Chapter 3
Marketing Begins
With Economics
The Marketing Department – Harrison High School
The Importance of Economic
Understanding
• Effective marketing is more than just being
creative in advertising.
• Marketing is more scientific than creative.
• Marketing relies on an understanding of
basic economic principles and concepts.
• Effective marketing requires an
understanding of competition.
The Basic Economic Problem
• A study of economics begins with the basic
economic problem of scarcity.
• People have unlimited wants and needs, but
economic resources are limited.
• Scarcity is the combination of unlimited
needs and wants with limited resources.
• Scarcity forces people and businesses to
make economic choices.
Frameworks 4.4
Three Basic Economic Questions
• All economies must answer the 3 basic economic
questions of
– What goods and services will be produced?
– How will they produced?
– For whom will they be produced?
• A country’s economic system is classified based on
how the country satisfies needs and how resources
are distributed.
– Controlled/Command Economy – the government
answers the questions.
– Free/Market Economy – the individuals interact in the
marketplace to answer the questions.
– Mixed Economy – all economies are mixed.
Frameworks 4.1
America’s Private/Free
Enterprise Economy
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Private/Free Enterprise – is based on independent decisions by
businesses and consumers with limited government regulation.
Characteristics of Private Enterprise
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The market answers the three economic questions.
Resources are owned by individual producers.
Competition (a rivalry between 2 or more businesses) exists in the marketplace.
The profit motive encourages businesses to efficiently provide products, at a
profit, that consumers need & want.
Consumers cast their “economic vote” when they decide what to purchase.
Consumers place their individual value, or view on the worth, of a product or
service.
Government stays out of the exchange unless individuals or society will be
harmed.
The democratic form of government is most closely associated with this type of
economy.
Frameworks 4.1
Role of the Government in Our
Private/Free Enterprise Economy
• To provide services to its
citizens.
• To support businesses and the
growth of business.
• To regulate trade to protect
consumers and workers.
• To promote competition in the
marketplace.
Private/Free Enterprise
• Private/Free Enterprise is
also known as Capitalism.
• Demand refers to the
quantity of a product
consumers are willing and
able to purchase at a given
price.
• Supply refers to the
quantity of a product that
producers are willing and
able to produce at a given
price.
Adam Smith wrote a book called
The Wealth of Nations in 1776
that advocated Capitalism.
Frameworks 4.1
Controlled/Command Economy
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The government answers the three economic questions.
Communism is the political system in which the government owns and
operates everything.
This type of economy tends to have very poor infrastructure – refers to the
condition of the country’s roads, ports, sanitation facilities, and utilities.
North Korea is a good example of a controlled/command economy.
Frameworks 4.5
North Korea
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North Korea has the fifth-largest army
in the world.
North Korea has the highest
percentage of military personnel per
capita of any nation in the world.
North Korea has a highly centralized
controlled/command economy. North
Korea is one of only two (along with
Cuba) with an entirely governmentplanned, state-owned economy.
North Korean children are up to 5
inches shorter and up to 14 pounds
lighter than children who were brought
up in South Korea. Adult men are 4
inches shorter and women are 2.5
shorter . Malnutrition in North Korea is
blamed for the height difference.
Watch video about North Korea
hosted by Dan Rather of 60
Minutes.
Frameworks 4.5
Mixed Economies
The United States government is involved in the economy
through laws and regulations governing businesses, and
provides socialistic programs such as Medicaid for the
economically disadvantaged and Medicare for the elderly.
Governor Mike
Huckabee
signs ARKids
legislation.
ARKids First health insurance provides two
coverage options for more than 70,000 Arkansas children who
otherwise might have gone without. ARKids A offers lowincome families a comprehensive package of benefits. ARKids
B provides coverage for families with higher incomes. We
have streamlined the application process for both packages,
allowing you to apply for either package on the same form.
Frameworks 4.5
Mixed Economies
All economies in the world today are mixed. There is
some government involvement in all economies.
The government is the
largest consumer of
goods and services in
the U.S.
Frameworks 4.5
Government Supports/Regulates Business
in Our Private/Free Enterprise System
• The Federal Emergency Management Agency (FEMA) provides disaster
assistance to help both businesses and homeowners rebuild after disasters.
• The Small Business Administration (SBA) provides counseling and
educational materials to support businesses. www.sba.gov
• The Securities and Exchange Commission (SEC) regulates the sale of
stocks and bonds.
• The Occupational Safety and Health Administration (OSHA) regulates the
workplace to ensure safe working conditions.
• The Environmental Protection Agency (EPA) regulates business practices
to promote a cleaner environment. Cars built after 1974 were required to
use unleaded gasoline only and reduced the level of lead in people’s blood.
• The Equal Employment Opportunity Commission (EEOC) regulates
businesses to protect employees from discrimination.
Government Involvement
The American Recovery
and Reinvestment Act of
2009 is an economic
stimulus package enacted by
Congress and signed into
law by President Barack
Obama on February 17,
2009.
The Act was intended to
provide a stimulus to the U.S.
economy in the wake of the
economic downturn.
