Chapter 2 Understanding How Economics Affects Business 1 Economics The study of how society chooses to employ scarce resources to produce goods and services and distribute them for consumption among various competing groups and individuals a Macroeconomics Analyzes the operations of the nations economy as a whole i GDP unemployment rate prices indexes b Microeconomics Analyzes the behavior of people and organizations in markets for particular products or services i Pricing supply demand interactions 1 Example Why do people buy smaller cars when gas prices go up c Resource Development The study of how to increase resources and create conditions that will make better use of them d Malthus Argument Too many people and not enough resources for everyone e Adam Smith Create more resources so everyone can be wealthier i Father of modern economics 1 Belief Freedom is vital to the survival of an economy people will work harder if they have incentives for doing so ii Invisible Hand The process that turns self directed gain into social and economic benefits for all fortunate ones 1 Assumption As people become wealthier they will reach out to help the less a Example Farmers produce more crops gives them profit and food for others Farmers then hire extra workers gives them more profit more food for others and employment to others 2 Capitalism All or most of the factors of production and distribution are privately owned by individuals and operated for profit Foundation of U S England Australia and Canada s economic system a Businesspeople not the government decide what to produce and how much what to charge how much to pay workers and where to produce the goods b Rights to Capitalism People take more risks i Own Private Property Individuals can buy sell and use land buildings machinery inventions and other forms of property and pass them along through generations ii Own A Business Keep Profits Profits Revenue Expenses iii Freedom of Competition Can compete with other businesses in selling and promoting goods and services follow iv Freedom of Choice Free to choose where they want to work and what career they want to c Free Markets Decisions about what and how much to produce are made by the market buyers sellers negotiate prices for goods and services i Supply The quantities of products manufactures or owners are willing to sell at different prices at a specific time 1 Amount supplied will increase as price increases ii Demand Quantity of products that people are willing to buy at different prices at a specific time 1 Quantity demanded will increase as price decreases iii Equilibrium Quantity demanded quantity supplied are equal 1 Market Price Equilibrium price as determined by supply demand 3 Free Market Competition a Perfect Competition Many sellers in a market and none is large enough to dictate the price of a product sellers products appear identical i Apples corn and potatoes b Monopolistic Competition Large number of sellers produce very similar products that buyers perceive as different i Hot dogs sodas personal computers t shirts ii Product Differentiation convincing customers that similar products are actually different is the key to success 1 Do this through advertising branding and packaging c Oligopoly Only a few sellers dominate the market in which products are all priced relatively similar to one another advertising creates perceived differences i Tobacco gasoline automobiles aluminum aircraft d Monopoly One seller controls total supply of a product or service and sets the price i U S prohibits the formation of monopolies other than utilities that sell natural gas water and electric power 1 Prices profits are controlled by public service commissions 4 Socialism The government owns most basic businesses like steel mills coalmines so that profits can be more evenly distributed among the people a Entrepreneurs own run smaller businesses but individuals are largely taxed in order to pay for social programs i Advantages 1 Social Equality Government takes income from wealthier people in the form of taxes and redistributes it to poorer people through various government programs 2 Free Benefits Healthcare childcare education longer vacations fewer work hours per week ii Disadvantages Takes away a lot of incentive 1 Brain Drain The loss of the best and brightest people to other countries 2 Fewer Inventions Innovation Those who come up with new ideas do not receive a very big reward 5 Communism The government makes almost all economic decisions and owns almost all the major factors a The government has no way of knowing what to produce because the prices do not reflect supply of production and demand i Leads to shortages of items including food clothing b Zero incentive to work Zero benefits c Sample Countries North Korea Cuba Venezuela 6 Mixed Economies Some allocation of resources is made by the market and some by the government a Free Market Economies Market largely determines what goods and services get produced who gets them and how the economy grows i Aka Capitalism ii Do not respond enough to the needs of the poor old or disabled b Command Economy Government largely decides what goods and services will be produced who gets them and how the economy grows i Aka Socialism Communism ii Do not create enough jobs or keep the wealth flowing fast enough c LONG TERM GLOBAL TREND MIX OF SOCIALISM CAPITALISM 7 The U S Economic System It s Key Economic Indicators a Gross Domestic Product GDP The total value of final goods and services produced in a country in a given year i A major influencer is the productivity of the workforce how much output workers create within a given amount of input time b Unemployment Rate Percentage of civilians at least 16 years old who are unemployed and tried to find a job within the past month i Frictional Unemployment Those who quit work b c they were unsatisfied with working conditions Also includes those who are entering the labor force or returning ii Structural Unemployed caused by the restructuring of firms or mismatch between job seekers the requirements of the job iii Cyclical Unemployment Occurs from a recession or similar downturn in the business cycle iv Seasonal Unemployment Demand for labor varies over the year c Inflation A general rise in the prices of goods and services over time d Disinflation Price increases are slowing or the inflation rate is declining e Deflation Prices are declining i Countries produce so many goods that people cannot afford
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