Introduction to Business Concepts Review

Factors of Production Resources nations need to create wealth  Land  Labor  Capital  Entrepreneurship  Knowledge

Economic Terms  Opportunity cost The benefit forgone when you choose one activity over another  Economic decision rule If benefits exceed costs, do it. If costs exceed benefits, don’t do it.

More Economic Terms  Output A result of an activity  Input What you put in to achieve that output  Productive efficiency Getting as much output for as few inputs as possible

Economic Systems  Capitalism (free-market economy) All or most factors of production and distribution privately owned and operated for profit

Foundations of Capitalism  Freedom to own private property  Freedom to own business and keep profits  Freedom of competition  Freedom of choice

Socialism  Based on premise that government should own most basic business  Business profits should be evenly distributed among the people

Communism  Government makes almost all economic decisions  Government owns almost all factors of production Land Labor Capital Knowledge Entrepreneurship (not encouraged)

Key Economic Indicators  Gross Domestic Product (GDP) Total value of final goods and services produced in a given period  Consumption+investment+net exports+government spending = GDP China Q GDP = 9.8% U.S Q GDP = 3.2%

Key Economic Indicators  Consumer Price Index (CPI) Monthly statistic measures pace of inflation or deflation  Producer Price Index (PPI) A/k/a Manufacturers’ Index Monthly statistic measures prices at wholesale level  Unemployment rate Number of civilians at least 16 years old who are unemployed and tried to find a job within the prior four weeks

Key Economic Indicators  Inflation rate A general rise in prices of goods and services over time  Deflation A situation in which price increases are slowing; inflation rate is declining  Disinflation A situation in which prices are declining  Stagflation A combination of high inflation and high unemployment

Key Financial Indicators  Money supply Monthly statistic measures amount of money in circulation  Fiscal policy Federal government efforts to stabilize economy with taxes and spending  Monetary policy Management of money supply and interest rates Controlled by Federal Reserve (the Fed)  National debt The sum of government deficits over time

Business Cycles  Periodic rises and falls that occur in economies over time Boom—recession—depression—recovery Recession  Two or more consecutive quarters of decline in GDP Depression  A severe recession, usually accompanied by deflation

Rule of 72  Useful for understanding inflation  A quick computation of how long it takes prices to double at various rates of growth  Example: If houses increase in price at 9% a year, how long for the price to double?  Answer: Divide 72 by 9% and you get the approximate number of years it takes to double the price, 8 years