Cib ch-2-ppt

 An economic system either promotes or hinders
business activity.
 Much of American’s business success is due to an
economic and social climate that allows
businesses to operate freely.
 Any change in the U.S. economic system has a
major influence on the business system.
 Also, GLOBAL ECONOMICS and WORLD
POLITICS have a major influence on U.S.
business.

 ECONOMICS: study of how society chooses to employ resources
to produce goods and services and distribute them for
consumption among various competing groups and individuals.
 MACROECONOMICS: looks at the operation of a nation’s
economy as a whole.
 MICROECONOMICS: looks at the behavior of people and
organizations in particular markets.
 “Economics” is sometimes defined as the allocation of scarce
resources.
 RESOURCE DEVELOPMENT is the study of how to increase
resources and to create the conditions that will make better use of
those resources.
 Businesses help economic systems by inventing products and services
that expand available resources (example: mariculture, raising fish in
ocean pens.)

 Some believe, like English economistThomas
Malthus, that the solution to poverty is birth
control
 Others believe that a growing population is a
valuable resource
 The textbook’s authors believe creating wealth
is done by teaching people the skills needed by
society
 Give a man a fish and you feed him for a day; teach a
man to fish and you feed him for a lifetime

 ADAM SMITH believed wealth could be created
through entrepreneurship.
 Smith envisioned creating more resources so that
everyone could be wealthier, not dividing fixed
resources.
 In 1776, Smith wrote THEWEALTH OF NATIONS, in
which he outlined steps for creating prosperity.
 Smith believed that FREEDOM was vital to the
survival of any economy.
 Also, he believed that people will work hard if they
have INCENTIVES for doing so.
 Smith is considered to be the FATHER OF MODERN
ECONOMICS.

 The INVISIBLE HAND is a phrase coined by Adam Smith to describe the
process that turns self-directed gain into social and economic benefits
for all.
 People working hard to make money for PERSONAL INTEREST would
(like an invisible hand) also BENEFITOTHERS.
 For example, a farmer trying to make money would grow as many crops as
possible.
 This would provide jobs and needed food for others.
 If everyone worked hard in his/her own self interest, Smith said, society
as a whole would prosper.
 Smith assumed that as people become wealthier, they would reach out
to help the less fortunate, but that hasn’t always happened.
 Many U.S. businesspeople are becoming concerned about social issues and
their obligation to return to society some of what they’ve earned.
 It is important for businesses to be ethical as well as generous.

 Explain what capitalism is and how free
markets work.

 Following the ideas of Adam Smith, businesspeople created more
wealth than ever before.
 But GREAT DISPARITIES (inequalities) in wealth remained or even
increased.
 Although it is not easy, opportunities to start one’s own business
have always been there, especially in a free market.
 CAPITALISM is an economic system in which all or most of the
factors of production and distribution are privately owned and
operated for profit.
 In capitalist countries, businesspeople decide how to use their
resources and how much to charge.
 No country is purely capitalist, but the foundation of the U.S. is
capitalism.
 Capitalism is also the foundation for the economics of England,
Canada,Australia, and most developed nations.

 People under free-market capitalism have FOUR
BASIC RIGHTS:
 The right to PRIVATE PROPERTY
 The right to OWN A BUSINESS and to keep all of that
business’s profits after taxes
 The right to FREEDOM OF COMPETITION
 The right to FREEDOM OF CHOICE
 One benefit of such rights is that people are
willing to take more RISKS than they would
otherwise.

 In a free-market system, decisions about
what to produce and in what quantities are
made by THE MARKET.
 CONSUMERS send signals to PRODUCERS
about what to make, how many, and so on
through the mechanism of PRICE
 In a free market the PRICE tells producers
how much to produce, reducing the chances
of a long-term shortage of goods.

 Prices in a free market are not determined by
sellers; rather buyers and sellers negotiating
in the marketplace determine them.
 Price is determined through the economic
concepts of supply and demand.

 SUPPLY refers to the quantity of products
that manufacturers or owners are willing to
sell at different prices at a specific time.
 The amount supplied will INCREASE as the
price INCREASES (DIRECT relationship.)
 The quantity producers are willing to SUPPLY
at certain prices is illustrated on a SUPPLY
CURVE.

