The Business Environment - Introduction To Business - ثاني ثانوي

1.3 The Business Environment Link to digital lesson www.ien.edu.sa Learning Outcomes Once you have completed this lesson, you should be able to: 1.3.1 Understand the phases of the business cycle. 1.3.2 Outline the four types of competition. 1.3.3 Explain the business environment and future business challenges. Key Terms Interest Rates Business Cycle Inflation Prosperity Recession Depression Perfect (Pure) Competition Monopolistic Competition Recovery Oligopoly Monopoly Focus on REAL LIFE Do you have more knowledge than you had five years ago? Are you able to play a sport better than you did 10 years ago? As your skills and abilities increase, you will depend less on others and begin to plan for your future. You might be concerned about earning and saving money. You will likely think about how your grades will affect plans for continuing your education. Various elements of your life change-both up and down. Your grades are likely to vary based on study habits and class efforts. The size of your savings account changes based on earning, saving, and spending. Just as you change, the economy changes, too. Ups and downs occur for business activities. As economic conditions improve, quality of life in a country improves. In contrast, downward economic trends result in difficulties for workers and consumers. LO 1.3.1 THE BUSINESS CYCLE Economic and business activities move in cycles. All nations experience good times and bad times in terms of their economies. Fortunately, over time, bad conditions disappear, and improved conditions return. Looking at the economic changes during history shows a pattern of good times to bad times and back to good times. This movement of the economy from one condition to another and back again is called a business cycle. Business cycles are the recurring ups and downs of GDP. Business cycles have four phases: prosperity, recession, depression, and recovery. Prosperity At the peak of the business cycle is prosperity. Prosperity is a period in which most people who want to work are working, businesses produce goods and services in record numbers, wages are good, and the rate of GDP growth increases. What stage of the business cycle do you think green energy is currently at? 1.3 The Business Environment | 39 وزارة التعليم Ministry of Education 2024-1446 GE44.PATHWAYS.G02.ITB.SB.PP1.indb 39 08/05/2024 09:13

The demand for goods and services is high. This period is usually the high point of the business cycle. Prosperity, though, does not go on forever. The economy eventually cools off and activity slows down. Recession When the economy slows down, a phase of the business cycle known as recession occurs. Recession is a period in which demand begins to decrease, businesses lower production, unemployment begins to rise, and GDP growth slows. NISSAN In addition to cars, what other types of products do people buy less of during hard times? Depression This downturn may not be too serious or last very long. However, it often signals trouble for some workers in related businesses. For example, if people have less money to spend, they buy fewer cars. Car manufacturers make fewer cars and may lay off workers. Companies that make batteries, tires, and other parts also may need to lay off workers. This drop in related businesses is called the ripple effect. Eventually, production weakens throughout the economy, and total output declines. Some recessions last for long periods as fewer factors of production are used and total demand falls. If a recession deepens and spreads throughout the entire economy, a nation and the rest of the world may move into the third phase, depression. Depression is a long period of high unemployment, weak consumer sales, and business failures. GDP falls rapidly during a depression. Fortunately, the world economy has not had a depression for more than 80 years. The period from 1929 to 1941 in history is referred to as the Great Depression. Over 25% of the labor force in most countries was unemployed. Many people could not afford to satisfy even their basic needs. Recovery Economic difficulties do not go on forever. A welcome phase of the business cycle, known as recovery, begins. Recovery is the phase in which unemployment begins to decrease, demand for goods and services increases, and GDP begins to rise again. During recovery, people gain employment. Consumers regain confidence about their futures and begin buying again. Recovery may be slow or fast. As it continues, the economy moves back into prosperity. 40 Chapter 1 | Exploring the World of Business and Economics Ministry of Education 2024-1446

Inflation and Interest Rates Two economic factors that often change during the business cycle are inflation and interest rates. Inflation is a continuous and influential increase in the level of prices. With inflation, buying power decreases. For example, if prices increased 5% during the last items that cost SAR 100 then would year, FYI During the 1980s and 1990s, some South American countries had an annual inflation rate as high as 300 to 400%. This is known as hyperinflation. In 1985, Bolivia had an annual inflation rate of more than 12,000%. More recently, in 2020, the African nation of Zimbabwe experienced an annual inflation rate exceeding 557%. now cost SAR 105. This means it now takes more money to buy the same amount of goods and services. Inflation occurs when the demand for goods and services is greater than the supply. When a large supply of money is spent for goods that are in short supply, prices increase. Most people think inflation is harmful since higher prices occur. Therefore, workers must earn more money to maintain the same buying power. The opposite of inflation is deflation, which means a decrease in the level of prices. This usually occurs with recession and depression. While prices of products are lower, people have less money to buy them. Deflation may also occur for specific products. In recent years, the cost of computers and electronic products has declined due to improved technology. governments In simple terms, interest rates represent the cost of money. Like everything else, money has a price. Interest rates have a strong influence on business activities. Companies and that borrow money are affected by interest rates. Higher interest rates mean higher business costs. Each day, interest rates change as the supply and demand for money changes. As amounts saved increase, interest rates tend to decline. This occurs because more funds are available. When borrowing by consumers, businesses, and government increases, interest rates will likely rise. 7-11ATIONS ATTOAS 16:4 10,000 SAR 10,000 SAR 10.000 CHECKPOINT What are the four phases of the business cycle? ess AOTTB36589 What is the current inflation rate in Saudi Arabia? وزارة التعليم 1.3 The Business Environment | 41 Ministry of Education 2024-1446

