Understanding Economics and Business - Principles of Economics PDF

Here is the converted markdown format of the image: # Understanding Economics and how it affects Business The image shows a piggy bank filled with symbols representing, house, car, family, money, city skyline and technology. ## The MAJOR BRANCHES of ECONOMICS * Economics -- The study of how soc...

Here is the converted markdown format of the image: # Understanding Economics and how it affects Business The image shows a piggy bank filled with symbols representing, house, car, family, money, city skyline and technology. ## The MAJOR BRANCHES of ECONOMICS * Economics -- The study of how society employs resources to produce goods and services for consumption among various groups and individuals. * Macroeconomics – 'Big' * Concentrates on the operation of a nation's economy as a whole. * Microeconomics – ‘Small' * Concentrates on the behavior of people and organizations in markets for particular products or services. ## Resource Development Resource Development -- The study of how to increase resources and create conditions that will make better use of them. ## ADAM SMITH the FATHER of ECONOMICS Smith believed that Freedom was vital to any economy's survival. * Freedom to own land or property and the right to keep the profits of a business is essential. * People will work hard if they believe they will be rewarded The image show Adam Smith, and title "The wealth of Nations by Adam Smith 1776" ## UNDERSTANDING the INVISIBLE HAND THEORY * As people improve their own situation in life, they help the economy prosper through the production of goods, services and ideas. * Invisible Hand -- When self-directed gain leads to social and economic benefits for the whole community. * A farmer earns money by selling his crops. * To earn more, the farmer hires farmhands to produce more crops. * When the farmer produces more, there is plenty of food for the community. * The farmer helped his employees and his community while helping himself. ## CAPITALISM Capitalism – an economic system in which all or most of the factors of production and distribution – such as land, factories and stores are owned by individuals, not the government, and operated for profit. * Countries with capitalist foundations: * United States * England * Australia * Canada The image a baker holding a plate of cakes. ## STATE CAPITALISM * State Capitalism – a combination of freer markets and some government control. * Well-known countries practicing state capitalism: * China * Russia ## CAPITALISM'S FOUR BASIC RIGHTS 1. The right to own private property. 2. The right to own a business and keep all that business's profits. 3. The right to freedom of competition. 4. The right to freedom of choice. ## Free market * \- is one in which decisions about what and how much to produce are made by the market - by buyers and sellers negotiating prices for goods and services. * In a free market prices are not determined by sellers; they are determined by buyers and sellers negotiating in the marketplace. ## MICROECONOMIC CONCEPTS OF SUPPLY AND DEMAND * A seller may want to sell shirts for $50, but only a few people may buy them at that price. * If the seller lowers the price to $30, more people buy the shirts. * The seller establishes a price of $30 based on what consumers are willing to pay. **Supply** -- The quantities of products businesses are willing to sell at different prices. **Demand** -- The quantities of products consumers are willing to buy at different prices. **Market Price** - Determined by supply and demand, this is the negotiated price ## Competition within Free Markets * Four different degrees of competition: * Perfect competition – the degree of competition in which there are many sellers in a market and none is large enough to dictate the price of a product. * Monopolistic competition - the degree of competition in which a large number of sellers produce very similar products that buyers nevertheless perceive as different (e.g. the fast food industry). * Oligopoly - a degree of competition in which just a few sellers dominate the market (e.g. gasoline, aircraft). * Monopoly – a degree of competition in which only one seller controls the total supply of a product or service, and sets the price. ## FREE MARKET BENEFITS and LIMITATIONS **Benefits:** * It allows for open competition among companies. * Provides opportunities for poor people to work their way out of poverty. **Limitations:** * People may start to let greed drive them. The is of bike shop with a person standing in the shop doorway. ## SOCIALISM * Socialism -- An economic system based on the premise that some basic businesses, like utilities, should be owned by the government in order to more evenly distribute profits among the people. * Entrepreneurs run smaller businesses. * Citizens are highly taxed. * Government is more involved in protecting the environment and the poor. ## BENEFITS of SOCIALISM * Social equality * Free education * Free healthcare * Free childcare * Longer vacations * Shorter work weeks * Generous sick leave ## NEGATIVES of SOCIALISM * Few incentives for businesspeople to take risks. * Brain Drain: Some of a country's best and brightest workers (i.e. doctors, lawyers and business owners) move to capitalistic countries. * Fewer inventions and innovations because the reward is not as great as in capitalistic countries. ## COMMUNISM * Communism -- An economic and political system in which the government makes almost all economic decisions and owns almost all the major factors of production. * Prices don't reflect demand which may lead to shortages of items, including food and clothing. * Most communist countries today suffer severe economic depression and citizens fear the government. ## TWO MAJOR ECONOMIC SYSTEMS * Free-Market Economies -- The market largely determines what goods and services are produced, who gets them, and how the economy grows. * Command Economies -- The government largely determines what goods and services are produced, who gets them, and how the economy will grow. ## Capitalism vs. Communism | | Free Market Economy (Capitalism) | Command Economy (Communism) | | :---------------------- | :------------------------------- | :---------------------------- | | Who determines Wages | People | Government | | Views on private property? | rewarded | Discouraged | | Views on competition? | encouraged | Discouraged | | Gov't influence on the economy? | Limited | Hands on | | Views on Freedom | valued | Regulation over choice | | Inventions/improve | incentives | People lack incentives | ## MIXED ECONOMIES * Mixed Economies -- Some allocation of resources is made by the market and some by the government. * Neither free-market nor command economies have created sound economic conditions so countries use a mix of the two economic systems. * Communist governments are disappearing * Socialist governments are cutting back on social programs, lowering taxes and moving toward capitalism. * Capitalist countries are increasing social programs and moving toward socialism. ## Key Economic Indicators - Homework **Gross Domestic Product (GDP)** -- Total value of final goods and services produced in a country in a given year. As long as a company is within a country's border, their numbers go into the country's GDP (even if they are foreign-owned). When the GDP changes, businesses feel the effect. **Unemployment Rate** -- The percentage of people who are willing and able to work but are unemployed. **Inflation** -- The general rise in the prices of goods and services over time. **Effectiveness** -- Producing the desired result, achieving the goal. **Efficiency** -- Utilizing available resources with maximum benefits. Producing goods and services using the least amount of resources. **Productivity** – relationship between the amount of output you generate given the amount of input (example: hours you work). ## PRODUCTIVITY Productivity is useful as a relative measure of actual output of production compared to the actual input of resources, measured across time or against common entities. As output increases for a level of input, or as the amount of input decreases for a constant level of output, an increase in productivity occurs. Therefore, a "productivity measure" describes how well the resources of an organization are being used to produce input. Productivity in developed economies has risen due to the technological advances that have made production faster and easier. Productivity in the service sector grows more slowly because of fewer technologies. ## BUSINESS CYCLES Business Cycles -- Periodic rises and falls that occur in economies over time. **Four Phases of Long-Term Business Cycles:** 1. Economic Boom - highest level of the GDP 2. Recession - decline in the GDP. 3. Depression - lowest level of the GDP. 4. Recovery or Growth - increase in the GDP. The image is of a graph to illustrate the business cycle, with the stages: peak, recession, trough, recovery and growth.