11 14 13 Chapter 2 Notes Understanding Economics and How It Affects Business 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 o Allocation of scarce resources Macroeconomics looks at the operation of a nations economy as a whole Microeconomics looks at the behavior of people and organizations in markets for Resource development study of how to increase resources and create conditions particular products and services that will make better use of them Adam Smith father of economics o Believed freedom was vital to the survival of any economy especially the freedom to own land or property and to keep the profits from working the land or running the business o People respond to incentives o Invisible hand describes the process that turns self directed gain into social and economic benefits for all As people become wealthier they would naturally reach out to help the less fortunate in the community Capitalism all or most factors of production and distribution are owned by individuals foundation of the US economic system State capitalism where the state runs some business instead of private owners Foundations of capitalism 1 The right to own private property 2 The right to own a business and keep al that business s profits 3 The right to freedom of competition 4 The right to freedom of choice People are willing to take more risks Free Markets Prices determined by buyers and sellers negotiating in the marketplace Supply quantities of products manufacturers or owners are willing to sell at different prices at a specific time supply increases when price increases Demand quantity of products that people are willing to buy at different prices at a specific time quantity demanded increases as price decreases Market price price toward which the market will trend equilibrium price 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 larger number of sellers produce very similar products that buyers nevertheless perceive as different o Product differentiation the attempt to make buyers think similar products are different in some way through advertising packaging and branding Oligopoly degree of competition in which just a few sellers dominate the market o Products from different companies tend to be priced about the same Monopoly occurs when one seller controls the total supply of a product or service and sets the price Socialism An economic system based on the premise that some if not most basic businesses should be owned by the government so that profits can be distributed more evenly among the people Social equality government takes money from wealthier and redistributes to poorer people Free education fee health care and free child care Takes away incentives Brain drain loss of the best and brightest people to other countries Less inventions and innovation Communism Economic and political system in which the government makes almost all economic decisions and owns almost all of the major factors of production Trend Toward Mixed Economies 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 the economic system o Don t respond enough to the needs of the poor the old or the disables o Don t protect the environment Command economies exist when the government largely decides what goods and services will be produced who gets them and how the economy will grow Socialism and communism o Don t create enough jobs or wealth All countries have a mix of the two systems Mixed economies exist where some allocation of resources is made by the market and some by the government 3 major indicators of economic condition gross domestic product GDP unemployment rate price indexes GDP the total value of final goods and services produced in a country in a given US Economy year Unemployment rate the percentage of civilians at least 16 years old who are unemployed and tried to find a job within the prior 4 weeks o Frictional people who have quit work because they didn t like something about it Refers to those who are entering the labor force for the first time or are returning to the labor force after significant time away o Structural caused by the restructuring of firms or by a mismatch between skills of job seekers and the requirements of available jobs o Cyclical recession or a similar downturn in the business cycle causes unemployment o Seasonal when demand for labor varies over the year Inflation general rise in the price of goods and services over time Disinflation occurs when price increases are slowing Deflation prices are declining Stagflation when the economy is slowing but prices are going up Consumer price index CPI monthly statistics that measure the pace of inflation or deflation o Core inflation CPI minus food and energy costs Producer price index PPI measures prices at the wholesale level Business Cycle Periodic rises and falls that occur in economies over time Phases of long term business cycles 1 Economic boom business is booming 2 Recession two or more consecutive quarters of decline in the GDP a Prices fall people buy less and businesses fail b Brings high unemployment 3 Depression severe recession usually accompanied by inflation 4 Recovery occurs when the economy stabilizes and starts to grow leads to economic boom and cycle starts again Stabilizing the Economy through Fiscal Policy Fiscal policy federal governments effort to keep the economy stable by increasing or decreasing taxes or government spending o Taxation National deficit amount of money the federal government spends beyond what it gathers in taxes for a given fiscal year National debt sum of government deficits over time National surplus if the government takes in more revenue than it spends Keynesian economic theory theory that a government policy of increasing spending and cutting taxes could stimulate the economy in a recession Monetary policy management of the money supply and interest rates by the Federal Reserve Bank
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