 DEMAND refers to the quantity of products
that people are willing to buy at different
prices at a specific time.
 The quantity demanded will DECREASE as
the price INCREASES (INVERSE
relationship.)
 The quantities consumers are willing to buy
at certain prices are illustrated on a DEMAND
CURVE.

 The key factor in determining supply and demand is PRICE.
 At the EQUILIBRIUM (MARKET) PRICE, the supply and demand
curves cross, and the quantity demanded equals the quantity
supplied.
 In free-market economies it is the INTERACTION between
SUPPLY and DEMAND that determines the market price in the
long-run.
 If SURPLUSES (too many products) develop, a signal is sent to sellers
to LOWER the price.
 If SHORTAGES (not enough products) develop, a signal is sent to
sellers to INCREASE the price.
 Eventually, supply will again equal demand.
 In countries without a free-market system, there is no such
mechanism, so there are often SHORTAGES OR SURPLUSES.
 When government interferes in free markets, surpluses and
shortages may develop.

 Perfect Competition
 Monopolistic Competition
 Oligopoly
 Monopoly

 PERFECT COMPETITION: many sellers in a
market and none is large enough to dictate
the price of a product.
 Sellers produce products that appear to be
IDENTICAL.
 There are no true examples of perfect competition,
but agricultural products are often used as an
example.

 MONOPOLISTIC COMPETITION : large
number of sellers produce very similar
products that buyers perceive as different.
 PRODUCT DIFFERENTIATION, making
buyers think similar products are different, is
key to success.
 The fast food industry is an example.

 OLIGOPOLY: just a few sellers dominate a
market.
 The INITIAL INVESTMENT required to enter the
market is usually high.
 Prices among competing firms tend to be close to
the same.
 Examples include breakfast cereal and soft drinks.

 MONOPOLY : one seller controls the total
supply of a product/service, and sets the
price.
 U.S. laws prohibit the creation of monopolies, but
permit approved monopolies for public utilities.
 New laws have ended the monopoly status of
utilities in some areas creating competition
among utility companies.
 DEREGULATION is meant to increase
competition and lower prices for consumers.

 Free market allows open competition among
companies.
 Free-market capitalism provides opportunities for
people to work their way out of poverty.
 Capitalism creates inequities between those who have
gained wealth and those who are not able to.
 Not all businesspeople agree on how to deal with this
inequity.
 Greed has led some businesspeople to engage in
unethical practices and deceive the public.
 Some government regulations are necessary to protect
stockholders and vulnerable citizens.

 Compare socialism and communism

 SOCIALISM : economic system based on the
idea that some, if not most, basic businesses
should be owned by the government so profits
can be distributed among the people.
 Entrepreneurs can own small businesses, but
profits are steeply taxed to pay for social
programs.
 Advocates of socialism acknowledge the major
benefits of capitalism, but believe wealth
should be more evenly distributed.

 Income is taken from the wealthier people
and redistributed to the poorer members of
the population.
 Workers in socialist countries are given free
education, free health care, free child care,
and more employee benefits.

 Socialism may create equality, but it takes
away some work incentives.
 Tax rates in some nations once reached 85%.
 Because wealthy professionals have very high
tax rates, many of them leave socialist countries
for countries with lower taxes.
 The loss of the best and brightest people to
other countries is called brain drain.
 Socialist systems can result in fewer inventions
and less innovation.

 COMMUNISM: economic and political system
in which the government makes almost all
economic decisions and owns almost all the
major factors of production.

 The government has no way of knowing what to
produce; prices don’t reflect supply and
demand.
 Shortages of many items may develop.
 Communism doesn’t inspire businesspeople to
work hard, and is slowly disappearing as an
alternative economic form.
 Most communist countries are suffering severe
economic depression, including North Korea
and Cuba.

 Analyze the trend toward mixed economies

 There are two dominant economic systems: Free market
economies and Command economies
 FREE MARKET ECONOMIES: economic systems in which
the market largely determines what goods and services
get produced, who gets them, and how the economy
grows.
 This system is commonly known as CAPITALISM.
 COMMAND ECONOMIES: 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.
 These economies are known as SOCIALISM and
COMMUNISM.

