Chapter 2: Understanding Economics and How It Affects Business

Vocabulary flashcards covering key definitions, market structures, economic systems, and economic indicators from Chapter 2.

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 conditions that will make better use of those resources.

Invisible hand

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.

State capitalism

A combination of freer markets and some government control.

Free market

An economic environment where decisions about what and how much to produce are made by the market.

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.

Market price (equilibrium point)

The price determined by supply and demand where quantity demanded and quantity supplied meet.

Perfect competition

The degree of competition in which there are many sellers but 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.

Oligopoly

A degree of competition in which a few sellers dominate a market.

Monopoly

A degree of competition in which one seller controls the total supply of a product or service, and sets the price.

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 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, 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.

Gross output (GO)

A measure of total sales volume at all stages of production.

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.

Frictional unemployment

Unemployment referring to people who have quit work because they didn't like the job, boss, or working conditions, or who are entering or returning to the labor force.

Structural unemployment

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.

Cyclical unemployment

Unemployment that occurs because of a recession or a similar downturn in the business cycle.

Seasonal unemployment

Unemployment that occurs where demand for labor varies over the year.

Inflation

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

Disinflation

A situation in which price increases are slowing, meaning the inflation rate is declining.

Deflation

A situation in which prices are declining.

Stagflation

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

Hyperinflation

A condition when the price of goods and services rises by 50 percent a month.

Consumer price index (CPI)

Monthly statistics that measure the pace of inflation or deflation.

Core inflation

The Consumer Price Index (CPI) minus food and energy costs.

Producer Price Index (PPI)

An index that measures the change in prices at the wholesale level.

Business cycles

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.

Keynesian economic theory

Theory that a government policy of increasing spending and cutting taxes could stimulate the economy in a recession.

National deficit

The amount of money the federal government spends beyond what it collects in taxes for a given fiscal year.

National debt

The sum of government deficits over time.

National surplus

A condition occurring when the government takes in more revenue than it spends.

Monetary policy

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