Understanding the Basic Economics PDF

LE: Understanding the Basic Economics (ch2) Week # of sessions year 1.1.1 Lecture course MTP Economy Sum total of all the economics activity within a given region Economics The study of how a society uses its scarce resources to produce and distribute goods and services Divided into small scale...

LE: Understanding the Basic Economics (ch2) Week # of sessions year 1.1.1 Lecture course MTP Economy Sum total of all the economics activity within a given region Economics The study of how a society uses its scarce resources to produce and distribute goods and services Divided into small scale perspective and large scale perspective Microeconomics Macroeconomics Study of how consumers, businesses, and industries collectively determine the quantity of goods and services demanded and supplied at different prices Study of “big picture” issues in an economy, including competitive behavior among firms, the effect of government policies, and overall resource allocation issues Factors of Production Natural Resources Human Resources LE: Understanding the Basic Economics (ch2) Capital Entrepeneurship Knowledge 1 Lands, People who Funds that Combination of Expertise forests, animals, other work in an organization finance the operations of a business innovation, initiave, and willingness to gained through experience (money, machines, tools and buildings) take risks required to create a business tangible assets in their natural state Economic Impact of Scarcity Scarcity Condition of any productive resource that has a finite supply Powerful effects Creates competition for resources Forcing trade-offs on the part of every participant in the economy -Businesses compete with each other for materials, employees, and customers Forced to make trade-offs, having to give up one thing to get something else More time you spend on one activity means less time for every other activity you could possibly pursue Opportunity Cost Value of the most appealing alternative not chosen -Way to measure the value of what you gave up when you pursued a different opportunity LE: Understanding the Basic Economics (ch2) 2 Economic Systems Policies that define a society’s particular economic structure; rules by wich society allocates economic resources Free Market Systems Planned Systems Economic system in which decisions about what to produce and quantity are done by the market’s buyers and sellers Economic system in which the government controls most of the factors of production and regulates their allocation Capitalism Economic system based on economic freedom and competition Social equality is a major goal Socialism Economic system characterized by public ownership and operation of key industries combined with private ownership and operation of less vital industries Lies between capitalism and communism, with fairly high degree of government planning and some government ownership of capital resources Nationalization & Privatization Nationalization Privatization Government’s takeover of selected companies or industries Turning over services once performed by the government to private businesses Forces of Demand & Supply Demand Supply Buyers’ willingness and ability to purchase products at various price points Specific quantity of a product that the seller is able and willing to provide at various prices Understanding demand Demand curve LE: Understanding the Basic Economics (ch2) 3 Graph that shows the amount of product that buyers will purchase at various prices Typically slope downward, implying that as price drops, more people are willing to buy If demand is strong, companies can keep their prices consistent or perhaps even raise them If demand weakens, companies can lower prices to stimulate more purchases Factors that can cause overall demand to increase or decrease Customer income Customer preferences toward the product Price of substitute products Price of complementary products Marketing expenditures Customers expectations about future prices Understanding supply Supply Curve Graph of the quantities of a product that sellers will offer for sale at various prices Typically slopes upward, implying that as prices rises, the quantity that sellers are willing to supply also rises Factors that can cause overall supply to increase or decrease Cost of inputs Number of competitors Advancements in technology LE: Understanding the Basic Economics (ch2) 4 Demand & Supply Interact -Buyers want to buy at the lowest possible price and sellers want to sell at the highest possible price Equilibrium Point The point at which quantity supplied equals quantity demanded Macro View: How an Economy Operates Competition Rivalry among businesses for the same customers nature of compettion varies widely by industry product category geography Pure competition Situation in which no single firm becomes large enough to influence prices (due to the existence of many other firms in the same marketplace) Monopoly Situation in hwich one company dominates a market to the degree that it can control prices and essentially shut out other competitors Can happen naturally as companies innovate or markets evolve Government mandate ( no product competition is allowed) Monopolistic Competition Situation in which numerous sellers offer products that can be distinguished from competing products in at least some small way Oligopoly Situation in which the number of competitors in a market is quite small LE: Understanding the Basic Economics (ch2) 5 Business Cycles Flunctuations in the rate of growth that an economy experiences over a period of several years Economic expansion occurs when the economy is growing and consumers are spending more money higher employment higher wages more consumer purchases Economic contraction occurs when consumer purchases declines, employment drops, and the economy slows down Recession Depression Period during which national income, A deep and prolonged recession, employment and production all fall (at least 6 months of decline in the GDP) generally considered to involve a catastrophic collapse of financial markets Unemployment Unemployment rate Indicates the percentage of the labor force currently without employment Inflation Inflation Deflation Steady rise in the average prices of Sustained fall in average prices goods and services throughout the economy Major concerns for costumers, businesses, and government leaders Government’s Role in a Free Market System LE: Understanding the Basic Economics (ch2) 6 Regulation Deregulation Relying more on laws and policies that on market forces to govern economic Removing regulations to allow the market to prevent excesses and correct activity itself over time Major areas in whcih the government plays a role in the economy are Protecting Stakeholders Fostering Competition Encouraging Innovation & Economic Development Stabilizing & Stimulating the Economy Protecting Stakeholders Stakeholders Internal and external groups affected by a company’s decisions and activities employees colleagues investors costumers suppliers society In the course of serving one or more of these stakeholders, a business may sometimes neglect, or at least be accused of neglecting the interest of other stakeholders. Fostering Competition Governments intervene in markets to preserve competition and ensure that no single enterprise becomes too powerful. LE: Understanding the Basic Economics (ch2) 7 To preserve competition and customer choice, governments occasionally prohibit companies from combinig through mergers or acquisitions Encouraging Innovation Encouraging the development and adoption of innovations that governments consider beneficial in some way Encouraging businesses to locate or expand in particular geographic areas by establising economic development zones Stabilizing & Stimulating the Economy Monetary Policy Fiscal Policy Government policy and actions to regulate the nation’s money supply Use of government revenue collection and spending to influence the business cycle done to stimulate a slow economy done to dampen a growing economy that is in danger of overheating and causing inflation Economic Measures & Monitors Economic Indicators Statistics that measure the performance of the economy Leading Indicators suggest changes that may happen to the economy in the future Price Indexes Offer a way to monitor the inflation or deflation in various sectors of the economy Consumer Price Index (CPI) LE: Understanding the Basic Economics (ch2) 8 Monthly statistics that measures changes in the prices of a representative collective of consumer goods and services. Used for: Adjusting Social Security payments Calculating cost-of-living increases for employees As a gauge of how well the government is keeping inflation under control Producer Price Index (PPI) Statistical measure of price trends at the producer and whole saler levels, reflecting what businesses are paying for the products they need. Used for: Help companies place an accurate value on inventories Protecting buyers and sellers with price escalation clauses in long term purchasing contracts National Economic Output Broadest measure of an economy’s health is gross domestic product (GDP) Gross domestic product (GDP) Value of all the final goods and services produced by business located within a nation’s borders 💡 GDP measures a country’s output (production, ddistribution, and use of goods and services) by computing the sum of all goods and services produced for final use in a country during a time period (1yr) Products may be produced by either local or foreign companies as long as the production takes place within a nation’s boundaries Monitoring GDP helps a nation evaluate its economic policies and compare current performance with prior periods or with the performance of other nations LE: Understanding the Basic Economics (ch2) 9 GNP considers who is responsible for the production; GDP considers where the production occurs LE: Understanding the Basic Economics (ch2) 10