Economics Chapter 2 PDF

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Overview of economics...

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Chapter Two Understanding Economics and How it Affects Business I.

Basic Economics Economics Definition: 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. 1. Macroeconomics: operation of a nation's economy as a whole 2. Microeconomics: behavior of people and organizations in markets for particular products or services Resource Development Definition: study of how to increase resources and create conditions that will make better use of them.

II.

Capitalism and Free Market Capitalism Definition: an economic system in which all of most of the factors of production and distribution are privately owned or operated for profit. 1. Right to own property 2. Right to own business and receive profits 3. Right to competition 4. Freedom of choice (where to live where to work) Factors of production and distribution are owned by individuals Individuals Decide: ● How much is produced ● What to charge ● How much to pay workers. No country is purely capitalist because governments interfere with minimum wages, farm prices and lending money State Capitalism Definition: combination of freer markets and some government control. 1. Right to own private property 2. Right to own a business and keep all that business profits 3. Right to freedom of competition 4. Right to freedom of choice Roosevelt’s Four Additional Freedoms Definition: additional freedoms that are essential to economic success 1. Freedom of speech and expression 2. Freedom to worship your own way 3. Freedom from want 4. Freedom from fear

Free Markets Definition: Decisions about what and how much to produce are made by the market, buyers and sellers negotiate prices for goods and services through signals from consumer to producers. Benefits: ● Allows for open competition among companies ● Provides opportunity for people to work their way out of poverty. Limitations: ● Greed ● Wealth will not redistribute down all the time, only a few will give back to the community. Supply Definition: the quantities of products manufactures or owners are willing to sell at different prices at a specific time In general supply will increase as the price increases because sellers can make more money with a higher price.

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Supply Curve

Quantity of TDemand Shirts Definition: quantity of products that the people are willing to buy at different prices at a specific time. The quantity demand will increase as the price decreases, because if it is at a lower price than the buyer will buy more. The lower the price the higher quantity demanded

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Deman d Curve

Quantity of TThe Equilibrium Point Shirts Definition: place where quantity demand and quantity supply is meet. The

intersection on the curve. Perfect Competition Definition: many sellers in a market with no clear comparison between product Examples: Products such as apples, corn, potatoes Monopolistic Competition Definition: a large number of sellers with very similar products that can be perceived as different Examples: Fast food industry selling hamburgers Oligopoly Definition: few sellers dominate a market because the investment required to enter the business is so great Examples: Tabacco, Gasoline, Automobiles. Monopoly Definition: One seller controls the total supply of a product or service. Illegal in American except for permitted monopolies. Examples: Natural gas, water, electric power.

III.

Socialism and Communism Socialism Definition: an economic system based on the premise that some companies should be owned by the government. Profits can be more evenly distributed among the people. Benefits: ● Social Equality ● Longer Vacations, fewer work hours, more employee benefits Negative: ● Takes away business peoples incentives, people leave the country “brain drain” ● Fewer inventions and less innovation Communism Definition: government makes all economic decisions and owns all major factors of productions. Most intrusion into people's lives. Benefits: ● None in the modern world. Negative: ● No freedom of religion, change, and choice. ● No reflect of supply and demand to produce.

IV.

Economic Systems of the United States Gross Domestic Product (GDP) Definition: Total value of final goods and services produced in a country in a

given year. Nation's economy is based on the GDP. Productivity of the workfound influences the growth of GDP Unemployment Rate Definition: refers to the percentage of civilians at least 16 years p;d who are unemployed and tried to find a job within the prior four weeks. Types of Unemployment ● Frictional Unemployment: those people who have quit work because they did not like the job. Also refers to people entering the labor force for the first time or are returning after a significant time away. ● Structural Unemployment: caused by restructuring of firms or by a mismatch between the location/skills of job seekers and the location/skills of the available jobs. ● Cyclical Unemployment: due to a recession or a downturn in the business cycle. Most serious. ● Seasonal Unemployment: Demand of labor varies over the year as with the harvesting of crops. Price Indexes Definition: help gauge the health of economy by measuring the levels of inflation, disinflation, deflation and stagflation. ● Inflation: a general rise in the prices of goods and services overtime ● Disinflation: the price increases are slowing, the inflation rate is declining but prices are not declining yet. ● Deflation: the prices are declining ● Stagflation: Economy is slowing but prices are going up anyhow. Consumer Price Index (CPI) Definition: monthly statistics that measure the pace of inflation or deflation. Now the government focuses on Core Inflation which is the CPI minus food and energy costs Producer Price Index Definition: measures the change in prices at the wholesale level. Tracks the price in nearly all industries in the goods-producing sector. Productivity in the United States Definition: more productivity means that workers can produce more goods and services than before in the same time period. Due usually to technology. Can lead to high unemployment when people are replaced with machines. Business Cycles Definition: periodic rises and falls that occur in the economy over time Recession Definition: two or more consecutive quarters of decline in the GDP Depression Definition: severe recession usually accompanied by deflation. Recovery Definition: economy stabilizes and starts to grow leading to an economic boom

V.

Fiscal Policy and Monetary Policy Fiscal Policy Definition: Federal government's efforts to keep the economy stable by increasing or decreasing taxes or government spending. Tools: 1. Taxation: high tax rates tend to slow the economy because they draw money away from the private sector and put it into the government. 2. Government Spending: spending on highways, social programs, education, infrastructures, etc. Can increase the national deficit which is the amount of money the federal government spends beyond what it collects in taxes for a given fiscal year. Monetary Policy Definition: The management of the money supply and interest rates by the Federal Reserve Bank. Controls the rising and lowering of interests rates, when there economy is booming the Fed tends to raise interest rates. When the unemployment gets too high, the Federal Reserve Bank may put more money into the economy and lower interest rates....