Chapter 2 : Understanding Economics and how it affects Business

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

Adam Smith

the father of economics

• he believed that:

  • instead of dividing, believed creating more resources for all

  • freedom was vital to any economy’s survival (own the land or property and to keep the profits)

  • people will work if they believe they will be rewarded

• he wrote “Wealth of the Nations”

invisible hand

when self-directed gain leads to social and economic benefits for the whole community

capitalism

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

free market

decisions about what and how much to produce are made by the market

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

market price

also known as equilibrium point; determined by supply and demand, this is the negotiated price

four degrees of competition:

perfect, monopolistic, oligopoly, monopoly

perfect competition

such as farmer’s market where goods are indistinguishable (many sellers no one dictates price)

monopolistic competition

such as fast food restaurants, products similar but consumers perceive the product to be different. Product differentiation is a key here. (advertising, branding, and packaging)

oligopoly

a situation where just a few major players dominate a market such as tobacco, automobiles, airline because investment to enter such a market is significant

monopoly

a situation where only one producer exists in a market. US law prohibits the creation of monopolies

socialism

an economic system based on the premise that some basic businesses, (like utilities, steel mines) should be owned by the government in order to more evenly distribute profits/resources among the people

communism

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

free-market economies

economic systems in which the government 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, who will get them, and how the economy will grow

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)

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

frictional

turnover, new job, recent graduate

structural

miss match in skills, new technology, outsourcing

cyclical

economic ups and downs

seasonal

holiday seasons

consumer price index (CPI)

monthly statistics that measure the pace of inflation or deflation

inflation

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

disinflation

a situation in which price increases are slowing (the inflation rate is declining)

deflation

prices are declining because too few dollars are chasing too many goods (over supply)

stagflation

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

inflation rate

percentage increase in prices of goods or services over a period of time

lagging

meaning that they don’t change direction until a few quarters after the economy does (unemployment rate)

coincident indicators

move at the same time as the economy does. The gross domestic product measures the economy’s output as it occurs (GDP as it occurs)

leading economic indicators

are indicators that change before the economy changes. Stock market returns are a leading indicator, as the stock market usually begins to fall before the economy declines and they improve before the economy begins to pull of a recession

business cycles

periodic rises and falls that occur in economies over time

fiscal policy

the federal government’s efforts to keep the economy stable by increasing or decreasing taxes or government spending

monetary policy

the management of the money supply and interest rates by the Federal Reserve Bank (the Fed)

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

national surplus

when government takes in more than it spends