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 competing groups 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 Thomas Malthus Dismal Science neo Malthusians believe too many people and not enough resources in late 1700s b The Secret to Creating a Wealthy Economy 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 nfather 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 Provides opportunities for poor people to work their way out of poverty h Benefits and Limitations of Free Markets Allows open competition among companies 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 Command economies gov t largely decides what goods will be produced who gets them how economy will grow Don t respond enough to needs of poor old or disabled People believe they have not done enough to protect environment 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 U S Economic System a Key Economic Indicators Gross Domestic Product GDP the total value of final goods services produced in a country in a given year domestic foreign owned are included as long as they are within country s boundaries influenced by productivity of workforce high GDP enables citizens to have high standard of living frictional structural cyclical seasonal Inflation general rise in the prices of good services over time