Exploring Business Chapter 2 notes
Exploring Business Chapter 2 notes BUS - 10123 - 002
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Date Created: 02/10/16
Chapter 2 Notes Vocabulary Brain drain: Some of a country’s best and brightest workers (i.e. doctors, lawyers and business owners) move to capitalistic countries. Business cycles-- Periodic rises and falls that occur in economies over time. Capitalism-- All or most of the land, factories and stores are owned by individuals, not the government, and operated for profit. Command economies-- The government largely determines what goods and services are produced, who gets them, and how the economy will grow. Communism-- An economic and political system in which the government makes almost all economic decisions and owns almost all the major factors of production. Consumer price index (CPI) -- Monthly statistics that measure the pace of inflation or deflation. Core inflation – CPI minus food and energy costs. Deflation-- Prices are declining because too few dollars are chasing too many goods. Demand-- The quantities of products consumers are willing to buy at different prices. Depression—a severe recession, usually accompanied by deflation. 1 severe depression in the 1930’s. Disinflation-- When the price increases are slowing (inflation rate declining). Economics-- The study of how society employs resources to produce goods and services for consumption among various groups and individuals. Fiscal policy-- The federal government’s efforts to keep the economy stable by increasing or decreasing taxes or government spending. Free-market economies-- Decisions about what and how much to produce are made by the market. -- The market largely determines what goods and services are produced, who gets them, and how the economy grows. Gross domestic product (GDP) -- Total value of final goods and services produced in a country in a given year. As long as a company is within a country’s border, their numbers go into the country’s GDP (even if they are foreign-owned). When the GDP changes, businesses feel the effect. Gross output (GO) -- A measure of total sales volume at all stages of production. Inflation-- The general rise in the prices of goods and services over time. Invisible hand-- When self-directed gain leads to social and economic benefits for the whole community. Keynesian economic theory – theory that a government policy of increasing spending could stimulate the economy in a recession. Macroeconomics-- Concentrates on the operation of a nation’s economy as a whole. Market price (Equilibrium Point) -- Determined by supply and demand, this is the negotiated price. Microeconomics-- Concentrates on the behavior of people and organizations in markets for particular products or services. Mixed economies-- Some allocation of resources is made by the market and some by the government. Monetary policy-- The management of the money supply and interest rates by the Federal Reserve Bank (the Fed). Monopolistic competition –a large number of sellers produce very similar products that buyers nevertheless perceive as different, such as hot dogs, sodas, personal computers, and T-Shirts. Monopoly—occurs when one seller controls the total supply of a product or service, and sets the price. National debt-- The sum of government deficits over time. National Deficit -- The amount of money the federal government spends beyond what it gathers in taxes. National Surplus -- When government takes in more than it spends. Oligopoly—a degree of competition in which just a few sellers dominate a market, as we see in tobacco, gasoline, automobiles, aluminum, and aircraft. Perfect competition—exists when there are many sellers in a market and none is large enough to dictate the price of a product. Seller’s product appear to be identical, such as agricultural products like apples, corn, and potatoes. Producer price index (PPI) -- An index that measures prices at the wholesale level. Recession—2 or more consecutive quarters of decline in the GDP. Prices fall, people purchase fewer products, and businesses fail. Brings high unemployment, increased business failures, and an overall drop in living standards. Resource development-- The study of how to increase resources and create conditions that will make better use of them. Socialism-- An economic system based on the premise that some basic businesses, like utilities, should be owned by the government in order to more evenly distribute profits among the people. Stagflation-- Economy is slowing, but prices are going up. State capitalism-- When the state, rather than private owners, run some businesses. Supply-- The quantities of products businesses are willing to sell at different prices. Unemployment rate-- The percentage of civilians at least 16- years-old who are unemployed and tried to find a job within the prior four weeks. Notes Ways to increase Resources • New energy sources – Hydrogen fuel • New ways of growing foods – Hydroponics • New ways of creating goods and services – Aquaculture – Nanotechnology Adam Smith believed • Freedom was vital to any economy’s survival. • Freedom to own land or property and the right to keep the profits of a business is essential. • People will work hard if they believe they will be rewarded. The invisible hand • As people improve their own situation in life, they help the economy prosper through the production of goods, services and ideas. Further explanation • A farmer earns money by selling his crops. • To earn more, the farmer hires farmhands to produce more crops. • When the farmer produces more, there is plenty of food for the community. • The farmer helped his employees and his community while helping himself. Capitalistic countries - United States - England - Australia - Canada Basic rights of Capitalism 1. The right to own private property. 2. The right to own a business and keep all that business’s profits. 3. The right to freedom of competition. 4. The right to freedom of choice. Free Market Economies • Consumers send signals about what they like and how they like it. • Price tells companies how much of a product they should produce. • If something is wanted but hard to get, the price will rise until more products are available. Benefits: It allows for open competition among companies. Provides opportunities for poor people to work their way out of poverty. Limitations: People may start to let greed drive them. Pricing Products explained • A seller may want to sell shirts for $50, but only a few people may buy them at that price. • If the seller lowers the price to $30, more people buy the shirts. • The seller establishes a price of $30 based on what consumers are willing to pay. • Neither free-market nor command economies have created sound economic conditions so countries use a mix of the two economic systems. In Socialism • Entrepreneurs run smaller businesses. • Citizens are highly taxed. • Government is more involved in protecting the environment and the poor. Benefits • Social equality • Free education • Free healthcare • Free childcare • Longer vacations • Shorter work weeks • Generous sick leave Negatives • Few incentives for businesspeople to take risks. • Fewer inventions and innovations because the reward is not as great as in capitalistic countries. In Communism • Prices don’t reflect demand which may lead to shortages of items, including food and clothing. • Most communist countries today suffer severe economic depression and citizens fear the government. Communist governments are disappearing. Socialist governments are cutting back on social programs, lowering taxes and moving toward capitalism. Capitalist countries are increasing social programs and moving more toward socialism. Four Types of Unemployment 1. Frictional 2. Structural 3. Cyclical 4. Seasonal CPI • The government computes the costs of goods and services (housing, food, apparel, medical care, etc.) to see if they are going up or down. • The wages, rent/leases, tax brackets, government benefits and interest rates of some citizens are based upon the CPI. Productivity • Productivity in the U.S. has risen due to the technological advances that have made production faster and easier. • Productivity in the service sector grows more slowly because of fewer technologies. • The higher the productivity, the lower the costs of producing goods and services. This helps lower prices. • New technology adds to the quality of the services provided, but not to the worker’s output. • A new form of measurement needs to be created to account for the quality as well as the quantity of output. • Four Phases of Long-Term Business Cycles: 1. Economic Boom 2. Recession – Two or more consecutive quarters of decline in the GDP. 3. Depression – A severe recession. 4. Recovery – When the economy stabilizes and starts to grow. This leads to an Economic Boom. • Tools of Fiscal Policy: - Taxation - Government Spending National debt • The National Debt has reached nearly $18 trillion. • If $1 bills were stacked, the National Debt would would stretch over 1,000,000 miles. The moon is only 238,857 miles away. • The Fed’s most visible role is increasing and lowering interest rates. - When the economy is booming, the Fed tends to increase interest rates. - When the economy is in a recession, the Fed tends to decrease the interest rates.
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