DREXEL BUSN 101 - How Economic Conditions Affect Businesses

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John Maynard Keynes (Canes): increase gov't spending & cut taxes during recession, decrease spending & raise taxes during inflation *not tested on* Adam Smith: believed economy would automatically function at full employment w/ minimal gov't intervention -depression changed this view and Keynesian economics took over.1. How Economic Conditions Affect Businesses -U.S. success= freedom of businesses -change in economic or political system, locally & globally, has major influence on business system success a. What Is Economics? -Economics: study of how society chooses to employ resources to produce goods & services & distribute them for consumption among various competinggroups and individuals *macroeconomics: looks at operation of a nation's economy as a whole *microeconomics: behavior of people and organizations in particular markets. -Resource development: study of how to increase resources and create the conditions that will make better use of those resources. b. The Secret to Creating a Wealthy Economy -Thomas Malthus & Dismal Science (neo-Malthusians) believe too many people and not enough resources in late 1700s *solution is radical birth control -Some economists believe large population is a resource. -Some industrial countries have slow population growth; in developing countries, population will climb. -Business owners provide jobs & economic growth for employees, communities, & themselves -Macroeconomists try to find why some countries are wealthy and others are poor, them implement policies & programs. c. Adam Smith and the Creation of Wealth -create more resources so everyone can become wealthier. (Wealth of Nations) -freedom was vital -considered ■father of modern economics d. How Businesses Benefit the Community -The efforts of businesspeople are an "invisible hand" that help the economy -invisible hand: describes the process that turns self-directed gain into social and economic benefits for all. 2. Understanding Free-Market Capitalism -capitalism: econ. system in which all or most of the factors of production and distribution are privately owned & operated for profit *businesspeople make decisions, not government officials *No country is purely capitalist; minimum wages, setting farm prices, & lending money is done by gov't -state capitalism: state runs some businesses instead of private owners (China, Russia, some Arab nations) a. The Foundations of Capitalism -Four basic rights: 1. The right to own property- individuals can buy, sell, and use land, buildings, & other property. 2. The right to own a business and keep all profit. 3. The right to freedom of competition- individuals are free to compete in selling & promoting. 4. The right to freedom of choice- free to choose where to work and what career Add'l by pres. Franklin Roosevelt: speech & expression, worship, freedom from want, and from fear b. How Free Markets Work -decisions about what & how much are made by the market by buyers & sellers -Price tells producers how much to produce c. How Prices Are Determined-by buyers and sellers negotiating in the marketplace -High price may be low quantity, seller lowers price quantity is likely to increase. d. The Economic Concept of Supply -Supply: quantity of products that manufacturers or owners are willing to sell at different prices at a specific time. *Generally, amount of supplied will increase as price increases *The higher the price, the more the vendor will be willing to supply. e. The Economic Concept of Demand -Demand: the quantity of products that people are willing to buy at different prices at a specific time. *Quantity demanded will increase as the price decreases f. The Equilibrium Point, or Market Place -Key factor in determining quantities supplied & demanded is price. -Crossing point where the supply curve and the demand curve meet is the equilibrium point/price. -Market price: the price determined by supply and demand. -If supplied exceeds demanded, signals sellers to lower price. If demanded exceeds supplied, sellers increase price. -Eventually they will equal. -In countries w/o free market, amounts are unknown. g. Competition within Free Markets -Four different degrees: perfect, monopolistic, oligopoly, and monopoly. *Perfect competition: there are many sellers in a market and none is large enough to dictate the price of a product. *Monopolistic competition: a large number of sellers produce very similar products that buyers perceive as different. *Oligopoly: just a few sellers dominate the market (tend to be priced the same) *Monopoly: only one seller controls the total supply of a product and sets the price h. Benefits and Limitations of Free Markets -Allows open competition among companies. -Provides opportunities for poor people to work their way out of poverty. -Encourages businesses to be more efficient. -Owners and managers have more money -Greed may dictate actions 3. Understanding Socialism -socialism: econ. sys. based on the premise that some basic businesses should be owned by gov't so profits are evenly distributed. a. The Benefits of Socialism -Major benefit is supposed to be social equality (free education, free health care, child care) -Longer vacations, more benefits, work fewer hours b. The Negative Consequences of Socialism -Loss of incentive -brain drain: loss of the best and brightest people to other countries. -fewer inventions, less innovation b. Understanding Communism -Communism: gov't makes almost all economic decisions and owns almost all the major factors of production. *no way of knowing what to produce; prices don't reflect supply & demand and no incentives. 4. The Trend Towards Mixed Economies -Free-market economies: market largely determines what goods & services get produced, who gets them, & how the economy grows *Capitalism*Don't respond enough to needs of poor, old or disabled *People believe they have not done enough to protect environment -Command economies: gov't largely decides what goods will be produced, who gets them, & how economy will grow *Socialism & communism *Not enough jobs/wealth to keep economy growing fast enough -Countries with one system generally move more toward the other -All have doe mix of the two. -Mixed economies: some allocation of resources is made by the market and some by the gov't.5. Understanding the

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