Chapter 2 Understanding Economics and How it Affects Business How Economic Conditions Affect Businesses Any change in the US economic or political system has a major influence on the success of the business system What is Economics Economics 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 looks at the operation of a nation s economy as a whole o Microeconomics looks at the behavior of people and organizations in markets for particular products or services The study of the allocation of scarce resources resources need to be carefully divided Resource development the study of how to increase resources and create conditions that among people usually by the govt will make better use of them o Businesses can contribute to an economic system by inventing products that greatly increase available resources The Secret to Creating a Wealthy Economy Followers of Thomas Malthus believe there are too many people in the world and the solution to poverty is radical birth control including forced abortions and sterilization Some macroeconomists believe that a large population especially an educated one can be a valuable resource o Business owners provide jobs and economic growth for their employees and communities as well as for themselves The challenge for macroeconomists to determine what makes some countries relatively wealthy and other countries relatively poor and then to implement policies and programs that lead to increased prosperity for everyone in all countries Adam Smith and the Creation of Wealth Scottish economist Adam Smith envisioned creating more resources so that everyone could become wealthier o Considered the father of modern economics Believed freedom was vital to the survival of any economy especially the freedom to own land or property and to keep the profits from working the land or running a business People will work long and hard if they have incentives for doing so Result economy will prosper How Businesses Benefit the Community People will work and produce if they are rewarded for their work Smith s view businesspeople work primarily for their own prosperity and growth o Efforts serve as an invisible hand that helps economy grow Invisible hand the process that turns self directed gain into social and economic benefits for all Many businesspeople are becoming more concerned about social issues and their obligation to return to society some of what they ve earned Understanding Free Market Capitalism The economic system that has led to wealth creation in much of the world is known as capitalism US Chapter 2 Understanding Economics and How it Affects Business o All or most of the factors of production and distribution are owned by individuals and operated for profit o Businesspeople not govt officials decide what to produce and how much what to charge and how much to pay workers Also decide whether to produce goods in their own countries or have them made in other countries o Govt gets involved in issues such as determining minimum wages setting farm prices and lending money to some failing businesses o State capitalism the state runs some businesses instead of private owners The Foundations of Capitalism Under free market capitalism people have 4 basic rights o The right to own private property o The right to own a business and keep all that business s profits o The right to freedom of competition o The right to freedom of choice where to work what to buy etc Meet or exceed demands while making a profit Under the four basic rights people are willing to take more risks than they might otherwise Pres Franklin Roosevelt believed four additional freedoms were essential to economic success o Freedom of speech and expression o Freedom to worship in your own way o Freedom from want o Freedom from fear How Free Markets Work Free market decisions about what and how much to produce are made by the market The price tells producers how much to produce o If something is wanted but isn t available the price tends to go up until someone begins making more of that product sells the ones already on hand or makes a substitute How Prices are Determined In a free market prices are determined by buyers and sellers negotiating in the marketplace The Economic Concept of Supply Supply the quantities of products manufacturers or owners are willing to sell at different prices at a specific time o The amount supplied will increase as the price increases because sellers can make more money with a higher price The supply curve indicates the relationship between the price and quantity supplied The higher the price the more the vendor will be willing to supply The Economic Concept of Demand specific time Demand the quantity of products that people are willing to buy at different prices at a o More demand higher price o Managing inventory car dealers want to get rid of what is in the lot first Chapter 2 Understanding Economics and How it Affects Business The quantity demanded will increase as price decreases The Equilibrium Point or Market Price Supply and demand curve would cross where quantity demanded and quantity supplied are equal equilibrium point or price Market price the price determined by supply and demand equilibrium If quantity supplied exceeds quantity demanded the resulting surplus signals sellers to lower the price If shortages develop because the quantity supplied is less than quantity demanded it signals sellers to increase the price Wage and price controls don t work Competition within Free Markets Four different degrees of competition o Perfect competition the degree of competition in which there are many sellers in a market and none is large enough to dictate the price of a product Sellers products appear to be identical Anyone can come into the market No controls How far should competition go Competition should Wal Mart be able to come in to a community and sell things at lower prices and put other companies out of business o Monopolistic competition The degree of competition in which a large number of sellers produce very similar products that buyers nevertheless perceive as different Product differentiation the attempt to make buyers think similar products are different in some way Similar products many sellers Ex shirts from different stores o Oligopoly A degree of competition in which just a few sellers dominate the market Initial investment
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