Text 1 - what is economics about?

Economics is a vast-scoped subject. It is a study of the possible ways in which people apply their knowledge, skills, and efforts to the gifts of nature in order to satisfy their material wants. To an economist, economic society is a mechanism for survival – a means of enabling people to carry out the tasks of resource raising, production, distribution and sales at a profit. If we look at the different political and social structures that exist in the world of today, and the way in which those systems developed over the years, we are tempted to say that people have made use of, and are making use of, a great variety of economic systems. In fact, it is possible to group these different economic structures into four broad categories. These basic types of economic organization are usually described as ‘traditional economy’, ‘market economy’, ‘command economy’ and ‘mixed economy’.

In traditional societies we find that the division of land and goods among people in a village or a town, the methods and times of planting, harvesting, craft object producing, the selection of crops and working tools, and the ways in which the produce is distributed among different social groups – these are all based on certain traditions. Year by year little is changed; indeed a change in working procedures may be regarded as an offence against the authority or even as an affront to memory of one’s ancestors. Traditional solutions to the economic problems of production and distribution are encountered in primitive agricultural and pre-industrial communities. But even in advanced countries traditions still play some part in determining how economy should work. We are familiar with businesses and professions in which it is customary for the son to follow his father into a trade or occupation.

The market system of economic organization is described as the ‘free enterprise’ or ‘capitalist’ system. The framework of a market system contains such essential features as private property, freedom of choice, competition, a very limited role for government, etc. Unlike it, command economy features a kind of economic plan. Nowadays there is no modern economy without some ‘command’ elements. In all developed countries there is a certain measure of government control too. Most economies in the world are of a mixed type. These countries are basically market economies, but all contain elements of state enterprise. Thus, they are mixtures of the command and the market economies.

Text 2 - economic environment

The economy comprises millions of people and thousands of firms as well as the government and local authorities, all taking decisions about prices and wages, what to buy, sell, produce, export, import and about many other matters. All these organizations and the decisions they take play a prominent part in shaping the business environment, in which firms exist and operate.

The economy is complicated and difficult to control and predict, but it is certainly important for all businesses. You should be aware that there are times when businesses and individuals have plenty of funds to spend and there are times when they have to cut back on their spending. This can have enormous implications for business as a whole.

When the economy is enjoying a boom, firms experience high sales and general prosperity. At such times, unemployment is low and many firms will be investing funds to enable them to produce more. They do this because consumers have plenty of money to spend and firms expect high sales. It naturally follows that the state of the economy is a major factor in the success of firms.

However, during periods when people have less to spend, many firms face hard times as their sales fall. Thus, the economic environment alters as the economy moves into a recession. At that time, total spending declines as income falls and unemployment rises. Consumers will purchase cheaper items and cut expenditure on luxury items such as satellite television and cars.

Changes in the state of the economy affect all types of business, though the extent to which they are affected varies. In the recession of the early 1990s Wall Street banks suffered badly. Profits declined and, in some cases, losses were incurred. This was because fewer people borrowed money from banks, thus denying them the opportunity to earn interest on loans, and a rising proportion of those who did borrow defaulted on repayment. These so-called ‘bad debts’ cut profit margins substantially. Various forecasters reckoned that the National Westminster Bank's losses in the case of Robert Maxwell's collapsing business empire amounted to over £100 million.