Chapter 2 Economic Challenges Facing Business Today

Macroeconomics

study of a nation's overall economic issues, such as how an economy maintains and allocates resources and how a government's policies affect the standards of living of its citizens.

Microeconomics

study of small economic units, such as individual consumers, families and businessness

Four Economic Systems

Communism, Socialism, Mixed, Capitalism

Socialism

economic system characterized by government ownership and operation of major industries such as communications.

Communism

economic system in which all property would be shared equally by the people of a community under the direction of a strong central government.

mixed market economy

economic system that draws from both types of economies, to different degrees

How a free market works

Many buyers and sellers trading freely determine the prices at which they will exchange goods and services

Supply

willingness and ability of sellers to provide goods and services

Demand

willingness and ability of buyers to purchase goods and services

Four Degrees of Competition

Perfect Competition, Monopolistic Competition, Oligopoly, Monopoly

Perfect Competition

exists when there are many sellers in a market and no seller is large enough to dictate the price of a product

Monopolistic Competition

market structure in which large numbers of buyers and sellers exchange heterogeneous products so each participant has some control over price.

Oligopoly

market situation in which relatively few sellers compete and high start-up costs form barriers to keep out new competitors.

ex. Banks, music industry

Monopoly

market situation in which a single seller dominates trade in a good or service for which buyers can find no close substitutes.

GDP - Gross Domestic Product

sum of all goods and services produced within a country's boundaries during a specific time period, such as a year.

Productivity

relationship between the number of units produced and the number of human and other production inputs necessary to produce them.

Frictional Unemployment

applies to members of the workforce who are temporarily not working but are looking for jobs.

Structural Unemployment

people who remain unemployed for long periods of time, often with little hope of finding new jobs like their old ones.

Cyclical Unemployment

people who are out of work because of a cyclical contraction in the economy.

Seasonal Unemployment

joblessness of workers in a seasonal industry.

Consumer Price Index (CPI)

measurement of the monthly average change in prices of goods and services.

Inflation

economic situation characterized by rising prices caused by a combination of excess consumer demand and increases in the costs of raw materials, component parts, human resources, and other factors of production.

Disinflation

describes a condition where price increases are slowing (i.e., the inflation rate is declining)

Deflation

opposite of inflation, occurs when prices continue to fall

Business Cycle

are the periodic rises and falls that occur in economies over time

Recession

cyclical economic contraction that lasts for six months or longer.

Depression

severe recession usually accompanied by deflation

demand curve

graph of the amount of a product that buyers will purchase at different prices

equilbrium price

prevailing market price at which you can buy an item

supply curve

graph that shows the relationship between different prices and the quantities that sellers will offer for sale, regardless or demand

pure competition

market structure in which large numbers of buyers and sellers exchange homogeneous products and no single participant has a significant influence on price.

Regulated monopoly

market situation in which a local, state, or federal government grants exclusive rights in a certain market to a single firm.

planned economy (centrally)

economic system in which government controls determine business ownership, profits, and resource allocation to accomplish government goals rather than those set by individual firms.

Privitization

conversion of government-owned and operated companies into privately held businesses

core inflation rate

inflation rate of an economy after energy and food prices are removed.

hyperinflation

economic situation characterized by soaring prices.

producer price index (PPI)

measurement of the average change in prices of goods and services received by domestic producers.

unemployment rate

percentage of the total workforce actively seeking work but currently unemployed.

monetary policy

government actions to increase or decrease the money supply and change banking requirements and interest rates to influence bankers' willingness to make loans.

4 stages of business cycle

prosperity, recession, depression, recovery

expansionary monetary policy

government actions to increase the money supply in an effort to cut the cost of borrowing, which encourages business decision makers to make new investments, in turn stimulating employment and economic growth.

restrictive monetary policy

government actions to reduce the money supply to curb rising prices, overexpansion, and concerns about overly rapid economic growth.

quantitative easing

expansionary monetary policy whereby a central bank buys back predetermined amounts of government bonds or other financial assets to increase liquidity and stimulate the economy.

fiscal policy

government spending and taxation decisions designed to control inflation, reduce unemployment, improve the general welfare of citizens, and encourage economic growth

budget deficit

situation in which the government spends more than the amount of money it raises through taxes.

national debt

money owed by government to individuals, businesses, and government agencies who purchase Treasury bills, Treasury notes, and Treasury bonds sold to cover expenditures.

budget surplus

excess funding that occurs when government spends less than the amount of funds raised through taxes and fees.

balanced budget

situation in which total revenues raised by taxes equal the total proposed spending for the year.