
the rapid development of the country.
 4. Fear of Nationalization - As there is a lot of competition in the
- In a mixed economy, private market, consumers have a lot of
individuals always have a fear of available options to choose between,
nationalization. This discourages them this ensures greater consumer
from making innovative decisions in sovereignty.
their business and also, they are not - corruption levels in the economy are
enough motivated to grow their less.
business organizations.
The capitalist model has some disadvantages
MARKET ECONOMIES as well such as -

- are based on the concept of free - limited government interference, the

markets. company fell themselves as free to
- there is very little government charge whatever price it wants from
interference. customers. This leads to the exploitation
- The government exercises little control of customers.
over resources, and it does not interfere - To increase profits and wealth,
with important segments of the Companies in a capitalist model of the
economy. economy use various wrong measures
- Instead, regulation comes from the to make their products sell in the
people and the relationship between market. They use the wrong raw
supply and demand. materials, wrong marketing tools, and
- mostly theoretical others to get their product or service
- a market economy facilitates sold in the market
substantial growth.
Socialist Economy
- growth is highest under a market
economic system. - is a type of economy in which business
operations are owned, operated, and
Capitalist Economy
regulated by the government itself.
- is a type of economy in which the - The sole aim is social welfare.
business operations of a country or - owned and operated by the
economy are controlled, managed, government on behalf of the people.
and regulated by the private sector of - The government makes all the major
the country. economic decisions related to the
- There is minimum or no government demand, supply, and money in the
intervention in the economy. market by considering the needs of
- production is controlled and operated present generations as well as future
by forces of supply and demand in the generations.
market. - By this, this model ensures Sustainable
- This type of economy is operated with Development.
the sole aim of earning profits. Some of
Socialism Modal has some benefits –
the best examples of countries using a
capitalist economy are New Zealand, - As the government is the major role
Singapore, Hong Kong, etc. player in this modal, the inequality
between rich and poor tends to
Capitalist modal has some advantages like –
decrease because of this modal.
- All the properties are owned and - Every person is supposed to be treated
operated by private individuals and equally in society and equality before
after the death of the person the the law as well.
property gets transferred to their family - helps in decreasing the poverty levels
members of the country.
- Individuals are free to open or close a - The ultimate goal of the Socialist
business in the capitalist economy this Economy is the common good
ensures more competition in the because this government keeps a
market because of which the regular check on environmental
entrepreneur tries to make or generate degradation, pollution, availability of
the best product or service possible. scarce resources, and other important
stuff.
 - Because of this, the nation is much - For most firms, the preeminent goal is
more futuristic compared to the to:
Capitalist Economy where
Maximize the value of the firm for its owners,
corporations to huge profits are ready
and its shareholders (subject to the very
to do anything
important constraint that this is done in a legal,
Socialist Modal has some disadvantages as ethical, and socially responsible manner)
well like –
How can this be done?
- One of the biggest disadvantages is
- Managers must pursue strategies that
that there is a loss of liberty. In this
increase the profitability of the
model, consumers don’t have
enterprise and its rate of profit growth
consumer sovereignty, and workers do
over time.
not have a choice to decide where to
- Profitability can be measured in several
work.
ways. But for consistency, it is the rate
- This leads to the infringement of
of return that the firm makes on its
freedom and rights available to
invested capital which is calculated by
citizens.
dividing the net profits of the firm by the
- As the government handles the
total capital
economy, there is involvement for
- Profit growth is measured by the
political figures in the economy which
percentage increase in net profits over
ultimately increases the corruption
time.
levels in the economy.
- As the entrepreneurs in this model are In general, higher profitability and a higher
not true owners, they lack the incentive rate of profit growth will increase an
and motivation to build and develop a enterprise’s value and thus the returns
business from scratch. This ultimately garnered by its owners, the shareholders.
can lead to a decrease in the number
of businesses operated by How to increase the profitability of the firm?
entrepreneurs in the country. the way to increase the profitability of a firm is
- The government in a Socialist economy to CREATE MORE VALUE.
can impose various rules and
restrictions which can become - The amount of value a firm creates is
excessive in the long run. measured by the difference between
its costs of production and the value
Final Word that consumers perceive in its products.
Economic systems are grouped into - In general, the more value customers
traditional, command, market, and mixed place on a firm’s products, the higher
systems. the price a firm can charge for those
products.
• Traditional systems focus on the basics - However, the price a firm charge for a
of goods, services, and work, and they good or service is typically less than the
are influenced by traditions and beliefs. value the customer places on the good
• A centralized authority influences or service. This is because the customer
command systems, captures some of that value in the form
• while a market system is under the of what economists call a consumer
control of forces of demand and surplus.
supply.
• Lastly, mixed economies are a GLOBAL EXPANSION, PROFITABILITY AND
combination of command and market PROFIT GROWTH
systems. Expanding globally allows firms to increase
STRATEGY AND THE FIRM their profitability and rate of profit growth in
ways not available to purely domestic
A firm’s strategy can be defined as the actions enterprises. firms that operate internationally
that managers take to attain the goals of the can:
firm.
 1. Expand the market for their domestic • The strategy, operations, and
product offerings by selling those organization of the firm must all be
products in international markets. consistent with each other if it is to
2. Realize location economies by attain a competitive advantage and
dispersing individual value-creation garner superior profitability. By
activities to locations around the globe operations, we mean the different
where they can be performed most value-creation activities the firm
efficiently and effectively. undertakes.
3. Realize greater cost economies from
For increased profit growth, a company may
experience effects by serving an
take goods or services developed at home
expanded global market from a
and sell them internationally.
central location, thereby reducing the
costs of value creation. • Procter and Gamble used this
4. Earn a greater return by leveraging any approach from Phils to USA, and other
valuable skills developed in foreign countries
operations and transferring them to • Microsoft from USA to across the globe
other entities within the firm’s global • Volkswagen and Toyota did the same
network of operations.
Their success is based not just upon the goods
HOW CAN A COMPANY INCREASE ITS or services that they sell in foreign nations but
GROWTH RATE? also upon the core competencies that
underlie the development, production and
• It is always important for management
marketing of those goods or services.
to decide where the company wants
to be positioned regarding value and Core competence refers to skills within the firm
cost, to configure operations that competitors cannot easily match or
accordingly, and to manage them imitate.
efficiently to ensure the firm is operating
on the efficient frontier. However, not LOCATION ECONOMIES
all positions in the efficient frontier are - For a firm that is trying to survive in a
viable. competitive global market, this implies
• In the international hotel industry, for that trade barriers and transportation
example, there might not be enough costs permitting the firm will benefit by
demand to support a chain that basing each value-creation activity it
emphasizes very low cost and strips all performs at that location where
the value out of its product offering. economic, political, and cultural
A central tenet of the basic strategy paradigm conditions, including relative factors
is that TO MAXIMIZE ITS PROFITABILITY, costs, are more conducive to its
performance.
A FIRM MUST DO 3 THINGS: - Firms that pursue such a strategy can
realize what we refer to as location
1. Pick a position on the efficiency frontier
economies, which are the economies
that is viable in the sense that there is
that arise from performing a value-
enough demand to support the choice
creation activity in the optimal location
(in business strategy, what makes the
for that activity wherever in the world
efficient frontier commendably
that might be.
viable?)
2. Configure its internal operations such as WHAT ARE THE EFFECTS OF THIS OPTIMAL
manufacturing, marketing, logistics, LOCATION FOR THAT ACTIVITY?
information systems, human resources,
and so on so that they support that 2 EFFECTS OF THIS OPTIMAL LOCATION FOR
position (why is internal operations THAT ACTIVITY:
configuration highly advised in a firm 1. It can lower the cost of value creation
that aims to penetrate the international and help the firm achieve a low-cost
market? ) position
3. Make sure that the firm has the right 2. It can enable the firm to differentiate its
organizational structure in place to product offerings from those of
execute its strategy. competitors.
 a legal, ethical, and socially
responsible manner).
What is EXPERIENCE CURVE all about?
- To maximize the value of a firm,
• It refers to a systematic reduction in managers must pursue strategies that
production costs that has been increase the profitability of the
observed to occur over the life of a enterprise and its rate of profit growth
product. over time