 MIXED ECONOMIES: economic systems in
which some allocation of resources is made
by the market and some by government.
 The U.S. has a mixed economy.
 The role of government in many parts of the
economy is a matter of some debate.
 For instance, the government has become the
largest employer in the U.S.

 Discuss the economic system of the United
States, including the significance of key
economic indicators (especiallyGDP),
productivity, and the business cycle.

 GROSS DOMESTIC PRODUCT (GDP): the total value
of final goods and services produced in a country in a
given year.
 Both domestic and foreign-owned companies can produce
goods and services included in GDP.
 A major influence on the growth of GDP is how productive
the work force is.
 THE UNEMPLOYMENT RATE: the number of
civilians at least 16 years old who are unemployed and
tried to find a job within the prior four weeks.
 There are four types of unemployment: frictional,
structural, cyclical, and seasonal (Text Figure 2.6.)

 THE PRICE INDEXES help measure the health of the economy.
 INFLATION : a general rise in the prices of goods, services over
time.
 DISINFLATION: price increases are slowing (the inflation rate is
declining.)
 DEFLATION : prices are declining (occurring when countries
produce so many goods that people cannot afford to buy them all)
 STAGFLATION is a situation when the economy is slowing, but
prices keep going up
 CONSUMER PRICE INDEX (CPI): monthly statistics that measure
the pace of inflation or deflation.
 CORE INFLATION is the CPI minus food and energy costs.
 PRODUCER PRICE INDEX (PPI): index that measures prices at the
wholesale level.

 U.S. productivity has gone up in recent years
because computers have made production
faster
 The HIGHER PRODUCTIVITY is, the LOWER
COSTS are in producing goods and services,
and the lower prices can be.
 The U.S. economy is a SERVICE ECONOMY–
very labor intensive–creating productivity
issues.

 Technologies may add to the quality of the
services but not to the output per worker
which is the definition of productivity.
 New measures of productivity for the service
economy are needed to measure quality as
well as quantity of output.

 Economic boom: there is strong business activity.
 Recession : two or more consecutive quarters of
decline in the GDP.
 Depression: severe recession, usually accompanied
by deflation.
 RECOVERY: occurs when the economy stabilizes.
The goal of economists is to predict these fluctuations,
which can be very difficult.
The government uses FISCAL and MONETARY policy to
minimize these disruptions.

 Contrast fiscal policy and monetary policy, and
explain how each affects the economy

 FISCAL POLICY: keep the economy stable by increasing or
decreasing taxes or government spending.
 The first half of fiscal policy involves taxation.
 HIGHTAX RATES may discourage small business ownership.
 LOWTAX RATES would tend to give the economy a boost.
 The second half of fiscal policy involves government spending.
 The NATIONAL DEFICIT is the amount of money that the federal
government spends over and above the amount it gathers in taxes.
 The NATIONAL DEBT is the sum of government deficits over time.
One way to lessen the annual deficits is to cut government
spending, but there is a continuing need for social programs and
for military spending.

 Theory that government policy of increasing
spending and cutting taxes could stimulate
the economy in a recession.
 When the economy is growing too fast,
Keynesian theory suggests cutting back on
government spending and increasing taxes.
 Government intervention is supposed to be a
short-term solution to wide swings in the
business cycle.

 FEDERAL RESERVE SYSTEM (THE FED) is a semiprivate
organization that decides how much money to put into circulation.
 MONETARY POLICY is the management of the monetary supply
and interest rates; it is controlled by the Fed.
 When the economy is booming, the Fed tends to raise interest rates.
 Lowering interest rates encourages more business borrowing.
 Raising and lowering interest rates helps control the rapid ups and
downs of the economy.
 The Federal Reserve also controls the MONEY SUPPLY.
 The more money the Fed makes available to businesspeople, the
faster the economy grows.
 To slow the economy, the Feds lowers the money supply.
 The economic goal is to keep the economy growing.

Cib ch-2-ppt

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