BMF 1.2
How do the principles of economics apply to businesses?
Economics - science that examines how goods and services are produced, sold, and used
All economic services are limited; needs/wants are unlimited
Factors of production - economic resources a nation uses to make goods and supply services for its population
Land, labor, capital, and entrepreneurship
Land - all of a nation’s natural resources; raw materials found in nature
Labor - work performed by people in organizations; human resources
Capital - all the tools, equipment, and machinery used to produce goods or provide services
Capital Goods - products businesses use to produce final products for consumers
Entrepreneurship - willingness and ability to start a new business
Entrepreneurs - people who start new businesses
Economic problem: unlimited wants cannot be filled with limited resources
Scarcity - demand is higher than the available resources
Every consumer decision has a cost - scarcity forces choices to be made
Trade-off - when something is given up in order to gain something else
Opportunity cost - value of the next best option that was not selected
Value - relative worth of something
Limited resources decrease + unlimited needs and wants increasing = scarcity
Systematic Decision-Making - process of choosing an option after evaluating available information and weighing the costs and benefits of the alternatives
Economic system - organized way in which a nation chooses to use its resources to create goods and services
Scarcity leads to 3 economic questions
What should we produce?
How should we produce it?
For whom should we produce it?
Traditional Economy - economic decision are based on society’s values, culture, and customs
Large rural populations that rely on farming and hunting activities to meet needs
LIttle or no manufacturing
People barter for goods or services
Command Economy - government makes all economic decisions for its citizens
Centrally-planned economy
Found in communist or socialist societies
Government owns and controls all factors of production, decides quantity of production, and sets prices
Market Economy - individuals free to make their own economic decisions
Free enterprise/private enterprise
Capitalism - economic system where the economic resources are privately owned by individuals rather than the government
Characteristics: Private Property, Profit, Competition, Voluntary Exchange, Economic Freedom
Mixed Economy - both government and individuals make decisions about economic resources
Level of government involvement in mixed economics can vary
Market Forces - economic factors that affect the price, demand, and availability of a good or service
Include supply and demand, the profit motive, and competition
Law of Supply and Demand - price of a product is determined by the relationship of the supply of a product and the demand for the product
Market Price - determined at the point where supply equals demand for a product - equilibrium
Supply Curve - producers supply greater quantity at higher prices
Demand Curve - consumers buy fewer goods at higher prices
Shortage - when demand is greater than supply
Surplus - when demand is less than supply
Profit Motive - one reason people choose to start and expand businesses
Profit - difference between income earned and expenses incurred by a business
Driving force of creating a business
Competition - action taken by 2 or more businesses attempting to attract the same customers
Customers free to choose the goods and services they buy