Chapter 3: Economics and Business

Economics

The study of the production, distribution, and consumption of goods and services.

Resources (Factors of Production)

Inputs used to produce outputs, including Land, Labor, Capital, Entrepreneurship, and Knowledge.

Economic System

A nation’s system for allocating resources among its citizens.

Free-Market Economy (Capitalism)

An economic system where the market largely determines what is produced and who gets it, with limited government involvement.

Capitalism’s Four Basic Rights

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

Command Economy

An economic system where the government largely determines what is produced and who gets it (includes Communism and Socialism).

Socialism

System where basic businesses (like utilities) are government-owned to distribute profits more evenly, while individuals run smaller businesses.

Communism

System where the government makes almost all economic decisions and owns almost all major factors of production.

Mixed Economy

A system that uses a mix of market and government allocation of resources. Most countries today are mixed.

Perfect Competition

Market with many small companies selling identical products; price is determined by supply and demand. Example: Corn or soybeans.

Monopolistic Competition

Many sellers offering similar but differentiated products.

Oligopoly

A few large sellers dominate the market and exert some control over price. Example: Airlines or automobile companies.

Monopoly

Only one seller in a market who can control prices. Example: Public utilities (Natural Monopoly) or patent holders (Legal Monopoly).

Supply vs. Demand

Supply is the quantity sellers are willing to sell at various prices; Demand is the quantity buyers are willing to purchase.

Equilibrium Price

The point where the supply and demand curves intersect.

Gross Domestic Product (GDP)

The market value of all goods and services produced domestically each year.

Recession

A slowdown in economic activity, often defined as GDP declining for two consecutive quarters.

Inflation vs. Deflation

Inflation is a period of rising average prices; Deflation is a period of falling prices.

Consumer Price Index (CPI)

A monthly measure of inflation based on price changes in a hypothetical 'basket of goods' bought by a typical household.

Fiscal Policy

Federal government efforts to keep the economy stable by increasing/decreasing taxes or government spending.

Monetary Policy

Management of the money supply and interest rates by the Federal Reserve Board.