How Economics Affects Business: The Creation and Distribution of Wealth
Economics Economics is the study of how society (People) chooses to employ limited resources to produce goods and services and distribute them for consumption.
Economics There are two branches of economics. Microeconomics Macroeconomics Microeconomics: The part of economics that looks at the behavior of people and organizations in particular markets.
Economics Macroeconomics: The part of economics that looks at the operation of nation’s economy as a whole.
Economic Systems Economic system is the accepted process by which labor, capital and natural resources are organized to produce and distribute goods and services in a society.
Four “What’s” of an Economic System What is produced? What amount is produced? What is the method of output distribution? What is the rate of economic growth?
Three Economic Systems Mixed Socialism (Highly Controlled) (Little Control) Communism Capitalism
Capitalism Capitalism is an economic System in which all or most of the factors of production and distribution are privately owned and operated for profit.
Foundation of Capitalism The right to private property The right to own a business and to keep all of that business’s profits. The right to freedom of competition. The right to freedom of choice.
Free Markets A free market is one in which decisions about what to produce and in what quantities are made by the market---that is, by buyers and sellers negotiating prices for goods and services. A free market is a market in which prices of goods and services are arranged completely by the mutual consent of sellers and buyers.
Free Markets In a free market, prices are not determined by sellers; they are determined by buyers and sellers negotiating in the market place. Price is determined by supply and demand.
Free Markets Supply: Supply refers to the quantity of products that manufacturers or owners are willing to sell at different prices at a specific time. Demand: Demand refers to the quantity of products that people are willing to buy at different prices at specific time.
Supply Curve High Price(P) S High Low Quantity(S)
Demand Curve High Price(P) D Low Quantity(D) High
Equilibrium Point S D Price Quantity High Low High Surplus Market Equilibrium Price S D Shortage Low Quantity High
Free-Market Competition Monopolistic Competition Oligopoly One Many Monopoly Perfect Competition Sellers
Perfect Competition Perfect competition exists when there are many sellers in a market and no seller is large enough to dictate the price of a product. Under perfect competition, seller produce products that appear to be identical. Agricultural product (apples, potatoes)
Perfect Competition Sellers Buyer
Monopolistic Competition Monopolistic competition exist when a large number of sellers produce products that are very similar but are perceived by buyers as different. Product differentiation is a key to success in this competition. T-shirts, candy.
Oligopoly An oligopoly is a form of competition in which just a few sellers dominate a market. Automobiles, tobacco, soft drinks, aircraft.
Monopoly Monopoly is a market in which there is only one seller for a product or service. Natural gas, electricity, water, diamonds.
Socialism Socialism is an economic system based on the premise that some, if not most, basic business should be owned by the government so that profits can be evenly distributed among the people.
Communism Communism is an economic and political system in which the state ( the government) makes almost all economic decisions and owns almost all the major factors of production.
Mixed Economies Mixed economies is an economic systems in which some allocation of resources is made by the market and some by the government. Both private and government production of goods and services occurs.