Economics Lecture Notes

How Economic Conditions Affect Businesses

• Economics: The study of how society allocates resources to produce goods and services and distribute them among competing groups and individuals.
• Macroeconomics: Focuses on the operation of a nation’s economy as a whole.
• Microeconomics: Examines the behavior of people and organizations in specific markets.
• Resource development: Aims to increase resources and improve their utilization; examples include:
  • New energy sources.
  • Innovative farming techniques.
  • Advances in creating goods and services.

Adam Smith and the Creation of Wealth

• Adam Smith's beliefs:
  • Economic freedom is crucial for survival.
  • The right to own property and retain business profits is essential.
  • People are motivated to work hard if they are rewarded.

How Businesses Benefit the Community

• Invisible hand theory: Individuals' efforts to improve their own situation inadvertently benefit society.
  • Invisible hand: Self-directed gain translates into social and economic benefits for all.
• Example: A farmer who hires workers to increase crop production benefits both the community (through increased food supply) and employees, while also helping himself.

Understanding Free-Market Capitalism

• Capitalism: An economic system where most factors of production and distribution are privately owned and operated for profit. Examples: United States, England, Australia, Canada.
• State capitalism: A mix of free markets and government control, exemplified by China's rapid growth.

Capitalism’s Four Basic Rights

• Private property ownership.
• Business ownership with profit retention.
• Freedom of competition.
• Freedom of choice.

How Free Markets Work

• Free market: Production decisions are made by the market; prices guide production levels.
• Consumer preferences signal demand.
• Scarcity drives up prices until supply increases.

Circular Flow Model

• Households: Provide input (factors of production) and receive input payments, use buying power to purchase goods and services from businesses.
• Businesses: Use inputs from households to produce goods and services, pay households for their inputs.

How Prices Are Determined

• Prices adjust based on supply and demand.
• Lowering prices increases quantity demanded.

Supply, Demand, and Market Price

• Supply: Quantity of products sellers are willing to sell at various prices.
• Demand: Quantity of products people are willing to buy at various prices.
• Market price (equilibrium point): Price determined by supply and demand.

Competition within Free Markets

• Perfect Competition
• Monopolistic Competition
• Oligopoly
• Monopoly

Benefits and Limitations of Free Markets

• Benefits:
  • Open competition.
  • Opportunities for upward mobility.
• Limitations:
  • Potential for greed.

Understanding Socialism

• Socialism: An economic system where basic businesses are government-owned for equitable profit distribution.
  • Smaller businesses are run by entrepreneurs.
  • High taxation funds government involvement in social and environmental protection.

The Benefits of Socialism

• Social equality.
• Free education, healthcare, and childcare.
• Longer vacations, shorter workweeks, and generous sick leave.

The Negative Consequences of Socialism

• Reduced incentives for risk-taking.
• Brain drain.
• Less innovation due to limited rewards.

Understanding Communism

• Communism: Government controls economic decisions and owns major factors of production.
  • Prices do not reflect demand, leading to shortages.
  • Often results in economic depression.

The Trend Toward Mixed Economies

Two Major Economic Systems

• Free-market economies: Market driven production and distribution of goods and services.
• Command economies: Government controlled production and distribution of goods and services.

Shift Towards Mixed Economies

• Both free-market and command economies have limitations.
• Communist governments are declining.
• Socialist governments are reducing social programs and taxes, moving towards capitalism.
• Capitalist countries are increasing social programs, moving towards socialism.

Mixed Economies

• Mixed economies: Resource allocation is shared between the market and the government.

Understanding the U.S. Economic System

Key Economic Indicators

• Gross Domestic Product (GDP): The total value of final goods and services produced in a country in a year.
  • GDP includes the output of foreign-owned companies within the country.
• Unemployment rate: Percentage of civilians (16+) unemployed and seeking jobs.
  • Four Types of Unemployment
    • Frictional
    • Structural
    • Cyclical
    • Seasonal
• Inflation and price indexes:
  • Inflation: General increase in prices.
  • Disinflation: Slowing price increases.
  • Deflation: Declining prices.
  • Stagflation: Slowing economy with rising prices.
  • Consumer Price Index (CPI): Measures inflation or deflation.
  • Producer Price Index (PPI): Measures price changes at the wholesale level.

The Business Cycle

• Business cycles: Periodic economic rises and falls.
  • Four phases:
    • Economic Boom
    • Recession: Two+ quarters of GDP decline.
    • Depression: Severe recession with deflation.
    • Recovery: Economy stabilizes and grows.

Stabilizing the Economy through Fiscal Policy

• Fiscal policy: Government management of the economy through taxation and spending.
  • Tools:
    • Taxation
    • Government spending
• National deficit: Government spending exceeds tax revenue in a fiscal year.
• National debt: Sum of government deficits over time.
• National surplus: Government revenue exceeds spending.

Using Monetary Policy to Keep the Economy Growing

• Monetary policy: Management of money supply and interest rates by the Federal Reserve Bank (The Fed).
  • The Fed influences interest rates.
  • The Fed raises interest rates during economic booms and lowers them during recessions.