4 How Business and Economic Work

The success of a business depends partly on the economic systems of the countries where it is located and where it sells its products. A nation’s economic system is a set of policies, laws and elections that determine what products and services are created and how they are allocated to establish a system created by their government. Economics is the study of how a society uses less resources to produce and distribute goods and services. Resources for an individual, a firm, or a nation are limited. Therefore, economics is the study of choice – what individuals, companies, or nations choose from available resources. Every economy is concerned with what kind and quantity of goods and services should be produced, how they are produced, and for whom. These decisions are made by the market, the government, or both. In America, the government and the free market system together guide the economy.

You probably know more about the economics that you feel. Every day, many news stories deal with economic issues: a union cut wages goes up on General Motors, the Federal Reserve Board lowers interest rates, Wall Street has a record day, the president proposes a cut in income tax , Consumer spending is increasing as the economy grows, or retail prices are rising, just to mention a few examples.

Global Economic System

Businesses and other organizations operate in accordance with their country’s economic system. Today the world’s largest economic systems are divided into two major categories: free market, or capital; And planned economies, including communism and socialism. However, in fact many countries use a mixed market system that incorporates elements of more than one economic system.

Global Economic System
Global Economic System

The major differentiator among economic systems is whether the government or individuals decide:

  • How to allocate limited resources – Factors of production – to best meet unlimited social needs of individuals and organizations
  • What goods and services to produce and in what quantities
  • How and where the goods and services are produced
  • How to distribute goods and services to consumers

Managers must understand and adapt to the economic systems or systems in which they operate. Companies that do business internationally, may discover that they have to adapt to the production and sales practices of other countries to adjust to the economic system. (Photo) summarizes the key elements of the world’s economic system.

The capitalism

In recent years, more and more countries have shifted to market systems and are far from planned economies. Occasionally, as in the case of the former GDR, the transfer of capital was painful but quite quickly. In other countries, such as Russia, the movement is a false start and one of repression. Capitalism, also known as the Private Sector System, is a tax on private ownership of market competition and product factors (resources). In a competitive economy, a large number of people and businesses buy and sell products in the market freely.

The capitalist system guarantees certain economic rights: the right to property, the right to make a profit, the right to make free elections, and the right to compete. The right to property is central to the capitalist system. The main incentive in this system is profitability, which encourages business. Profit is also essential to producing goods and services, building a production plant, paying profits and taxes, and generating jobs. 

In the capital system, competition is good for both business and consumers. It leads to better and more diverse products, keeps costs stable, and increases productivity. Companies are trying to produce their goods and services at the lowest possible price and sell them at the highest possible cost. But when profits are high, more businesses enter the market to find their share of those profits. Comparison of results reduces costs between companies. Companies must find new ways to operate more efficiently if they want to continue to make a profit – and stay in business.

McDonald’s China

McDonald's China
McDonald’s China


Since joining the World Trade Organization in 2001, China has embraced the principles of capitalism and expanded its economy. China is the world’s largest producer of mobile phones, PCs and tablets, and is the largest market for over one billion people in the country. The explosion of McDonald’s and KFC franchises reflects the success of US-style capitalism in China, and Beijing’s attempt to host the 2022 Winter Olympics is a sign of economic independence. This Mac Café is an example of changing western products according to Chinese tastes. This is an example of changing western products according to Chinese tastes. Do you think that China’s capitalist trend could develop under the ruling Chinese Communist Party, which opposes workers’ rights, free speech and democracy? (Credit: Marku Kudjerski / flickr / Attribution 2.0 Generic (CC BY 2.0)



The complete opposite of capitalism is socialism. In the communist economic system, the government owns almost all the resources and controls all the markets. Central to economic decision-making: The government, rather than competing forces in the market, decides what will be produced, where it will be produced, how much will be produced, where the raw materials and goods will come, and who will get it. What is the product, and the costs? This form of central economic system offers little if any choice for the citizens of a given country. In the early 20th century, countries that chose Socialism, such as the former Soviet Union and China, believed that it would raise their standard of living. In practice, though, tight control over most parts of people’s lives, such as the career they can choose from, where they work, and what they can buy, leads to lower productivity. There was no reason for the laborers to work harder or produce quality goods, because higher work had no rewards. Errors in planning and resource allocation can also lead to shortages of basic products.

These factors were the cause of the collapse of many independent nations of the Soviet Union in 1991. Recent reforms in Russia, China, and the Eastern European nations have shifted these economies to a more capitalized, market-oriented system. North Korea and Cuba are the only remaining examples of the communist economic system. Time will tell whether Cuba can make small steps to the market economy Now that the United States has restored diplomatic relations with the island nation some years ago.

