Transcript The Role of Business in the Economy

The Role of Business in
the Economy
Presented by:
Tom Downey
PayneWest Insurance
MCEE – Bozeman, MT
June 19, 2013
Who is Tom Downey?
 Carroll College graduate – Business Finance, with
minor in Economics
 Taught Risk management classes at Carroll 2 years
 Taught CIC – Certified Insurance Counselor courses
in Mt. N.D. and WA
 Licensed Consultant and Expert witness in
Insurance issues.
 CPCU – Charter Property Casualty Underwriter
 President Butte Local Development Corporation
Class Introduction
Please tell us a little about yourself
 Field of study
 Number of years of teaching experience
 Other jobs/careers besides teaching
Outcome of this Discussion
 Better understanding of commerce and trade
 Realize that the “invisible hand” will help markets
approach equilibrium.
 Understand the role of business in the economy.
 Understand that externalities may affect equilibrium.
 Be able to determine for yourself if people and society is
better off in a free society with business interests
competing for your purchases of goods and services.
Definitions
First we must establish a basic understanding of relevant terms and definitions so as we
discuss concepts in business and the economy, so that we are all on the same page as to
what we are actually talking about.

Market – is a social arrangement that allows buyers and sellers to discover
information and complete voluntary exchanges of goods and services.

Commerce- trading something of economic value such as a good, service,
information, or money between two entities.

Business – the management and coordination of people and resources to
accomplish particular production goals, usually for the purpose of making a profit.
** As a result of business in the economy, the variety, quality, and quantity of goods and services
available to consumers increases, while the prices of goods and services decreases.
Role of Business
To understand the Role of Business in the
Economy, and its influence on your life and
standard of living, imagine a world in which you
had to produce everything you consume.
1. Grow your own food
2. Sew your own clothes
3. Cook all of your meals
4. Build your own car, computer, cell phone,
house, and furniture.
Role of Business
It would be impossible to actually complete all of these
activities on your own.
 It takes a lot of time and resources to learn how to
build a car, etc…
 Time and resources are scarce…
o People have to
make choices about
how they spend them.
Learning Exercise #1
The Pencil Story and Illustration

Attach the Pencil story and take turns reading the entire article
to emphasize the complex manufacturing process as well as
the many steps and parts to a simple pencil.

Discuss Pencil story – especially how for such a simple item as
a pencil there is really no one person who knows how to
personally make a pencil and do all the steps himself.
Discuss the “Invisible Hand” theory about all the people and
steps necessary to line up in a
society to bring a pencil into
being. How does the
“invisible hand” lead each
person and business in the
process?

Invisible Hand Theory
Definition of 'Invisible Hand‘: A term coined by economist Adam Smith in his
1776 book "An Inquiry into the Nature and Causes of the Wealth of Nations".
In his book he states:
"Every individual necessarily labors to render the annual revenue of the society
as great as he can. He generally neither intends to promote the public interest,
nor knows how much he is promoting it ... He intends only his own gain, and he
is in this, as in many other cases, led by an invisible hand to promote an end
which was no part of his intention. Nor is it always the worse for society that it
was no part of his intention. By pursuing his own interest he frequently promotes
that of the society more effectually than when he really intends to promote it. I
have never known much good done by those who affected to trade for the public
good."
Thus, the invisible hand is essentially a natural phenomenon that guides free
markets and capitalism through competition for scarce resources.
Invisible Hand Theory
Investopedia explains 'Invisible Hand'
Smith assumed that individuals try to maximize their own
good (and become wealthier), and by doing so, through trade
and entrepreneurship , society as a whole is better off.
Furthermore, any government intervention in the economy
isn't needed because the invisible hand is the best guide for
the economy.
*** Buyers and Sellers act in their own best
interest and in doing so, the interests of the
other party is also served.
Trade
TRADE is what increases our standard of living.
 Instead of having to produce everything you consume on your
own, you are able to trade with others and obtain a higher
quality of life.
 Through specializing in the production of a particular good or
service, more is produced compared to each of us producing
everything on our own.
 Not only do individuals specialize in production, businesses also
specialize in producing particular goods and services.
Businesses bring “specialized” people, equipment, and other
resources together and coordinate the production of goods and
services.
Business Size
Nearly all businesses start out small, and only those firms
that meet consumers’ demands and produce efficiently
stay in business and grow into larger firms.
 Big business in not a bad thing
 Big businesses are those businesses that are:
 Able to supply highly demanded products at the lowest
prices, and
 Consistently meet the demands of consumers.
 Consumers are better off because of business in the
economy because they gain from purchasing the
goods and services supplied by businesses.
Discussion Topic #1
What if you only traded goods and services with everyone in this classroom…
 If each of us specialized in producing one good or service, would you be
better off than if you produced everything on your own?
 What products might you each produce?



Grow food
Sew clothing
Build furniture
 Could one of us produce a car or computer??
Now imagine if we could trade with everyone in our
town…
 Would we have more options?
 Would we have better products and services available?
Now imagine if we could trade with everyone in our state, or in our country.
 Does it give us better options and better quality/quantity??
Importance of Business to Trade
Businesses are vitally important in coordinating trade.
1. Businesses not only allow for larger scale production to
meet the needs of many consumers,
2. They also make it easier for consumers to locate sellers
who produce
3. particular goods and services of interest.
4. It is not always easy for an individual to coordinate trade
with people who live far away.
5. It is easier, however, for businesses to coordinate with
other businesses allowing for greater variety, quantity,
and quality for consumers, as well as lower prices.
Profit Incentive
 Because businesses have
the incentive of making
profit, they efficiently
coordinate resources such
as labor and equipment.
 Efficient production
translates into lower prices,
which attract consumers.
Clearly, we, as consumers, are
better-off because of business
in the economy.
Discussion Topic #2
The Wal Mart “big business”
discussion
 How does society benefit
from Walmart?
 Pros and Cons…
Markets
 Markets are not always perfect.
 Sometimes people are hurt by business in the economy.
 Sometimes transactions between buyers and sellers also
affect people not involved in the transaction.
Externalities
Negative Externality
 When people not involved in the transaction experience costs
or are hurt by the transaction.
 Pollution is an example of a negative externality. Power plants
that burn coal to produce energy may emit pollution into the air
which negatively affects people who breathe that air. In cases
where negative externalities are present, economists say that
these are examples of market failures. In other words, markets
and the interaction between buyers and sellers do not always
account for all of the costs of trade.
 In the event of market failures, government intervention
and/or more clearly defined property rights are possible
solutions.
Externalities
Positive Externality
 If a business purchases an eyesore, for example, such as a
junk yard, and replaces it with an aesthetically pleasing
facility, a positive externality is generated.
 An aesthetically pleasing facility is more likely to attract
customers.
 The positive externality is received by passers-by that
benefit from the positive viewscape.
Conclusion
 Overall, the presence of business in the economy results in a higher standard of living
for each of us.
 Even though people are sometimes hurt if market failures are present, the benefits of
having business in the economy far outweigh the costs.

Businesses benefit each of us by producing the good and services that we desire.
 Instead of having to produce everything we consume on our own, businesses
facilitate trade between people and allow for greater variety, quantity, and quality of
products and services at lower prices.

Although business is sometimes portrayed in a negative light, it is important to
remember that businesses exist only if they serve the needs of consumers.

Without consumers to buy their products, firms go out of business.
 We, as consumers, undoubtedly experience a higher quality of life due to business in
the economy because each of us voluntarily chooses to engage in trade with
businesses.
 We make this choice because we benefit from the products and services produced by
businesses in the economy.
Questions?