Business Environment.
Economists classify factors of production into four categories: Land, labor, capital and enterprise (MANKIW, 2011). Land is a natural resource that includes ground space, air, seas, oceans etc. The owners of land are referred as landlords and its rewarding factor as rent. Land is considered as the prime factor of production since the other factors need a surface for them to be effective. Labor refers to human input such as skills, knowledge, expertise and management. It is classified according to quality, skills and qualifications. The owners of labor are referred to as laborers while the rewards are wages and salaries.
Capital refers to all man-made goods or services, finances or investments that produce other goods and services. Capital is categorized into fixed capital i.e. machinery, technology, plant and equipment, buildings, and working capital which includes raw materials and stocks. The owners of capital are money lenders while its reward is interest. Enterprise includes the management, initiators of ideas and organizers of the other factors of production. The owners are referred to as entrepreneurs while the reward is profit (MANKIW, 2011).
Types of economic systems, their pros and cons, and how they are used in resource allocation.
Economists recognize three different economic systems; command, market and traditional economies (MANKIW, 2011). In a traditional economic system, resource allocation is shaped by culture and traditions. This economic system is characterized by static standards of living, and lack of financial and occupational mobility. The advantage with this economy is that resources and efforts are shared equally. There exists of rules, which obligate individuals to owe to the community. Production is environmental friendly and sustainable since there is use of primitive methods of production. However, this economy is vulnerable to weather changes. The system is also vulnerable to the other economic systems, which possess superior powers. The Inuit people in Canada are a traditional economic system example. The Inuit’s survived from fishing and hunting, and what they got was equally shared among the community. Currently, two thirds of Haiti population depends on subsistence farming, and this has always made them vulnerable to natural disasters such as earthquakes, which affect production.
A command, planned or communist economic system refers to a government controlled system. The state makes decisions on allocation and distribution of resources (MANKIW, 2011). It regulates wages, prices, and in some cases manages the running of industries. Example of such an economy is Cuba and the Communist Soviet Union in 1980’s. The advantage of such an economy is that resources are equally shared, and this leads to homogeneous economic growth. Production is only comprised of essential commodities. However, with such an economy, innovation is hindered since the government makes production decisions. The consumer has minimal consumption choice, and the market lacks competition and specialization which compromises quality.
Market or pure economies refer to economies where individuals make their own decisions. Resource allocation and distribution of resources is determined by entrepreneurs or companies. Individuals make investment choices, determine what jobs to take, and what to produce and consume. The government has limited involvement in this economy. The advantage of this economic system is that it is flexible, and responds to wants quickly. Competition in this economy allows a wide variety and effective production. This economy, however, may lead to specialization in production of certain goods considered as non-profitable. The economy may encourage production of hazardous goods, which have high demand. The economy also leads to increased rates of unemployment, since the businesses employ only those factors that are profitable (MANKIW, 2011). Market economies are prevalent in UK, Canada, US and Germany where markets are voluntarily used by buyers and sellers in exchange of resources, goods and services.
Economists have derived another form of economic system that combines the elements of a command and market economy. This is referred as a mixed economy. A significant example of such an economy is in the United States, Spain, UK and France. In these economies, decisions are made in the market and by individuals. The government plays a role in resource distribution and allocation. Companies and entrepreneurs are free to produce but the government decides on how the benefits are to be distributed.
The advantage with mixed economic systems is that the economy is put under protection (MANKIW, 2011). The government intervenes in protecting unnecessary competition, production of non-essential, commodities, and in setting price limits. However, the structure leads to formation of monopolistic organizations. Take an instance of NHS in UK, under the health care sector, or USPS a mail service company in US. Consumers are forced to use their services since there is no other option or other service providers. When the state controls an economy, chances of bureaucracy rise, and this affects efficiency.
Fiscal and monetary social and competition policy.
Fiscal policy involves the use of tax and budgetary measures in controlling aggregate demand. During recession, the government lowers taxes and increases expenditures. This creates an investment condition where production and output increase leading to a boost in aggregate demand. During inflation, the government reacts by increasing tax rates and cuts on expenditure (MANKIW, 2011). The monetary policy is an action of central banks in achieving macroeconomic policy. The policy uses interest rates, prices and exchange rates in ensuring economic stability. During inflation, the central bank increases the levels of interest rates. This leads to a decreased money supply, increased prices and reduction in aggregate demand. Its expansionary measure involves increasing the amount of money in circulation by lowering the interest rates. This implies increased investment prices, increased aggregate demand and reduced prices.
These policies are limited on time lags which affect the speed of their implementation (MANKIW, 2011). Some decisions under these policies also create a state of economic imbalance. They favor certain social classes like monopolists while entrepreneurs in the free market suffer the consequence. The effectiveness of monetary policy can also be limited by consumers who opt to hold large sums of money rather than spend it when interests decrease.
The National Health Service (NHS), UK.
NHS has for decades been known for being a monopolistic service provider, in UK. The hospital has undergone significant reforms, under the control of government, which have led to stiffened competition in the private health sector. The government controls its pricing strategy, wages and salaries of the employees. The demand side of the hospital has been on a rising trend. However, the customers who use the facility do it for lack of a choice.
Despite the cheap access, the facility has compromised the level of services. Most of the health providers receive low rates and this has led to a significant shift to the private sector. Research indicates that given a choice 89% of the patients who consume the services of the hospital would opt to visit other facilities. There lacks fairness and equity in the facility. The control of the structure and system of the hospital, by the government, has triggered slow service rates.
Market structures.
Market structures are a collection of elements that determine how sellers and buyers interact, how market prices change, and how different production levels and selling process are interrelated. They are categorized into; perfect competition, monopoly, oligopoly and monopolistic market structures. Market structures are characterized by the number of industries and firms that influence competition levels, the nature of cost and price determination, product differentiation levels, and market share (MANKIW, 2011).
Discussion of market structures, characteristics, pros and cons.
A perfect competition structure is characterized by production of homogeneous products from competing number of firms. There are no barriers to entry in this market. Prices are determined by buyers demand. The sellers are price takers while the buyers determine the output and price levels (MANKIW, 2011). Examples include retail shops and agricultural producing firms.
A monopoly market is characterized by few firms producing limited variety of commodities. The disadvantage in this market is that there lacks variety (MANKIW, 2011). The sellers determine the prices and output levels while buyers are price takers. The barriers to entry in this market are high to discourage new entrants. Examples include electricity producing firms.
An oligopoly involves few dominating firms that produce differentiated and substitutable products. Barriers to entry in this market are significantly high to avoid competition. The sellers are price makers and determine levels of output while the buyers are price takers. The pricing decision in this case is enhanced by the demand curve. Examples include oil market in UK i.e BP, Shell etc and soft drinks such as Pepsi, Coke and Schweppes.
A monopolistic market is characterized by competing firms with slightly differentiated products (MANKIW, 2011). Restaurants are an example of monopolistic markets; they all serve food but on different locations, and different types. The sellers determine the prices, but in consideration of what the other competing firms offer. The consumers enjoy a variety of products with manageable prices.
Bibliography.
MANKIW, N. G. (2011). Principles of economics. Mason, Ohio, Thomson South-Western.
