Understanding How Economics Affects Business * * * Understanding How Economics Affects Business CHAPTER 2 Nickels McHugh McHugh * * 1-1

Economics Economics is the study of how society chooses to employ resources to produce goods and services and distribute them for consumption among various competing groups and individuals. Macroeconomics Microeconomics Resource Development

Economic Theories “Dismal Science” Too many people in one family Thomas Malthus (Early 1800s) “Dismal Science” Too many people in one family Adam Smith (1776) Freedom is vital “Invisible Hand”

3 types of Economic Systems Capitalism: Capitalism is an economic system based on private ownership of the means of production and their operation for profit. Characteristics central to capitalism include private property, capital accumulation, wage labor, voluntary exchange, a price system, and competitive markets. USA, Canada, UK etc. Socialism: Socialism is an economic system where the ways of making a living (factories, offices, etc.) are owned by a society as a whole, meaning the value made belongs to everyone in that society, instead of a group of private owners. People who agree with this type of system are called socialists. Bangladesh, Vietnam, Cuba, China etc. Communism: a theory or system of social organization in which all property is owned by the community and each person contributes and receives according to their ability and needs. North Korea, Laos, China etc.

Free Market in Capitalist Economy Free Market: A Free market is one in which decisions about what and how much to produce are made by the market- the buyers and sellers negotiating prices for goods and services. Capitalist countries have free market economy. Private Property Profit Ownership Freedom of Competition Freedom of Choice/Work

How Prices are Determined in free market (by Supply and Demand) Supply: The quantity of products that manufacturers or owners are willing to sell at different prices at a specific time. Demand: The quantity of products that people are willing to buy at different prices at a specific time.

Supply Curve

Demand Curve

The Equilibrium Point or Market Price

Competition within Free Markets Perfect Competition: Many sellers in a market None is large enough to dictate the price of a product For example: potatoes, rice, corn etc. Monopolistic Competition: Large number of sellers Produce very similar products that buyers nevertheless perceive as different. For example: Soft drinks, fast-food, t-shirt etc.

Competition within Free Markets (cont..) Oligopoly: Few sellers dominate the market. For example: Tobacco, automobile, aircraft etc. Monopoly: Only one seller controls the total supply of a product or service Sets the price for the total market. For example, DESCO, WASA etc.

Pros and Cons of Capitalism Open competition to provide high- quality products and services Creates wealthy economy Creates opportunity for employment to reduce poverty Inequality in society in terms of wealth Greedy people and companies

Benefits and Negatives of Socialism Social equality Free education, free health care, free child care Negatives of Socialism: Brain Drain: The loss of the best and brightest people to other countries. Fewer innovation

Negatives of Communism Government does not know what to produce Communism does not inspire businesspeople to work hard because incentives are not there

The Major Economic Systems Free-market Economy: It exists when the market largely determines what goods and services get produced, who gets them, and how the economy grows. Capitalism is associated with this economic system. Command Economy: It exists when the government largely decides what goods and services will be produced, who gets them, and how the economy will grow. Socialism and Communism are variations of this economy.

The Major Economic Systems (cont…) Mixed Economy: Economic systems in which some allocation of resources is made by the market and some by the government. Bangladesh, Iceland, Sweden, France, the U.S, the U.K, Cuba, Russia, China are some of the countries with mixed economy.

Key Economic Indicators Gross Domestic Products (GDP): The total value of final goods and services produced in a country in a given year. Unemployment Rate: The number of civilians who are unemployed and trying to find a job. Inflation: A general rise in the prices of goods and services over time. Disinflation: A situation in which price increases in a slow manner .

Key Economic Indicators Deflation: A situation in which prices are declining. Stagflation: A situation when the economy is slowing but prices are going up anyhow. (e.g. Cyprus, Italy etc.) Consumer Price Index (CPI): Monthly statistics that measure the pace of inflation or deflation. Producer Price Index (PPI): An index that measures prices at the wholesale level.

The Business Cycle Business cycles are the periodic rises and falls that occur in economies over time. Boom Recession Depression Recovery

Stabilizing Economy through Fiscal Policy Fiscal Policy: The governments effort to keep the economy stable by increasing or decreasing taxes or government spending. National Debt: The sum of government deficits over time. If the government takes in more revenue than it spends, there is a national surplus.