President Obama signs into the law the
American Recovery and Reinvestment Act,
commonly known as “The Stimulus.”
The Act was worth as
much as $787 billion.
Government Involvement
The cartoon above reflects the view of many
Americans concerning the TARP law, commonly
called “The Bailout.”
The Troubled Asset
Relief Program (TARP) is a
program of the United States
government to purchase assets
and equity from financial
institutions in order to
strengthen the financial sector.
TARP allows the
United States Department of
the Treasury to purchase or
insure up to $700 billion of
"troubled" assets.
It was the largest
component of the government's
measures to address the
subprime mortgage crisis.
Privatization Vs. Nationalization
• Privatization – is the act of
the government selling or
converting any of its
businesses to be run by
private individuals.
• Nationalization – is the act of
taking an industry, business,
or other private assets into
government ownership.
The Business Cycles
• Business cycles are constant
changes and ups and downs in
economic growth.
A government
influences business cycles
through its policies and
programs. When taxes are
raised, businesses and
consumers have less money
with which to fuel the economy.
The government may
reduce interest rates, cut
taxes, or institute federally
funded programs to spark a
depressed economy.
Trough – the low point of a recession
just before recovery begins.
Peak – the high point of an economic
recovery.
Frameworks 4.9
The Phases of the
Business Cycle
Prosperity is a period of economic growth and expansion.
Nationwide there is low unemployment, an increase in the
output of goods and services, and high consumer spending.
Recession is a period of economic slowdown. Unemployment
begins to rise, fewer goods and services are produced, and
consumer spending decreases. Recessions usually last 6-8
months, cut can last for a long period of time.
Depression is a period of prolonged and deep recession.
Consumer spending is very low, unemployment is very high,
and production of goods and services is down significantly.
Poverty results because many people are out of work and
cannot afford to buy food, clothing, or shelter. The Great
Depression of the early 1930s best illustrates a depression.
Recovery is a period of renewed economic growth following a
recession or depression. Recovery is characterized by
reduced unemployment, increased consumer spending, and
moderate expansion by businesses. Periods of recovery differ
in length and strength.
Frameworks 4.9
Depression
A long and severe drop in the
Gross Domestic Product.
The Great Depression that began in 1929 left many Americans homeless and
standing in line at soup kitchens.
Frameworks 4.9
Economic Measurements
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Productivity is output per worker hour.
Gross domestic product is a measure of the goods and services produced
using labor and property located in a country.
Inflation refers to rising prices. A low inflation rate (1-5 percent) shows that an
economy is stable.
The Consumer Price Index (CPI), also called the cost-of-living index, measures
the change in price of some 400 retail goods and services used by the average
urban household.
The Producer Price Index (PPI) measures wholesale price levels in the
economy. Increases often get passed along to the consumer.
The Consumer Confidence Index (CCI) measures consumer confidence about
personal finance, economic conditions, and buying conditions.
The higher the unemployment rate, the greater the chances of an economic
slowdown.
The lower the unemployment rate, the greater the chances of an economic
expansion.
Frameworks 4.8
Observing The Laws
Of Supply And Demand
• Economics operates on two levels:
– Macroeconomics studies the economic behavior and
relationships of an entire society.
– Microeconomics examines relationships between individual
consumers and producers.
– Microeconomics also studies how individuals make decisions
about what to produce and what to buy.
– Marketers are primarily concerned about Microeconomics.
• Factors Affecting Demand
– How strong is the need or want for that product?
– Is the supply of the product large or small?
– What is the availability of alternative products that will satisfy
the need?
Observing The Laws
Of Supply And Demand
• Analyzing Demand Curves
– A demand curve is often illustrated by a graph that
illustrates the relationship between price and the
quantity demanded.
• Law of Demand
– When the price of a product is increased, less will be
demanded.
– When the price is decreased, more will be demanded.
Frameworks 4.6
Demand Curve for Movies
Price
$10.50
9.00
7.50
6.00
4.50
3.00
1.50
1,000
Quantity
2,000
3,000
4,000
5,000
6,000
7,000
Frameworks 4.6
Supplying the Product
• Businesses operate to make a profit and will
prefer to supply more of those products that offer
the greatest profit potential.
Frameworks 4.6
Economic Resources
• Land/Natural Resources – anything in its natural state –
oil, natural gas, coal, trees.
• Capitol Resources – money, tools, and equipment
needed for production of products or services.
• Labor/Human Resources – employees of the business.
• Entrepreneurship – the individual who takes the risk of
owning and operating the business.
Frameworks 4.2
Buying Economic Resources
What country is the largest trading partner for the
United States?
1. Canada: $ 518.10
2. China: $ 345.45
3. Mexico: $ 315.59
4. Japan: $176.30
5. Germany: $129.73
6. United Kingdom: $ 97.22
7. South Korea: $ 71.70
8. France: $ 62.03
9. Saudi Arabia: $ 59.32
10. Brazil: $ 54.14
The Oil Sands of Alberta
“Where Black Gold
And Riches Can Be
Found In The Sand”
There’s an oil boom going
on right now. Not in Saudi
Arabia or Kuwait or any of
those places, but 600 miles
north of Montana.
