Ch. 2 Understanding Business: Understanding How Economics Affects Business

Economics

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.

Macroeconomics

The part of economics study that looks at the operation of a nation's economy as a whole.

Microeconomics

The part of economics study that looks at the behavior of people and organizations in particular markets

Resource Development

The study of how to increase resources and to create the conditions that will make better use of those resources.

Invisible Hand

A phrase coined by Adam Smith to describe the process that turns self-directed gain into social and economic benefits for all.

Capitalism

An economic system in which all or most of the factors of production and distribution are privately owned and operated for profit.

Foundations of Capitalism

1. Right to own private property
2. Right to own a business and keep all the profits.
3. Right to freedom of competition
4. Right to freedom of choice

Supply

The quantity of products that manufacturers or owners are willing to sell at different prices at a specific time.

Demand

The quantity of products that people are willing to buy at different prices at a specific time.

Equilibrium Point

The place where quantity demanded and supplied meet. Market price will usually tend toward the equilibrium point.

Market Price

The price determined by supply and demand.

Perfect Competition

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.

Monopolistic Competition

The degree of competition in which a large number of sellers produce very similar products that buyers nevertheless perceive as different. Sellers trying to convince consumers that their products are different from competitors though they may be very simi

Monopoly

A degree of competition in which only one seller controls the total supply of a product or service.

Oligopoly

A degree of competition in which just a few sellers dominate a market. Price differences rather than product differences. ie. tobacco, autos, aluminum, aircraft, gas. Not as much competition from others because initial investment is great.

Socialism

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

Brain Drain

The loss of the best and brightest people to other countries.

Communism

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

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.

Command Economies

Economic systems in which the government largely decides what goods and services will be produced and who will get them, and how the economy will grow.

Mixed 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.

Unemployment Rate

Refers to the percentage of civilians at least 16 years old who are unemployed and tried to find a job within the prior four weeks.
Types of unemployment:
Frictional: People who have quit because they didn't like the job, boss or working conditions and wh

Inflation

A general rise in the prices of goods and services over time.

Disinflation

A situation in which p;rice increases are slowing (inflation rate is declining).

Stagflation

A situation when the economy is slowing but prices are going up anyhow.

Consumer Price Index

Monthly statistics that measure the pace of inflation or deflation.

Producer Price Index

An index that measures prices at the wholesale level.

Business Cycle

The periodic rises and falls that occur in economies over time.

Recession

Two or more consecutive quarters of decline in the GDP.

Depression

A severe recession, usually accompanied by deflation.

Fiscal Policy

The federal government's efforts to keep the economy stable by increasing or decreasing taxes or government spending.

National Debt

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.

Monetary Policy

The management of money supply and interest rates by the Federal Reserve Bank.