Prof Howard Frank Outline Ch 2 How Economic Conditions Affect Businesses Major part of success in America is stemmed from an economic social climate that always businesses to operate freely People are free to start a business anywhere and they are just as free as to fail as to succeed Freedom to fail motivates people to keep trying to succeed because the rewards can often be so great Any change in the U S economic or political system has a major influence on the success on the business system Global economics and politics also have similar influences Free Market one not controlled by the government 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 Resources land labor capital entrepreneurship and knowledge Macroeconomics The part of economics that looks at the operation as a whole i e the effects of population growth Microeconomics The part of economics that looks at the behavior of people and organizations in particular markets Resources are scarce Resource Development The study of how to increase resources and to create the conditions that will make better use of the resources i e recycling and oil conservations Businesses often contribute to an economic often invent products and or services that greatly increase the available resources Why Economics Was Known as the Dismal Science Thomas Malthus believed that their the solution to poverty was birth control This is because he believed that there would soon be to many people in the world and not enough resources to provide for them However it is evident that he is wrong and that in fact population is growing slower than expected Some macroeconomists disagree with Malthus and believe that a large educated population is one of the keys to economic growth Further educating other people The best thing we can do to help the economy is to educate people Growth Economics and Adam Smith Adam Smith believed freedom and especially the freedom to own land or property and the freedom to keep profits from working the land or running a business was vital for the survival of any economy Smith believed as long as farmers laborers and businesspeople continued to reveal profits they would continue to work hard and long hours which would then provide products and plenty of food to everyone How Businesses Benefit the Community Under smith s theory people do not necessarily set out to help others however as people try to improve their own prosperity their efforts serve as an invisible hand that helps the economy grow and prosper through production of needed goods services and ideas Invisible Hand A phrase coined by Adam Smith to describe the process tat turns self directed gain into social and economic benefits Sometimes people s self centered efforts to become wealthy lead to jobs for some and in the case of farming food for all Unethical practices undermine the whole economic system Understanding Free Market Capitalism Even though it may seem difficult to start a successful business because of the accumulated money needed to buy or start a business and the necessary work hours to make it grow there are always opportunities The Economic system that has led to wealth creation in much of the world is known as capitalism Capitalism An economic system in which all or most of the factors of production and distribution are privately owned and operated for a profit Capitalism allows businesses to decide what to produce how much to pay workers how much to charge for goods and services whether to produce certain goods import goods or have them made in other countries and so on No country is purely a capitalist country Governments often get involved in issues such as determining minimum wages however the foundation of the U S economy is capitalism The Foundations Capitalism 4 Basic rights 1 The right to private property Individuals can buy sell and use land buildings machinery inventions and other forms of property 2 The right to own a business and keep all of that business s profits Profits equal revenues minus expenses Profits act as important incentives for business owners 3 The right to freedom of competition Individuals are allowed to compete against other individuals or businesses by offering new products and promotions under established guidelines of government o To survive and grow businesses need laws and regulations which ensure that people will do what they say they ll do 4 The right to freedom of choice People are free to choose where they want to work and what career they want to follow How Free Markets Work A free market is one in which decisions about what to produce and in what quantities are made by the market buyers and sellers negotiating prices for goods and services Consumers send signals to tell producers what to make how many color etc by buying or choosing not to buy certain products and services The price tells producers how much to produce For example if something is isn t available the price tends to go up until someone begins making more of the product sells the one on hand or makes a substitute Prices are determined by buyers and sellers negotiating in the marketplace The Economic Concept of Supply Supply The quantity of products that manufacturers or owners are willing to sell at different prices at a specific time The amount supplied will increase as the price increases because sellers can make more money with a higher price All things being equal the higher the price the more the vendor will be willing to supply The Economic Concept of Demand prices at a specific time Demand The quantity of products that people are willing to buy at different The quantity demanded will increase as the price decreases The reason for this is because if something is very cheap it is more likely that people will be willing to spend their money on it Who doesn t like a sale Equilibrium Point or Market Price Sellers prefer a high price while buyers prefer a low price The place where quantity demanded and supplied meet is called the equilibrium point Market Price The price determined by supply and demand In countries with no free market there is no such mechanism to reveal to businesses what to produce or what amounts to produce so there are often shortages or surpluses Competition within Free Markets Economists generally agree that there are four different degrees of competition 1 perfect competition 2
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