Chapter 2 Understanding How Economics Affects Business How Economic Conditions Affect Businesses Major part of US success ability to operate freely Economics is 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 Macroeconomics the part of economics study that looks at the operation of a nation s economy as a whole o Microeconomics the part of economics study that looks at the behavior or ppl and organizations in particular markets Resource development is the study of how to increase resources and create conditions that will make better use of them like recycling Neo Malthusians believe there are too many ppl in the world today However many industrial countries like Italy US s populations are growing so slowly that it will cause an issue of having too many old ppl and not enough young ppl to support them in the developing world population is climbing faster which will lead to poverty and unrest Adam Smith envisioned creating more resources so that everyone could become wealthier He believed freedom was vital to the survival of any economy ppl would work hard if they had incentives considered father of modern economics Invisible hand a phrase coined by Adam Smith to describe the process that turns self directed gain into social and economic benefits for all Understanding Free Market Capitalism US Europe Japan Canada adopted free market principles Capitalism an economic system in which all or most of the factors of production and distribution are privately owned and operated for profit 4 basic rights o 1 The right to own private property o 2 The right to own a business and keep all that business s profits o 3 The right to freedom of competition o 4 The right to freedom of choice In a free market decisions about what and how much to produce are made by the market by buyers and sellers negotiating prices for goods and services Price tells producers how much to produce Seller lowers a price demand will most likely go up Supply the quantity of products that manufacturers or owners are willing to sell at different prices at a specific time o Amount supplied increases as price increases Demand the quantity of products that ppl are willing to buy at different prices at a specific time o Quantity demanded will increase as the price decreases Supply curve demand curve cross where quantity demanded and quantity supplied are equal equilibrium point price market price the price determined by supply demand If quantity supplied exceeds quantity demanded this surplus signals sellers to lower the price if shortages develop it signals sellers to increase the price 4 different degrees of competition o 1 Perfect competition exists when there are many sellers in a market and none is large enough to dictate the price of a product o 2 Monopolisitic competition a large number of sellers produce very similar products that buyers nevertheless perceive as different such as hotdogs sodas t shirts ex fast food industry Product differentiation the attempt to make buyers think that similar products are different in some way o 3 Oligopoly just a few sellers dominate a market tobacco gas cars Initial investment to start off is tremendous Prices the same for each seller o 4 Monopoly occurs when one seller controls the total supply of a product or service and sets the price Illegal in US Benefits of free market allows open competition provides opportunities for poor ppl to work their way out of poverty encourages businesses to be more efficient Limitations of free market inequality business owners managers make more money and have more wealth than lower level workers some ppl let greed dictate how they act Understanding Socialism 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 more evenly distributed among the ppl Benefits social equality free education through college free health care free child care longer vacations from work shorter work days more employee benefits Negatives o Brain drain the loss of the best and brightest ppl to other countries o fewer inventions less innovation Understanding Communism communism an economic and political system in which the gov makes almost all economic decisions and owns almost all the major factors of production problems gov doesn t know what to produce ppl don t have incentives to work hard The 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 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 communism Mixed economies economic systems in which some allocation of resources is made by the market and some by the government Understanding the US Economic System Indicators of economic conditions o Gross domestic product GDP the total value of final goods and services produced in a country in a given year Company is part of a country s GDP as long as it is located within the country s boundaries Major influence on GDP productivity of the workforce o Unemployment rate the number of civilians at least 16 years old who are unemployed and tried to find a job with the prior 4 weeks o Price indexes Frictional refers to ppl who quit work b c they didn t like the job those entering the labor force for the 1st time those returning to the labor force after significant time away Structural refers to unemployment caused by the restructuring of firms or by a mismatch between the skills of job seekers and the requirements of available jobs Cyclical occurs b c of a recession or a similar downturn in the business cycle most serious Seasonal occurs where demand for labor varies over the year Inflation a general rise in the prices of goods and services over time Disinflation a situation in which price increases are slowing inflation rate is declining Deflation prices are declining Stagflation a situation when the economy is slowing but prices are going up anyhow Consumer price index CPI monthly statistics that measure the pace of inflation or deflation Chained consumer price index takes into account that consumers would shift their purchases as prices go up or down Producer price index PPI an index that measures prices at the wholesale level It can be
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