Understanding Economics How It Affects Business 01 10 2014 Economics study of how society chooses to employ resources to produce goods and services and distribute them for consumption among various competing groups and individuals Study of the allocation of scarce resources MICROECONOMICS vs MACROECONOMICS o Natural resources land wood oil energy o Human resources workers labor o Financial resources Capital money o o Resource development the study of how to increase resources and to create the conditions that will make better use of those resources Business owners provide jobs and economic growth for their employees and communities as well as for themselves Adam Smith Wealth of Nations Father of Modern Economics freedom was vital to survival of any economy freedom to own land or property and to keep profits from working the land or running a business o WORK for INCENTIVES Invisible hand describes the process that turns self directed gain interest into social and economic benefits for all MARKETS Capitalism economic system in which all or most of the factors of production and distribution are privately owned and operated for profit o Operated for profit businesspeople NOT GOVT decide what to produce how much what to charge where to produce foreign or not and how much to pay workers o No country purely capitalist govt involved in determining minimum wage setting farm prices lending money to failing businesses o State capitalism state runs some businesses instead of private owners o FOUR BASIC RIGHTS Right to own private property individuals can buy sell use land buildings machinery inventions etc can pass on as inheritance Right to own a business and keep all that business s profits rev expenses salaries materials taxes Right to freedom of competition Right to freedom of choice career where what to buy sell o Ppl are willing to take risks Free Markets o Decisions about what and how much to produce are made by market by buyers and sellers negotiating prices for goods and services o Consumers control by choosing to buy not buy certain products services o Price tells producers how much to produce o Prices determined by buyers and sellers negotiating in the marketplace o Supply quantity of products that manufacturers or owners are willing to sell at diff prices at a specific time price up supply up o Demand quantity of products people are willing to buy at diff prices at a specific time price up demand down o Market price price determined by supply and demand o Equilibrium point price intersection of curves o Competition within free markets pg 39 Perfect competition many sellers price takers agriculture Monopolistic competition large number of sellers produce similar products that buyers perceive as diff Product differentiation attempt to make buyers think similar products are diff Oligopoly few sellers dominate price relatively same bc of intense price competition would lower profits for everyone product differentiation Auto industry cell phone providers oil fuel Monopoly one seller controls supply and sets price prices and profits controlled by public service commissions to protect interest of buyers Deregulation Cable collegeboard DMV Socialism economic system based on premise that some if not most basic businesses should be owned by the government so that profits can be more evenly distributed among people way of life o Advantages social equality more govt programs easier more relaxed o Disadvantages no incentives fewer innvovation Brain drain loss of best and brightest to other countries Communism economic and political system in which government makes almost all economic decisions and owns almost all the major factors of production o Disadvantage govt has no way of knowing what to produce bc prices don t reflect supply demand no incentive shortages Free market economies economic systems in which market largely determines what goods and services get produced who gets them and how the economy grows capitalism Command economies economic systems in which govt largely decides what goods and services will be produced who will get them and how the economy will grow socialism communism All countries are a lovely blend of the two Capitalism and socialism Mixed economies economic systems in which some allocation of resources is made by the market and some by the govt Economic Indicators measure that predicts all affect each other GDP unemployment rate price indexes productivity Housing starts retail sales changes in personal income Gross Domestic Product GDP total value of final goods and services produced in a country in a given year As long as a company is within a country s border their numbers go into the country s GDP even if they are foreign owned o Doesn t include material well being of country stocks etc o US GDP 15 6 trillion 2012 Unemployment rate percentage of civilians at least 16 years old who are unemployed are tried to find a job within the prior four weeks o Frictional certain percentage that will always be unemployed between jobs etc o Structural lack skills o Cyclical business cycle recession high o Seasonal varies by season teachers o Underemployment includes those who are working part time and want a full time job and those who stopped looking for work Inflation general rise in price of goods and services over time too many dollars chasing too few goods Disinflation when the price increases are slowing inflation rate declining Deflation prices are declining bc too few dollars are chasing too many goods Stagflation economy is slowing but prices are going up Consumer Price Index CPI monthly statistics that measures the pace of inflation or deflation o Govt computes costs of goods and services housing food apparel medical care to see if they are going up or down o Wages rent leases tax brackets govt benefits and interest rates of some citizens are based upon the CPI o Core inflation CPI food and energy costs Producer price index index that measures prices at wholesale level Business cycles periodic rises and falls that occur in economies over time o Economic boom o Recession two or more consecutive quarters of decline in GDP prices fall less purchases made high unemployment o Depression severe recession usually accompanied by deflation o Recovery economy stabilizes and starts to grow o Higher productivity lower costs of production lower prices High o Machinery technology may add to quality of service but not output per PRODUCTIVITY unemployment worker Stabilizing the