Mixture of economic systems

Pure capitalism and communism are endless. The real-world economies are the link between the two. The US economy tends toward net capital, but it uses government policies to promote economic stability and growth. In addition, through policies and laws, the government transfers money to the poor, the unemployed, and the elderly or the disabled. American capital has created some very powerful organizations in the form of large corporations, such as General Motors and Microsoft. To protect small firms and entrepreneurs, the government has passed legislation requiring the Giants to compete fairly against weak competitors.

Canada, Sweden, and the UK, among others, are also called mixed economies; That is, they use more than one economic system. Occasionally, the government is primarily socialist and owns basic industries. In Canada, for example, the government owns the communications, transportation, and utilization industries, as well as some of the natural resources industries. It also provides health care to its citizens.

The mixed economy includes some elements of government-owned production – some public lands, postal services, and some water sources. But the government is largely involved in the economic system through taxation, spending and welfare work. The economy is integrated in the sense that the country strives to achieve many social goals – income redistribution and retirement pensions, for example – that may not be attempted in the purely capitalist system.

Microeconomics and Macroeconomics

The state of the economy affects both people and businesses. How you spend your money (or save it) is a personal financial decision. Whether you continue in school and whether you are working part-time are also economic decisions. Every business also runs within the economy.

There are two main areas of economics. Macroeconomics is the study of the economy as a whole. It looks like aggregate data for a large group of people, companies, or products as a whole. In contrast, microeconomics focuses on individual segments of the economy, such as homes or companies.

Economic Development as a Circular Flow

Another way of looking at how the economy sectors interact is by examining the circulating flows of inputs and outputs between households, businesses and governments as shown (Figure). Let’s review the exchange within the circle around the red circle below. Homes provide inputs for businesses (natural resources, labor, capital, entrepreneurship, knowledge), which convert these inputs into products (goods and services) for consumers. In return, households receive income, wages, interest, and property profits (blue circle). Businesses receive revenue from the purchase of consumer goods and services.

(Figure) The second major exchange occurs between governments (federal, state, and local) and between households and businesses. Governments provide a variety of publicly available goods and services (highways, schools, police, courts, health services, unemployment insurance, social security) that benefit consumers and businesses. 

Changes in one flow affect the other. If the government increases taxes, households have less to spend on goods and services. Reducing consumer spending leads to reduced productivity, and reduced economic activity; Unemployment can rise. In contrast, tax cuts can stimulate economic activity. Keep the circulation flow in mind as we continue to study economics. The way of communication between economic sectors will become more pronounced as we explore macroeconomics and microeconomics.

Economics as a rotational flow

  1. What is economics, and how can you benefit from understanding basic economic concepts?
  2. Comparison of and contrasting the world’s major economic systems. Why is capitalism rising, communism is on the decline, and socialism is still popular?
  3. What is the difference between macroeconomics and microeconomics?

A summary of the learning outcomes

What are the basic features of the world’s economic system, and how are the three sectors of the US economy connected?

Economics is the study of how people, businesses, and governments use less resources to create and distribute goods and services. Today there is a global trend towards capitalism. Capital, also known as the Private Enterprise System, is a tax on private ownership of market competition and product elements. Competition leads to more diverse goods and services, keeps costs stable, and pushes businesses to be more efficient.

In a communist economy, the government owns virtually all resources, and economic decision-making is done by central government planning. Governments have generally moved away from communism because it is inefficient and delivers a low standard of living. Other industries can be done individually. The state is also effective in determining business objectives, pricing and product selection, and labor rights. Most national economies today are a combination of socialism and capitalism.

Anglo-Saxon glossary


Private ownership of the competitiveness and product element in the market based on an economic system (s); Also known as a Private Enterprise System.

Rotational flow

Input and output movement among households, businesses, and governments; This is a way to show how the sectors of the economy interact.


An economic system that features government ownership of almost all resources, control of all government markets, and central government planning to make economic decisions.


Study how a society uses fewer resources to produce and distribute goods and services.


Sub-area of economics that focuses on the overall economy by looking at the aggregate data of individuals, companies, or large groups of products.


The sub-area of economics that focuses on individual segments of the economy, such as homes or companies.

Mixed economy

Economists that combine several economic systems; For example, an economy where the government owns some industries but others are owned by the private sector.


An economic system in which the ownership of basic industries is controlled either by the government itself or by the private sector under strong government.

Leave a Reply

Your email address will not be published. Required fields are marked *