1. Chapter 2
Understanding How Economics Affects Business Introduction to Business (BUS201) Course Instructor: Sadia Haque

2. 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: The part of economics study that looks at the operation of a nation’s economy as a whole.
Microeconomics: The part of economics study that looks at the behavior of people and organizations in particular markets.

3. Resource Development
The study of how to increase resources and to create the conditions that will make better use of those resources.

4. Economic Systems
Capitalism: An economic system in which all or most of the factors of production and distribution are privately owned and operated for profit. For example: USA, Canada, UK etc.
Socialism: An economic system based on the premise that some, if not most, basic businesses should be owned by the government so that profits can be more evenly distributed among the people. For example: Vietnam, Cuba etc.
Communism: An economic and political system in which the government makes almost all economic decisions and owns almost all the major factors of production. For example: North Korea, Laos, China etc.

5. Foundations of Capitalism:
The right to own private property
The right to own a business and keep all that business’s profit
The right to freedom of competition
The right to freedom of choice

6. 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.

7. How Prices are Determined 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.

8. Supply Curve

9. Demand Curve

10. The Equilibrium Point or Market Price

11. Competition within Free Markets
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. For example: potatoes, rice, corn etc.
Monopolistic Competition: The degree of competition in which a large number of sellers produce very similar products that buyers nevertheless perceive as different. For example: Soft drinks, fast-food, t-shirt etc.

12. Competition within Free Markets (cont..)
Oligopoly: A degree of competition in which just a few sellers dominate the market. For example: Tobacco, automobile, aircraft etc.
Monopoly: A degree of competition in which only one seller controls the total supply of a product or service, and sets the price. For example, DESCO, WASA etc.

13. Benefits of Free Market (Capitalism)
Open competition to provide high-quality products and services
Creates wealthy economy
Creates opportunity for employment to reduce poverty

14. Negatives of Free Market Economy (Capitalism)
Inequality in society in terms of wealth
Greedy people and companies

15. 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

16. Negatives of Communism
Government does not know what to produce as prices do not reflect supply and demand
Communism does not inspire businesspeople to work hard because incentives are not there

17. 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.

18. 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.

19. 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 are slowing .

20. 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.
Consumer Price Index (CPI): Monthly statistics that measure the pace of inflation or deflation.

21. The Business Cycle
Business cycles are the periodic rises and falls that occur in economies over time.
Recession: Two or more consecutive quarters of decline in GDP.
Depression: A severe recession, usually accompanied by deflation.

22. 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.
Monetary Policy: The management of the money supply and interest rates by the central bank.