BUSN Ch.2 Economics The Framework for Business

Define economics and discuss the evolving global economic crisis 2-2Analyze the impact of fiscal and monetary policy on the economy 2-3Explain and evaluate the free market system and supply and demand 2-4Explain and evaluate planned market systems 2-5Describe the trend toward mixed market systems 2-6Discuss key terms and tools to evaluate economic performance

economy

A financial and social system of how resources flow through society, from production to distribution, to consumption.

economics

The study of the choices that people, companies, and governments make in allocating society's resources.

macroeconomics

The study of a country's overall economic dynamics, such as the employment rate, the gross domestic product, and taxation policies.

microeconomics

The study of smaller economic units such as individual consumers, families, and individual businesses.

fiscal policy

Government efforts to influence the economy through taxation and spending.

budget surplus

Overage that occurs when revenue is higher than expenses over a given period of time.

budget deficit

Shortfall that occurs when expenses are higher than revenue over a given period of time.

federal debt

The sum of all the money that the federal government has borrowed over the years and not yet repaid.

monetary policy

Federal Reserve decisions that shape the economy by influencing interest rates and the supply of money.

commercial banks

Privately owned financial institutions that accept demand deposits and make loans and provide other services for the public.

money supply

The total amount of money within the overall economy.

money

Anything generally accepted as a medium of exchange, a measure of value, or a means of payment.

M1 money supply

Includes all currency plus checking accounts and traveler's checks.

M2 money supply

Includes all of M1 money supply plus most savings accounts, money market accounts, and certificates of deposit.

open market operations

The Federal Reserve function of buying and selling government securities, which include treasury bonds, notes, and bills.

Federal Deposit Insurance Corporation (FDIC)

A federal agency that insures deposits in banks and thrift institutions for up to $250,000 per customer, per bank.

discount rate

The rate of interest that the Federal Reserve charges when it loans funds to banks.

reserve requirement

A rule set by the Fed, which specifies the minimum amount of reserves (or funds) a bank must hold, expressed as a percentage of the bank's deposits.

economic system

A structure for allocating limited resources.

capitalism

An economic system—also known as the private enterprise or free market system—based on private ownership, economic freedom, and fair competition.

The right to own a business and keep after-tax profits

The right to keep and spend after-tax income earned from profits, acting as a powerful motivator for business owners.

The right to private property

The right of individuals and private businesses to buy, sell, use, and will property such as land, machines, and buildings.

The right to free choice

The freedom of people and businesses to buy, choose where to work, and choose where to live, directly feeding competition.

The right to fair competition

The dependence on fair competition among businesses to drive higher quality, lower prices, and more choices.

The Fundamental Rights of Capitalism

The right to own a business and keep after-tax profits

The right to private property

The right to free choice

The right to fair competition

pure competition

A market structure with many competitors selling virtually identical products. Barriers to entry are quite low.

monopolistic competition

A market structure with many competitors selling differentiated products. Barriers to entry are low.

oligopoly

A market structure with only a handful of competitors selling products that can be similar or different. Barriers to entry are typically high.

monopoly

A market structure with one producer completely dominating the industry, leaving no room for any significant competitors. Barriers to entry tend to be virtually insurmountable.

Four Degrees of Competition

pure competition A market structure with many competitors selling virtually identical products. Barriers to entry are quite low.

monopolistic competition A market structure with many competitors selling differentiated products. Barriers to entry are low.

oligopoly A market structure with only a handful of competitors selling products that can be similar or different. Barriers to entry are typically high.

monopoly A market structure with one producer completely dominating the industry, leaving no room for any significant competitors. Barriers to entry tend to be virtually insurmountable.

natural monopoly

A market structure with one company as the supplier of a product because the nature of that product makes a single supplier more efficient than multiple, competing ones. Most natural monopolies are government sanctioned and regulated.

supply

The quantity of products that producers are willing to offer for sale at different market prices.

supply curve

The graphed relationship between price and quantity from a supplier standpoint.

demand

The quantity of products that consumers are willing to buy at different market prices.

demand curve

The graphed relationship between price and quantity from a customer demand standpoint.

equilibrium price

The price associated with the point at which the quantity demanded of a product equals the quantity supplied.

socialism

An economic system based on the principle that the government should own and operate key enterprises that directly affect public welfare.

communism

An economic and political system that calls for public ownership of virtually all enterprises, under the direction of a strong central government.

mixed economies

Economies that embody elements of both planned and market-based economic systems.

privatization

The process of converting government-owned businesses to private ownership.

gross domestic product (GDP)

The total value of all final goods and services produced within a nation's physical boundaries over a given period of time.

unemployment rate

The percentage of people in the labor force over age 16 who do not have jobs and are actively seeking employment.

business cycle

The periodic contraction and expansion that occur over time in virtually every economy.

contraction

A period of economic downturn, marked by rising unemployment and falling business production.

recession

An economic downturn marked by a decrease in the GDP for two consecutive quarters.

depression

An especially deep and long-lasting recession.

recovery

A period of rising economic growth and employment.

expansion

A period of robust economic growth and high employment.

inflation

A period of rising average prices across the economy.

hyperinflation

An average monthly inflation rate of more than 50%.

disinflation

A period of slowing average price increases across the economy.

deflation

A period of falling average prices across the economy.

consumer price index (CPI)

A measure of inflation that evaluates the change in the weighted-average price of goods and services that the average consumer buys each month.

producer price index (PPI)

A measure of inflation that evaluates the change over time in the weighted-average wholesale prices.

productivity

The basic relationship between the production of goods and services (output) and the resources needed to produce them (input) calculated via the following equation: output/input = productivity.