ليم LO 1.3.2 TYPES OF COMPETITION Type of In a market economy, individuals and businesses make the decisions about what to produce, how to produce it, and what price to charge for the product. Competition among businesses is necessary to ensure fairness for consumers and producers. As shown in Figure 1-3, four types of competitive situations are common, known as the four types of market economy. Perfect Competition Competition 1. Perfect Number of Business | Real-World Firms or Suppliers Many 2. Monopolistic Many 3. Oligopoly Few 4. Monopoly One Examples Corn, wheat, peanuts, many agricultural products Clothing, furniture Automobiles Software protected by copyright, many local public utilities FIGURE 1-3 FOUR DIFFERENT TYPES OF COMPETITION How does the number of businesses in a market affect competition? Perfect (or pure) competition exists when there are many buyers and sellers of a product. No single buyer or seller can affect the price of the product. Common examples of perfect competition are corn, wheat, peanuts, and other agricultural products. The main characteristics of perfect competition are: 1. The market involves similar or identical products. 2. No restrictions exist on new companies entering the market. 3. All sellers offer basically the same product. 4. All buyers and sellers know everything about the market, such as the prices charged by all sellers. 5. The market cannot be affected by any one buyer or seller. In perfect competition, the forces of supply and demand determine the market price. Supply is the quantity of an item that businesses are willing and able to provide. If consumers want an item and are willing to pay a price that allows a business to make a profit, businesses will provide the product. However, if the supply of a product is greater than consumers want, businesses will probably reduce supply or discontinue the product. The supply of a product affects the price. With a huge supply of the crops and livestock raised on farms, prices will probably remain low. However, if a drought reduces the amount of corn grown, the price of corn will likely increase. The price of a product with new technology will likely be high until other companies start to offer a similar item. Demand is the quantity of a good or service that consumers are willing and able to buy. If many consumers want (or demand) a particular good or service, its price will likely go up. When customers see several products that they believe will satisfy a particular want or need, demand for any one of those products will not be as high. Customers will be willing to switch from one product to another if the price of one is much higher than the others. Monopolistic Competition Monopolistic competition is a market situation with many buyers and numerous sellers, offering products that are very similar, but not identical, and all satisfy the same need. Examples of products sold in this type of competitive market include clothing, soap, furniture, and many consumer items. 42 Chapter 1 | Exploring the World of Business and Economics Ministry of Education 2024-1446

Each seller attempts to make its item different from others with unique product features, a famous brand name, unique packaging, or services such as free delivery or a lifetime warranty. These attempts to create a distinct product image in the minds of consumers are referred to as product differentiation. Oligopoly An oligopoly is an industry situation with a few large sellers. Companies are required to make a sizable investment to compete in the market. Examples of oligopolies are the automobile, airline, car rental, and farm implement industries. With few sellers, the actions of one competitor can affect the others. For example, if an automobile manufacturer offers special discounts, other car companies will likely do the same to avoid losing customers. Monopoly A monopoly is a market with only one seller, and barriers keep other companies from entering the industry. In a monopoly, there is no close substitute for the product or service. With only one company as the supplier of the item, the business might charge a very high price. However, at some high price, customers would likely stop buying, even in the case of urgently needed products like medicine. In many countries, governments might create a monopoly to provide services needed by everyone, such as gas, water, or electricity. These monopolies are usually regulated by various government agencies to avoid excessive prices. A legal monopoly, also called a limited monopoly, is created when a government issues a franchise, license, copyright, patent, or trademark. These actions protect the owners' intellectual property and prevent unauthorized use by others who have not shared in the time, effort, and expense required for its development, or who don't have the required experience and capabilities. For example, computer software companies can obtain a legal monopoly for the sale of programs designed for specific word processing or spreadsheet activities. CHECKPOINT How do the four forms of competition differ? What type of competition exists in the construction industry? وزارة التعليم Ministry of Education 2024-1446 1.3 The Business Environment | 43

