Chapter 2

Business Management: A Malaysian Perspective All Rights Reserved
Oxford University Press Malaysia, 2008 2 1

CHAPTER TWO
Influence of Economics
on Business
BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition) All Rights Reserved

Oxford Fajar Sdn. Bhd. (008974-T), 2012 2 2
LEARNING OUTCOMES
In this chapter, you will learn to:

Explain the major differences between a free market system and a
centrally-planned system.
Discuss why many economies of the world have adopted the mixed
economic system.
Explain how a free market works.
Elaborate on the different types of market structure.
Relate the impact of economic growth, unemployment, inflation and
globalization on businesses.
Define fiscal and monetary policy and explain how they are used by the
government to regulate the economy.
Analyze and assess the performance of the Malaysian economy from
20002010 by relating it to the key indicators of economic growth.

INTRODUCTION TO ECONOMICS
Economics as a study of scarcity and choice.

Scarcitya situation whereby human
wants/needs are forever greater than the supply
of time, goods and resources.
The two branches of economics are
microeconomics and macroeconomics

FACTORS OF PRODUCTION
Land : Gift of nature

Labour : The physical and mental capacity of
humans to produce goods and services.
Capital : Man-made goods such as machines to
facilitate further production of goods.
Entrepreneurship : The creative ability of
individuals to seek profits by combining land,
labour and capital to produce the goods and
services.
ALL ECONOMIES HAVE TO
ADDRESS THREE ISSUES
What goods and services to produce?

How to produce the goods and services?
For whom are these goods and services going to
be produced?

EARLY ECONOMIC THEORIES
Thomas Malthuss economic theory

Control the population so that people are able to
enjoy more goods and services.
Adam Smiths economic theory

Wealth creation among individuals is healthy and it
will improve the lives of everyone.
Freedom to accumulate wealth and make profits
are vital for the survival of an economy.

ECONOMIC SYSTEMS TO
ADDRESS SCARCITY PROBLEM
The free market system

The centrally-planned system
The mixed system

FREE MARKET SYSTEM
Also referred to as capitalism.

A system where all economic decisions are taken
by individual households and firms with no
government intervention.

FREE MARKET SYSTEM (cont.)
Individuals have four basic rights:

1. To own private property.
2. To own a business and keep all its profits
after taxes.
3. Freedom to compete in wealth accumulation
and consumption of goods and services.
4. Freedom of choice on ability to pay.

FREE MARKET SYSTEM (cont.)
The system recognizes the importance of private

sector to drive economic growth through
competition.
Customers have the power to determine and
influence the types and quantities of goods to be
produced.

SOME LIMITATIONS OF FREE
MARKET SYSTEMS
Inequality of income and wealth distribution

A national and global concern
Greed compromises ethics
Individuals become materialistic to fulfil self-
interests rather than social interests.
Potential environmental damage

CENTRALLY-PLANNED SYSTEM
It adopts the ideology of Karl Marx.

Government makes almost all economic
decisions and owns all factors of production.

SOME LIMITATIONS OF
CENTRALLY-PLANNED SYSTEMS
Public ownership.
Does not promote entrepreneurship.
Choices of goods and services are limited.
Reduces individual incentiveBrain Drain.

MIXED ECONOMIC SYSTEM
A cross-breed between the free-market and

centrally-planned systems.
Many economies of the world have adopted
this system due to limitations of the free
market and centrally-planned systems.

MIXED ECONOMIC SYSTEM
(cont.)
The mixed economy promotes freedom of

individual choice and decisions to maximize
satisfaction.
However, when markets fail, the government will
intervene.

FREE MARKETS IN OPERATION
What is a market?
Any arrangement where buyers and sellers interact
to determine the quantity and price of goods to be
exchanged at a certain period.
What is demand?
The choice making behaviour of consumers.
What is supply?
The choice making behaviour of producers or
firms.
DEMAND AND SUPPLY
The law of demand

when price increases, quantity demanded will
reduce, vice versa.
The law of supply

when price increases, quantity supplied will
increase, vice versa.

DEMAND CURVE
Price (P)
D
Quantity (Q)
SUPPLY CURVE
Price (P)
Quantity (Q)
MARKETS IN OPERATION:
EQUILIBRIUM POINT

TYPES OF MARKET
STRUCTURE
Perfect Competition
Monopoly
Monopolistic Competition
Oligopoly

COMPARISON OF MARKET
STRUCTURES

MACROECONOMICS AND ITS
IMPACT ON THE BUSINESS
ENVIRONMENT
INTRODUCTION TO MACROECONOMICS
Macroeconomics looks at the economy as a whole

or in aggregates.
There are four key players in the economy:
households, firms, the government and the rest of
the world (i.e. international trade).

