Exploring Business Chapter 2
Exploring Business Chapter 2 Bus 10123-002
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This 5 page Class Notes was uploaded by Kassandra Cabrera on Friday January 29, 2016. The Class Notes belongs to Bus 10123-002 at Kent State University taught by Eric Von Hendrix (P) in Spring 2016. Since its upload, it has received 40 views. For similar materials see EXPLORING BUSINESS in Business at Kent State University.
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Date Created: 01/29/16
Exploring Business Chapter 2 The MAJOR BRANCHES of ECONOMICS Economics -- The study of how society employs resources to produce goods and services for consumption among various groups and individuals. Macroeconomics -- Concentrates on the operation of a nation’s economy as a whole. Microeconomics -- Concentrates on the behavior of people and organizations in markets for particular products or services. RESOURCE DEVELOPMENT The study of how to increase resources and create conditions that will make better use of them. EXAMPLES of 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 the FATHER of ECONOMICS Smith believed that: 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 THEORY As people improve their own situation in life, they help the economy prosper through the production of goods, services and ideas. Invisible Hand -- When self-directed gain leads to social and economic benefits for the whole community. UNDERSTANDING the INVISIBLE HAND THEORY 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. Capitalism – All or most of the land, factories and stores are owned by individuals, not the government, and operated for profit. States with capitalism: United States, England, Australia and Canada STATE CAPITALISM When the state, rather than private owners, run some businesses. Countries with state capitalism: Russia and China These countries have had some success using capitalism, but there future as a country is uncertain CAPITALISM’S FOUR BASIC RIGHTS The right to own private property. The right to own a business and keep all that business’s profits. The right to freedom of competition. The right to freedom of choice FREE MARKETS Decisions about what and how much to produce are made by the market. 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 PRICING 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. Supply The quantities of products businesses are willing to sell at different prices. Demand The quantities of products consumers are willing to buy at different prices. EQUILIBRIUM Market Price (Equilibrium Point) Determined by supply and demand, this is the negotiated price. FREE MARKET BENEFITS and LIMITATIONS 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 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. Entrepreneurs run smaller businesses. Citizens are highly taxed. Government is more involved in protecting the environment and the poor. BENEFITS of SOCIALISM Social equality, free education, free healthcare, free childcare, longer vacations, shorter work weeks and generous sick leave NEGATIVES of SOCIALISM Few incentives for businesspeople to take risks. Brain Drain: Some of a country’s best and brightest workers (i.e. doctors, lawyers and business owners) move to capitalistic countries. Fewer inventions and innovations because the reward is not as great as in capitalistic countries. COMMUNISM An economic and political system in which the government makes almost all economic decisions and owns almost all the major factors of production. TWO MAJOR ECONOMIC SYSTEMS Free-Market Economies -- The market largely determines what goods and services are produced, who gets them, and how the economy grows. Command Economies -- The government largely determines what goods and services are produced, who gets them, and how the economy will grow. MIXED ECONOMIES Some allocation of resources is made by the market and some by the government Neither free-market nor command economies have created sound economic conditions so countries use a mix of the two economic systems TRENDING TOWARD MIXED ECONOMIES 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. GROSS DOMESTIC PRODUCT 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 UNEMPLOYMENT 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 Four Types of Unemployment Frictional Structural Cyclical Seasonal Inflation The general rise in the prices of goods and services over time Disinflation When the price increases are slowing (inflation rate declining). Deflation Prices are declining because too few dollars are chasing too many goods. Stagflation Economy is slowing, but prices are going up. CONSUMER PRICE INDEX Monthly statistics that measure the pace of inflation or deflation 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. PRODUCER PRICE INDEX An index that measures prices at the wholesale level. 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. PRODUCTIVITY in the SERVICE SECTOR 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. BUSINESS CYCLES Periodic rises and falls that occur in economies over time. 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. FISCAL POLICY The federal government’s efforts to keep the economy stable by increasing or decreasing taxes or government spending. Tools of Fiscal Policy: Taxation Government Spending National Deficit The amount of money the federal government spends beyond what it gathers in taxes. National Debt The sum of government deficits over time. (Nearly 18 trillion) National Surplus When government takes in more than it spends MONETARY POLICY The management of the money supply and interest rates by the Federal Reserve Bank (the Fed). 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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