In the study of economics, some factors affect small businesses, which are referred to as micro-economic factors. According to Goodwin et al. (2013), there are four main types of economic systems, which are traditional, command, market, and mixed economic systems. The first part of this discussion will examine government and market factors that can affect the small scale business if it operates in a traditional economic system and market economic system. The second part will include the ideal market system for the new small scale business. This essay will demonstrate that a small scale firm will need to operate in a mixed system because the government protects small business from the competition from large firms while allowing them to engage in competition strategies.
If the business operates in a traditional economic system, it will not be affected by government regulations or laws since this system applies to populations that live in close-knit societies. These societies are characterized by having simple lifestyles, such as they only produce goods and services, mostly for subsistence consumption (Ferri, 2011). They do not engage in commercial enterprises to generate money. Rather, they rely on the barter trade system to trade goods and services (Ferri, 2011). The business would operate best in a traditional economic system if it is involved in agricultural farming where farmers exchange farm products with other farmer traders. In this system, technological or medicine-based businesses will not be the best choice among the alternative options of businesses to launch.
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The second system in which the business can operate in the market economic system in which the government plays no role in influencing the distribution of scarce resources. This system is also called the free-market system where sellers decide what to produce and buyers are allowed to choose the best among the given choices of goods and services. An example of an economy in which a new business can operate freely without too much interference from the government in America because it promotes the spirit of capitalism among entrepreneurs (Ferri, 2011). The advantage of this economy is that new firms can engage in competition to generate more profits and buyers are provided with vast choices to among the best quality among goods and services (Musgrave & Kacapyr, 2009). The only challenge is that small-scale business can face barriers to entry from monopolistic firms that are well established in the free market system.
For the best ideal capitalist economy, a new small-scale business should operate in a mixed economic system. This system involves the government controlling firms to a certain degree while at the same time; the government allows a free market economy to flourish (Ferri, 2011). This is the same as allowing the mixed economic system and the command economic system to operate together. In this economy, the government regulates businesses through taxation and registration of firms (Ferri, 2011). It also regulates prices of goods and services that basic to the common citizen, such as the price of cooking gas.
There are two main indicators that will be used to measure goods and services in a mixed economy, namely market forces and government interventions. Government interventions include price ceiling and price floor. The government uses price ceiling, which is the lowest prices set by the government which producers can offer to customers, ensuring that small-scale businesses are not locked out of the competition (Ferri, 2011). There is also the price floor, which is the highest price that the capped on some goods and services to protect consumers from price discrimination, as well as to prevent firms from overcharging consumers.
Market forces include demand, supply, and prices of goods and services, which are some of the factors that will determine to what extent quantity demand, will be affected. For example, if the supply of goods will be low, the quantity demanded will rise, and when the supply increases, the quantity demanded will decrease (Ferri, 2011). Moreover, when the price of goods and service increases, the quantity demanded will also rise, and when the price decreases, the quantity demanded will decrease.
If the business operates in a socialist economy, the production of goods and services will be controlled by a centralized command system of the government. In this system, the government decides everything, which includes planning and distribution of scarce resources. An example of such an economy is the USSR where a communist government rules people ensures social goods are provided to its citizens (Ferri, 2011). A socialist economy is designed to ensure that citizens receive public goods, which include healthcare services, public lightings, and construction of roads, schools, and the distribution of cleaning drinking water.
The price floor shares an inverse relationship with the labor market, such that if the government restricts businesses to sell a certain good above a given price, it means that firms will not be more employees in the production process (Ferri, 2011). Therefore, a small-scale business might be forced to lay off some employees to maintain a balance between paid wages and expected profits to be generated.
This discussion shows that the mixed economic system will be the best for starting the small-scale business. This is because a small-scale business will be protected from being locked out of the competition from large firms which tend to create barriers to entry by increasing prices of goods and services. In this case, the government will introduce interventions, such as price ceiling and price floor, which are tools used to regulate competition among firms. Also, the small scale business will benefit from operating in a free market by creating competitive edge strategies against its rivals.
References
Ferri, P. (2011). Macroeconomics of growth cycles and financial instability . Northampton:Edward Elgar Publishing.
Goodwin, N., Nelson, J., Harris, J., Torras, M., & Roach, B. (2013). Macroeconomics in context. New York, NY: M.E. Sharpe.
Musgrave, F., & Kacapyr, E. (2009). Barron's AP microeconomics/macroeconomics . NatorpBoulevard: Barron's Educational Series.