THE CIRCULAR FLOW OF
INCOME AND EXPENDITURE

MACROECONOMIC CONCERNS
Economic growth
Inflation
Unemployment
Globalization

UNDERSTANDING BASIC
MACROECONOMIC CONCEPTS
The business cycle has four phases:

1. Boom
2. Recession
3. Depression
4. Recovery

BUSINESS CYCLE

KEY ECONOMIC INDICATORS
Gross Domestic Product (GDP)

Unemployment Rate
Price Indices
Consumer Price Index (CPI)
Producer Price Index (PPI)

KEY ECONOMIC INDICATORS
(cont.)
To measure economic growth of a nation, the

following may be used:
Gross Domestic Product
Gross National Product
Gross National Income

PRICE INDICES
They are mainly used to measure inflation.

The commonly used price indices are Consumer
Price Index (CPI) and Producer Price Index (PPI).

CONSUMER PRICE INDEX (CPI)
CPI is commonly used to measure the impact of

inflation on households.
This index is based on a standard market basket
of goods and services purchased by a typical
urban family, e.g. food, clothing and utilities.
CPI is a weighted average of a number of
component price indexes of the basket of goods
and services above.

MALAYSIA INFLATION RATE (%)
20002011
2000 1.6
2001 1.4
2002 1.8
2003 1.2
2004 3.0
2005 3.0
2006 4.0
2007 3.8
2008 2.0
2009 5.4
2010 2.9
2011 3.2 (as of Nov 2011)
Source: Economic Reports, Prime Ministers Department.

PRODUCER PRICE INDEX (PPI)
PPI measures prices at wholesale level.

For example, in the first quarter of 2006, PPI was
170.3 compared to 156.1 in same period last year
for Malaysia.
This indicates that wholesale prices have been
increasing over the one year period.

OTHER ECONOMIC INDICATORS
Per capita income

average income received by an individual
person or citizen.
Productivity
the amount of output that can be produced by a
worker in an hour.

HOW DOES THE GOVERNMENT
REGULATE AND STABILIZE THE
ECONOMY?
The government applies a combination of monetary and
fiscal policies.
Monetary policy
affect aggregate demand by controlling the supply
of money through the Central Bank.
Fiscal policy
affect aggregate demand through government
expenditure and taxation.


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Business Management: A Malaysian Perspective All Rights Reserved

Oxford University Press Malaysia, 2008 2 1

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition) All Rights Reserved

In this chapter, you will learn to:

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition) All Rights Reserved

Economics as a study of scarcity and choice.

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition) All Rights Reserved

Land : Gift of nature

What goods and services to produce?

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition) All Rights Reserved

Thomas Malthuss economic theory

Adam Smiths economic theory

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition) All Rights Reserved

The free market system

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition) All Rights Reserved

Also referred to as capitalism.

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition) All Rights Reserved

Individuals have four basic rights:

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition) All Rights Reserved

The system recognizes the importance of private

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition) All Rights Reserved

Inequality of income and wealth distribution

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition) All Rights Reserved

It adopts the ideology of Karl Marx.

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition) All Rights Reserved

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition) All Rights Reserved

A cross-breed between the free-market and

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition) All Rights Reserved

The mixed economy promotes freedom of

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition) All Rights Reserved

The law of demand

The law of supply

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition) All Rights Reserved

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition) All Rights Reserved

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition) All Rights Reserved

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition) All Rights Reserved

Macroeconomics looks at the economy as a whole

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition) All Rights Reserved

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition) All Rights Reserved

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition) All Rights Reserved

The business cycle has four phases:

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition) All Rights Reserved

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition) All Rights Reserved

Gross Domestic Product (GDP)

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition) All Rights Reserved

To measure economic growth of a nation, the

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition) All Rights Reserved

They are mainly used to measure inflation.

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition) All Rights Reserved

CPI is commonly used to measure the impact of

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition) All Rights Reserved

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition) All Rights Reserved

PPI measures prices at wholesale level.

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition) All Rights Reserved

Per capita income

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition) All Rights Reserved

BUSINESS MANAGEMENT: A Malaysian Perspective (Second Edition) All Rights Reserved

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