Two things explain this:

• Learning effect
• Economies of cycle

The learning effect refers to cost savings that

come from learning by doing.

a. Labor, for example, learns by repetition how

to carry out a task, such as assembling
airframes, most efficiently. Labor productivity
increases over time as individuals learn the
most efficient ways to perform particular skills. Profitability can be measured in a number of
ways, but for consistency, we shall define it as
b. Economies of scale refer to the reductions the rate of return that the firm makes on its
in unit costs achieved by producing a large invested capital (ROIC), which is calculated
volume of product. Attaining economies of by dividing the net profits of the firm by total
scale lowers a firm’s net cost and increases its invested capital.
profitability.
Profit growth is measured by the percentage
Strategy & Structure Of International Business increase in net profits over time. In general,
Introduction higher profitability and a higher rate of profit
growth will increase the value of an enterprise
Firms can increase their profitability by and thus the returns garnered by its owners,
expanding their operations in foreign markets. the shareholders.
Managers can increase the firm's profitability VALUE CREATION
by pursuing strategies that lower costs and
add value to the firm's products, which The way to increase the profitability of a firm
enables the firm to raise prices. is to create more value.

- Managers can increase the rate at The amount of value a firm creates is
which the firm's profits grow over time measured by the difference between its
by pursuing strategies to sell more costs of production and the value that
products in existing markets or by consumers perceive in its products.
pursuing strategies to enter new Figure 2 illustrates these concepts. The value of
markets. a product to an average consumer is V; the
- As we shall see, expanding average price that the firm can charge a
internationally can help managers consumer for that product given competitive
boost the firm's profitability and pressures and its ability to segment the market
increase the rate of profit growth over is P; and the average unit cost of producing
time. that product is C ( C comprises all relevant
Strategy and the Firm costs, including the firm's cost of capital).

A firm's strategy can be defined as the actions

that managers take to attain the goals of the
firm.

- For most firms, the preeminent goal is to

maximize the firm's value for its owners
and shareholders (subject to the very
important constraint that this is done in
-
STRATEGIC POSITIONING

Porter notes that it is important for a firm to be

explicit about its choice of strategic emphasis
with regard to value creation (differentiation)
and low cost, and to configure its internal
operations to support that strategic emphasis.
Figure 3 illustrates his point. The convex curve
in Figure 3 is what economists refer to as an
efficiency frontier.

FIGURE 3 Strategic Choice in the International

Hotel Industry

The efficiency frontier shows all of the different

positions that a firm can adopt with regard to
adding value to the product (V) and low cost
(C) assuming that its internal operations are
configured efficiently to support a particular
position