Business- Chapter 2
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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.
The part of economics study that looks at the operation of a nation's economy as a whole.
The part of economics study that looks at the behavior of people and organizations in particular markets.
The study of how to increase resources and to create the conditions that will make better use of those resources.
A phrase coined by Adam Smith to describe the process that turns self-directed gain into social and economic benefits for all.
An economic system in which all or most of the factors of production and distribution are privately owned and operated for profit.
The Foundations of Capitalism
- The right to own private property
- The right to own a business and keep all that business's profit
- The right to freedom of competition
- The right to freedom of choice
The quantity of products that manufacturers or owners are willing to sell at different prices at a specific time.
The quantity of products that people are willing to buy at different prices at a specific time.
The price determined by supply and demand.
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.
The degree of competition in which a large number of sellers produce very similar products that buyers nevertheless perceive as different.
A degree of competition in which just a few sellers dominate the market.
A degree of competition in which only one seller controls the total supply of a product or service, and sets the price.
Four Different Degrees of Competition
- Perfect Competition
- Monopolistic Competition
An economic system based on the premise that some, if not most, basic businesses should be owned by the government so that profits can be more evenly distributed among the people.
The loss of the best and brightest people to other countries.
An economic and political system in which the government makes almost all economic decisions and owns almost all the major factors of production.
Economic systems in which the market largely determines what goods and services get produced, who gets them, and how the economy grows.
Economic systems in which the government largely decides what goods and services will be produced, who will get them, and how the economy will grow.
Two Major Economic Systems
- Free-market economies
- Command economies
Economic systems in which some allocation of resources is made by the market and some by the government.
Gross Domestic Product (GDP)
The total value of final goods and services produced in a country in a given year.
Four Kinds of Unemployment
- Frictional unemployment
- Structural unemployment
- Cyclical unemployment
- Seasonal unemployment
People have to quit work because they didn't like the job, the boss, or the working conditions and who haven't yet found a new job. It also refers to those people who are entering the labor force for the first time (e.g., new graduates) or are returning to the labor force after significant time away (e.g., parents who reared children). There will always be some frictional unemployment because it takes some time to find a first job or a new job.
Unemployment caused by the restructuring of firms or by a mismatch between the skills (or location) of job seekers and the requirements (or location) of available jobs (e.g., coal miners in an area where mines have been closed).
A recession or similar downturn in the business cycle (the ups and downs of business growth and decline over time). This type of unemployment is the most serious.
Where demand for labor varies over the year, as with the harvesting of crops.
A general rise in the prices of goods and services over time.
A situation in which price increases are slowing (the inflation rate is declining).
A situation in which prices are declining.
A situation when the economy is slowing but prices are going up anyhow.
Consumer Price Index (CPI)
Monthly statistics that measure the pace of inflation or deflation.
Producer Price Index (PPI)
An index that measures prices at the wholesale level.
The periodic rises and falls that occur in economies over time.
Two or more consecutive quarters of decline in the GDP.
Four Phases of Business Cycle
- Economic Boom
A severe recession, usually accompanied by deflation.
The federal government's efforts to keep the economy stable by increasing or decreasing taxes or government spending.
The sum of government deficits over time.
Keynesian Economic Theory
The theory that a government policy of increasing spending and cutting taxes could stimulate the economy in a recession.
The management of the money supply and interest rates by the Federal Reserve Bank.
Two branches of economics
How does capitalism create a climate for economic growth?
Under capitalism, businesspeople don't often deliberately set out to help others; they work mostly for their own prosperity and growth. Yet people's efforts to improve their own situation in life act like an invisible hand to help the economy grow and prosper through the production of needed goods, services, and ideas.
Who decides what to produce under capitalism?
In capitalist countries, businesspeople decide what to produce, how much to pay workers, and how much to charge for goods and services. They also decide whether to produce certain goods in their own countries, import those goods, or have them made in other countries.
How does free market work?
The free market is one in which buyers and sellers negotiating prices for goods and services influence the decisions about what gets produced and in what quantities. Buyers' decisions in the marketplace tell sellers what to produce and in what quantity. When buyers demand more goods, the price goes up, signaling suppliers to produce more. The higher the price, the more goods and services suppliers are willing to produce. Price is the mechanism that allows free market to work.
What are the advantages and disadvantages of socialism?
Socialism intends to create more social equity. Workers in socialist countries usually receive more education, healthcare, and other benefits and also work fewer hours, with longer vacations. The major disadvantage of socialism is that it lowers the incentive to start a business or to work hard. Socialist economies tend to have a higher unemployment rate and slower growth rate than capitalist economies.
How does socialism differ from communism?
Under communism, the government owns almost all major production facilities and dictates what gets produced and by whom. Communism is also more restrictive when it comes to personal freedoms, such as religious freedom.
What is a mixed economy?
A mixed economy is part capitalist and part socialist. Some businesses are privately owns, but taxes tend to be high to distribute income more evenly among population.
What countries have mixed economies?
The United States has a mixed economy, as do other developed countries.
What are the benefits of mixed economies?
A mixed economy has most of the benefits of wealth creation that free markets bring plus the benefits of greater social equality and concern for the environment that socialism promises.
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