Chapter 1
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Economic Output & Indicators
- Aggregate Output: Total quantity of goods and services produced in an economy over a given period. It is used to measure the overall economic activity within a country or region and is a key component in calculating GDP.
- Gross Domestic Product (GDP): Total market value of all final goods and services produced within a nation’s borders in a year. GDP is a primary indicator of a country's economic health, providing a snapshot of the size and growth rate of the economy.
- GDP per Capita: GDP divided by the population—measures average economic output per person. This metric is used to assess the prosperity of a country by indicating the average economic well-being of each resident.
- Gross National Product (GNP): GDP plus income earned by residents from overseas investments minus income earned within the domestic economy by foreign residents. GNP reflects the total income earned by a country's residents, regardless of where the income was earned.
- Real GDP: GDP adjusted for inflation. This adjustment provides a more accurate picture of economic growth by removing the effects of changes in price levels.
- Nominal GDP: GDP measured in current prices, not adjusted for inflation. It reflects the total value of goods and services produced at current prices, without accounting for the effects of inflation.
- Economic Indicators: Statistics used to assess the health of the economy (e.g., GDP, CPI, unemployment). These indicators help economists and policymakers understand current economic conditions and predict future trends.
- Consumer Price Index (CPI): Measures changes in the price level of a market basket of consumer goods and services. CPI is used to measure inflation by tracking changes in the prices paid by consumers for a representative basket of goods and services.
- Inflation: A general increase in prices across an economy. Inflation reduces the purchasing power of money.
- Deflation: A general decrease in prices across an economy. Deflation can lead to decreased economic activity as consumers delay purchases in anticipation of lower prices.
- Purchasing Power Parity (PPP): Compares different countries’ currencies through a market “basket of goods” approach. PPP helps to compare the real purchasing power of currencies by examining the cost of a similar basket of goods in different countries.
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Types of Economies & Economic Systems
- Capitalism: Economic system with private ownership and free markets. In capitalism, resources are allocated through market mechanisms, and economic decisions are driven by the pursuit of profit.
- Communism: System where all property is publicly owned and each person works and is paid according to abilities and needs. Communism aims to eliminate social classes and create an egalitarian society.
- Socialism: Major industries are owned by the government, but private enterprise can exist. Socialism seeks to balance individual freedoms with social equality and welfare.
- Planned Economy: Government controls production and distribution decisions. In a planned economy, the government determines what goods and services are produced and how they are distributed.
- Market Economy: Economic decisions are made by individuals or the open market. Prices and quantities are determined by supply and demand.
- Mixed Market Economy: Combination of free-market and some government control. It seeks to balance the efficiency of the market with government intervention to address market failures and promote social welfare.
- Private Enterprise: Economic system with private ownership, freedom of choice, and competition. Private enterprise fosters innovation, efficiency, and economic growth.
- Stability: Condition in which an economy has low inflation and full employment. Economic stability promotes investment, consumer confidence, and long-term growth.
- Recession: Decline in GDP for two consecutive quarters. It is characterized by decreased economic activity, rising unemployment, and reduced consumer spending.
- Depression: Severe and prolonged downturn in economic activity. A depression can have devastating effects on individuals, businesses, and the overall economy.
- Surplus: When supply exceeds demand or revenues exceed expenditures. Surpluses can lead to lower prices, reduced profits, and potential waste of resources.
- Shortage: When demand exceeds supply. Shortages can lead to higher prices, rationing, and potential dissatisfaction among consumers.
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Supply, Demand, and Market Structures
- Demand: The willingness and ability of buyers to purchase a good. Effective demand is constrained by income and prices.
- Supply: The willingness and ability of producers to offer a good for sale. The quantity supplied depends on factors such as production costs, technology, and the prices of related goods.
- Law of Demand: As price decreases, quantity demanded increases (and vice versa). This inverse relationship is graphically illustrated by the downward-sloping demand curve.