ليم LO 1.3.3 THE BUSINESS ENVIRONMENT AND ECONOMIC CHALLENGES The future of business for every country requires knowledge and a plan. The process starts with researching the resources, economic conditions, and local and global business opportunities of the nation. Technology, educated workers, and business systems will be the foundation for economic success. To achieve business growth and an improved quality of life, the plan must emphasize increased training for job skills, enhanced use of technology, and wise capital allocation. In addition, companies must possess the ability to adapt to consumer preferences. Using creative methods to develop innovative solutions, expanded output of goods and services will result. Also possible are actions to address economic concerns such as hunger, disease, unsafe water, pollution, and poverty. Saudi Vision 2030 Saudi Vision 2030 is driven by Saudi Arabia's own strengths. The country's position in the Islamic world will enable it to play its leading role in supporting the Arab and Islamic nations, and local and international investment will be key to diversifying the economy and achieving its sustainability. In addition, the strategic location of Saudi Arabia will enable it to be a hub connecting the three continents of the world (Africa, Asia, and Europe). The vision is based on three main axes: a vibrant society, a thriving economy, and an ambitious nation. Its goals will be achieved through: ⚫ building an education system aligned with market needs • creating paths for business success for small and medium enterprises, and large corporations developing investment tools to diversify the economy with new job opportunities privatizing some government services attracting the finest talent Each of these actions will result in an improved business environment for citizens in both the private and public sectors. This vision is designed to guide all participants in the economy to take their responsibilities and the necessary initiatives to face challenges and seize opportunities. Subeconomies Within the main economy of a country, there are often subeconomies that provide goods, services, and career opportunities. When faced with unexpected economic, social, or health crises, businesses must adapt to a new economic environment. Innovation and community connections are essential for every business, but especially small businesses. These enterprises range from home- based sales and consulting services to small manufacturing companies and online technology support. In recent years, several new opportunities for business start-ups have emerged, including: Social entrepreneurs who blend usual business practices with innovation to address concerns such as hunger, disease, poverty, and education • The gig economy, which includes independent contractors and freelancers with flexibility of projects and work locations The shared economy, which emphasizes renting or borrowing products rather than buying The circular economy, which involves environmental activities to recover, restore, recycle, reuse, and repurpose resources. Emphasis is on renewable energy and innovations that minimize waste and ecological impact; also referred to as the green economy 44 Chapter 1 | Exploring the World of Business and Economics Ministry of Education 2024-1446

The blue economy, which is designed to preserve and regenerate oceans and the marine environment, with an emphasis on sustainability for fisheries, aquaculture, and maritime tourism One additional subeconomy, often overlooked, is the informal economy. Home-based businesses, street vendors, and family farms are an important source of employment and income for many people around the world. Occurring alongside formal companies, these unreported transactions are significant in many countries. Informal economic activities can range from 10 to 20% of the economy in some nations to more than 60% in others. No one can predict the future of an economy with certainty. To maintain or increase a country's standard of living and to prevent unemployment, government, businesses, and the third sector must coordinate their efforts. This cooperation can result in creating jobs and providing for the needs and wants of people. CHECKPOINT What economic challenges will countries face in the future? 1.3 ASSESSMENT Key Concepts Determine the best answer. 1. True or False. Deflation results in lower buying power of money. 2. True or False. Supply is the quantity of a good or service that a consumer is willing and able to buy at a particular price. 3. The phase of the business cycle in which unemployment is highest is a. recession b. recovery c. prosperity d. depression 4. When a few large companies control an industry, this is referred to as a. pure competition b. monopolistic competition c. oligopoly d. monopoly 5. As competition increases, prices a. usually increase as well b. are not affected so will usually not change c. will usually decrease d. There is no way to predict what will happen to prices due to competition. وزارة التعليم Ministry of Education 2024-1446 1.3 The Business Environment | 45

Make Academic Connections 6. Research View the Saudi Vision 2030 website (www.vision2030.gov.sa) and select a topic that interests you. Create a brief report with actions local businesses might take to achieve the vision communicated for this topic. 7. Visual Communication In monopolistic competition, companies offer products that are very similar, but not identical. Product differentiation is used to create a distinct image. Select three brands of the same food item or consumer product from local and global companies. Prepare a report on the actions of each company to create an image different from competitors. 8. Geography Obtain information about a country with an economy dependent on the ocean or other water sources for its industries and jobs. Create a poster or other presentation to visually show the industries, employment, and other business activities related to the marine environment of the country. ليم 46 Chapter 1 | Exploring the World of Business and Economics Ministry of Education 2024-1446