In Alberta, Canada, in a
town called Fort McMurray
where, in the dead of
winter, the temperature
sometimes zooms up to
zero.
Frameworks 4.2
Supplying the Product
• A supply curve is illustrated by a graph that
illustrates the relationship between price and
quantity supplied.
• The Law of Supply
– When the price of a product is increased, producers
will prefer to produce more of that product.
– When the price is decreased, less will be produced.
Frameworks 4.6
Supply Curve for Cell Phones
Price
$105
90
75
60
45
30
15
10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000
Quantity
Frameworks 4.6
Intersecting Supply & Demand
The Market Price is found when supply and
demand curves meet. AKA – Equilibrium Point
Price
Supply
Demand
$2,100
1,800
1,500
Market Price
1,200
900
600
Supply and
Demand
Curves for
Laptop
Computers
300
100
200
Quantity (in 000s)
300
400
500
600
700
800
Frameworks 4.6.2
Surplus Vs. Shortage
Surpluses of goods occur when supply
exceeds demand. When this happens,
businesses respond by lowering their
prices in order to encourage people to buy
more of the product. AKA – a buyer’s
market.
When demand exceeds supply, shortages
of products occur. When shortages occur,
businesses can raise prices and still sell
their merchandise. AKA – a seller’s market.
Equilibrium exists when the amount of
product supplied is equal to the amount of
product demanded.
Frameworks 4.6.1
Jingle all the Way was released
in December, 1996.
Types Of Economic Competition
• In pure competition, many suppliers will offer
very similar products – even the same products.
All cattle farmers
are competitors with
each other. But they
rarely view
themselves that way.
Why?
Individually, they
have virtually no
influence on the price
they receive for their
product – pure
competition.
Types Of Economic Competition
• A monopoly is a type of market in which one supplier offers a
unique product and has exclusive control of the market.
• Some regulated monopolies are allowed to exist because it would
not make sense to have more than one provider of that product or
service.
Frameworks 5.4.3
Between Pure Competition & Monopoly
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In an oligopoly a few businesses offer very similar products or
services. The cost of starting a new business in this situation is
extremely high – usually there will be no new competitors.
If these businesses work together (collusion) they will have created
an illegal monopoly.
In an oligopoly if one business increases or lowers price, the other
businesses will usually match the competitor's new price.
If they compete with each other based on price, prices will be
lowered to a point where the business may become unprofitable.
Between Pure Competition & Monopoly
• In monopolistic competition, there are many firms competing with
products that are somewhat similar.
• This is the most common type of competition facing businesses
today.
• A business in this situation will have little control in the marketplace,
as they will usually be forced to stay in line with their competitors.
• However, the greater the differences among products and services,
the more control the business will have over its pricing strategy.
• Business will strive to have products and services that are better
than, and different from, competitors.
Monopolistic Competition
Avoiding Monopolistic Competition
The term blue ocean refers to
all the industries not in existence
today—the unknown market space,
untainted by competition. In blue
oceans, demand is created rather
than fought over. There is ample
opportunity for growth that is both
profitable and rapid.
In blue oceans, competition is
irrelevant because the rules of the
game are waiting to be set.
The term blue ocean is an
analogy to describe the wider, deeper
potential of market space that is not
yet explored.
How much would
you pay to see a circus
act like those found at
Ringling Brothers and
Barnum and Bailey?
A ticket can cost
as little as $12.
How much would you pay to see
a Cirque Du Soleil show?
The ticket price is
$125 - $150 for a Cirque Du
Soleil show in Las Vegas.
The traveling shows
have prices ranging from a
low of $69 to a high of $250.
http://www.cirquedusoleil.com/
en/shows/ka/tickets.aspx
Why is Cirque Du Sloeil successful?
• Traditional circuses, that
feature animal acts and
clowns, have been on
the decline for many
years.
• Cirque Du Sloeil
(headquartered in
Montreal, Canada),
avoided monopolistic
competition and created
a “Blue Ocean.”
Watch video from 60 minutes program.
Utility Means Satisfaction
Economic utility is the amount of satisfaction, or
value, a consumer receives from the consumption
of a particular product or service.
Businesses use economic utility to increase the
chances that consumers will buy their products or
services.
The four types of utility: Form Utility, Time Utility,
Place Utility and Possession Utility.
Frameworks 4.3
Form Utility
Type of utility created by changes in the
form or shape of a product to make it
useful.
Frameworks 4.3.1
Place Utility
Created by having a good or service at the
location where it is needed or wanted
Frameworks 4.3.1
Time Utility
Created when a product or service is
available when it is needed or wanted by
consumers
Frameworks 4.3.1
Possession Utility
Created when ownership of a
good or service is transferred
from one person to another,
but it may also occur through
renting or borrowing.
Finding ways to finance, rent,
or lease products has become
an important business activity.
Frameworks 4.3.1
Test