CHAPTER 2 UNDERSTANDING HOW ECONOMICS AFFECTS BUSINESS What is Economics Economics the study of how society chooses to employ resources to produce goods and services and distribute them for consumption among various competing groups and individuals Macroeconomics looks at the operation of a nation s economy as a whole Microeconomics looks at the behavior of people and organizations in markets for particular products or services o Macroeconomics includes GDP the unemployment rate and price indexes o Microeconomic issues include pricing and supply demand interactions Resource development the study of how to increase resources say by getting oil from shale and tar sands and create conditions that will make better use of them recycling and conservation The Secret to Creating a Wealthy Economy Followers of Malthus still believe there are too many people in the world and the solution to poverty is radical birth control including forced abortions and sterilization To create a wealthy economy one does not give a man fish but teaches him how to fish o give a man a fish and you feed him for a day but teach a man to fish and you o teach a person to start a fish farm and he or she will be able to feed a village for feed him for a lifetime a lifetime Adam Smith and the Creation of Wealth How Businesses Benefit the Community Freedom was vital to survival of an economy He believed people will work long and hard if they have incentives for doing so People try to improve their own situation in life their efforts serve as an invisible hand that helps the economy grow and prosper through the production of needed goods services and ideas Invisible hand process that turns self directed gain into social and economic benefits for all UNDERSTANDING FREE MARKET CAPITALISM Capitalism an economic system in which all or most of the factors of production and distribution are privately owned and operated for profit Capitalism is the foundation of the U S economic system and of the economies of England Australia Canada and most other developed nations The Foundations of Capitalism 1 The right to own private property Individuals can buy sell and use land buildings machinery inventions and other forms of property they can also pass it down to their children 2 The right to own a business and keep all that business s profits Profits as an important incentive for business owners 3 The right to freedom of competition 4 The right to freedom of choice People are free to choose where they want to work and what career they want to follow President FDR believed four additional freedoms were essential to economic success freedom of speech and expression the freedom to worship in your own way freedom from want and freedom from fear How Prices Are Determined In a free market prices are determined by buyers and sellers negotiating in the marketplace The Economic Concept of Demand Demand refers to the quantity of products that people are willing to buy at different prices at a specific time At higher prices there are fewer buyers and vice versa The Equilibrium Point or Market Price The key factor in determining the quantities supplied and demanded is Price In the long run the equilibrium point where Supply and Demand intersect will be the market price Market Price price derived from supply and demand It is the price towards which the market will trend Supply exceeding demand leads to a surplus which signals sellers to lower the price Demand exceeding supply leads to a shortage which signals sellers to increase the price o Eventually after increasing or decreasing the price supply will equal demand if nothing else interferes Competition within Free Markets oligopoly and monopoly There are four types of competition Perfect competition monopolistic competition Perfect competition exists when there are many sellers in a market and none is large enough to dictate the price of a product Monopolistic competition a large number of sellers produce very similar products that buyers nevertheless perceive as different such as hot dogs sodas personal computers and t shirts Product differentiation the attempt to make buyers think similar products are different in some way key to success Oligopoly a degree of competition in which just a few sellers dominate the market The initial investment to enter the oligopoly business is often tremendous airlines Monopoly occurs when one seller controls the total supply of a product or service and sets the price Laws prohibit the creation of monopolies Benefits and Limitations of Free Markets It allows open competition among companies Competition leads business to provide customers with high quality products at fair prices with food service otherwise will lose customers to businesses who do Socialism Socialism an economic system based on the premise the some if not most basic businesses steel mills coal mines and utilities should be owned by the government so that profits can be more evenly distributed among the people They believe the wealth should be more evenly distributed than occurs in free market capitalism Benefits of Socialism The main benefit of socialism is supposed to be social equality It takes income from wealthier people in form of taxes and redistributes it to poorer people through various government programs Free education through college free health care and free child care are some benefits from socialist governments Negative Consequences of Socialism Brightest people such as doctors lawyers business owners and others leave socialist countries for capitalistic countries with lower taxes Brain drain the loss of the best and brightest people to other countries UNDERSTANDING COMMUNISM Communism is an economic and political system in which the government makes almost all economic decisions and owns almost all the major factors of production Some communist countries have not allowed their citizens to practice certain religions change jobs or move to the town of their choice Lacks incentives for business people to work Free market economies exist when the market largely determines what goods and services get produced who gets them and how the economy grows Capitalism is the popular term for this economic system Command economies exist when the government largely determines what goods and services will be produced who gets them and how the economy will grow Socialism and communism are variations on this economic system Mixed economies exist where some allocation of resources is made by the
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