- Law of Supply: As price increases, quantity supplied increases (and vice versa). This direct relationship is graphically illustrated by the upward-sloping supply curve.
- Demand and Supply Schedule: Table showing quantities demanded or supplied at different prices. The schedules provide a snapshot of market conditions at various price points.
- Demand Curve: A graph showing the relationship between price and quantity demanded. It illustrates how much of a product consumers are willing and able to buy at different prices.
- Equilibrium Price (Market Price): Price at which quantity demanded equals quantity supplied. It is where the demand and supply curves intersect, representing a balance between buyers and sellers.
- Competition: Rivalry among businesses for consumer dollars. It promotes innovation, efficiency, and lower prices.
- Perfect Competition: Many sellers, identical products, no market control. In this idealized market, prices are determined solely by supply and demand, and no individual firm has the power to influence prices.
- Monopoly: One producer dominates and controls prices. It often leads to higher prices, reduced output, and lower quality.
- Oligopoly: A few large firms dominate a market. They often engage in strategic behavior, such as price fixing and collusion, to maintain their market power.
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Resources & Factors of Production
- Factors of Production: Land, labor, capital, and entrepreneurship used to produce goods/services. These resources are scarce and must be allocated efficiently to maximize production.
- Capital: Tools, equipment, and facilities used in production. It enhances productivity and expands the range of goods and services that can be produced.
- Labor (Human Resources): The physical and mental effort used in production. It is essential for transforming raw materials into finished goods and services.
- Physical Resources: Tangible things like buildings and machinery. They provide the infrastructure and equipment needed for production processes.
- Information Resources: Data and other knowledge inputs. They guide decision-making, coordinate activities, and improve efficiency.
- Entrepreneur: A person who risks time and money to start and manage a business. Entrepreneurs play a crucial role in driving innovation, creating jobs, and fostering economic growth.
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Business Environments
- Domestic Business Environment: Conditions in the home country that affect business. These conditions include economic factors, political and legal regulations, social and cultural norms, and technological advancements.
- Global Business Environment: International forces that affect a business. These forces include international trade agreements, exchange rates, political instability, and cultural differences.
- Economic Environment: Conditions of the economic system (growth, inflation, interest rates). It includes factors such as GDP growth, inflation rates, interest rates, unemployment levels, and consumer confidence.
- Technological Environment: Innovations and tech tools that impact how businesses operate. It influences product development, production processes, marketing strategies, and customer service.
- Political-Legal Environment: Relationship between business and government, including regulations. It establishes the rules of the game for businesses, protects consumers and workers, and promotes fair competition.
- Sociocultural Environment: Customs, values, and demographic characteristics of society. It shapes consumer preferences, work ethics, social responsibility, and ethical standards.
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Policies and Government Influence
- Fiscal Policies: Government decisions on taxation and spending to influence the economy. Fiscal policy aims to stabilize the economy, promote full employment, and achieve sustainable growth.
- Monetary Policies: Central bank policies that control the money supply and interest rates. These policies influence borrowing costs, investment decisions, and overall economic activity.
- Stabilization Policy: Use of fiscal and monetary policy to reduce economic fluctuations. It aims to moderate the business cycle and prevent extreme booms and busts.
- Privatization: Converting government-owned businesses to private ownership. Privatization seeks to improve efficiency, increase competition, and reduce the size of the government.
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Business Success and Measurement
- Profits: The financial gain made in a transaction or operation (Revenue – Expenses). These are a key indicator of business health and sustainability.
- Productivity: Output per unit of input—how efficiently resources are used. Higher productivity leads to lower costs, increased competitiveness, and improved living standards.
- Balance of Trade: Difference between a country’s exports and imports. A trade surplus indicates that a country is exporting more than it imports, while a trade deficit indicates the opposite.
- Standard of Living: The level of wealth, comfort, and access to goods and services available. It reflects the overall well-being of a population and is influenced by factors such as income, education, health care, and environmental quality.
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