Chapter 2 - Understanding Economics and How it Affects Business Flashcards Preview

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1

What is the difference between macroeconomics and microeconomics?

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.

Macro-- The part of economics study that looks at the operations of a nation's economy as a whole. (ex. government spending) (GDP, unemployment rate, and price indexes)

Micro-- The part of economics study that looks at the behavior of people and organizations in particular markets.

2

What is better for an economy than teaching a man to fish?

The secret to economic development is contained in the additional statement to the quote, "Give a man a fish and you feed him for a day, but teach a man to fish and you feed him for a lifetime' 'Teach a person to start a fish farm, and he or she will be able to feed a village for a lifetime'.

Business owners provide jobs and economic growth for their employees and communities as well as for themselves.

3

What does Adam Smith's term invisible hand mean? How does the invisible hand create wealth for a country?

In Adam Smith's view, businesspeople don't necessarily deliberately set out to help others. They work primarily for their own prosperity and growth. Yet as people try to improve their own situation in life, their efforts serve as an 'invisible hand' that helps the economy grow and prosper through the production of needed goods, services, and ideas.
The phrase invisible hand is used to describe the process that turns self-directed gain into social and economic benefits for all.
How? The only way farmers can become wealthy is to sell some of their crops to others. To become even wealthier, they have to hire workers to produce more food. So the farmers' self-centered efforts to become wealthy lead to jobs for some and food for almost all.

4

What are the four basic rights that people have under free-market capitalism?

1. The right to own private property.
This is the most fundamental of all rights under capitalism.
2. The right to own a business and keep all that business's profits.
Profits act as important incentives for business owners.
3. The right to freedom of competition.
4. The right to freedom of choice.

One benefit of these rights is that people are willing to take more risks than they might otherwise.

5

How do businesspeople know what to produce and in what quantity?

Businesspeople know what to produce through the free market system dictated by consumers. Supply and demand.

The price tells producers how much to produce. If something is wanted and unavailable, the price tends to go up until someone begins making more of that product, sells the ones already on hand, or makes a substitute.

6

How are prices determined?

In a free market, prices are not determined by sellers; they are determined by buyers and sellers negotiating in the marketplace.
Supply and Demand.

7

What are the four degrees of competition, and what are some examples of each?

1. Perfect competition (ex. agricultural products like apples, corn, and potations)
2. Monopolistic competition -- the degree of competition in which a large number of sellers produce very similar products that buyers nevertheless perceive as different (ex. hot dogs, sodas, personal computers, and t-shirts)
3. Oligopoly -- a degree of competition in which just a few sellers dominate a market (ex. tobacco, gasoline, cars, aluminum, and aircraft)
4. Monopoly -- when one seller controls the total supply of a product or service, and sets the price. In USA, law prohibits monopolies. (ex. public utilities that sell natural gas, water, and electric power)

8

Free Market

A free market is one in which decisions about what and how much to produce are made by the market--by buyers and sellers negotiating prices for goods and services.

Benefit: open competition
Was a major factor in creating the wealth that industrialized countries now enjoy
Dangers: some people let greed dictate how they act. Criminal charges are involved

9

What led to the emergence of socialism?

To overcome some of capitalism's limitations, some countries have adopted an economic system called socialism.
Socialism is an economic system based on the premise that some, if not most, basic businesses (e.g. steel mills, coal mines, and utilities) should be owned by the government so that profits can be more evenly distributed among the people.

10

What are the benefits and drawbacks of socialism?

Benefits: the major benefit is supposed to be social equality. Government takes income from wealthier people, in the form of taxes, and redistributes it to the poorer people through various government programs.
Free education through college, free health care, and free child care. Workers in socialist countries usually get longer vacations, work fewer hours per week, and have more employee benefits than countries with free-market systems.

Drawbacks: Socialism may create more equality than capitalism, but it takes away some of businesspeople
s incentives. (ex. tax rates in some socialist nations once reached 83%) (This loss of the best and brightest people to other countries is called a brain drain).
Socialism also tends to result in fewer inventions and less innovation.

11

What countries still practice communism?

Most communist countries today are suffering severe economic depression.
North Korea, Cuba, and some parts of Russia.

12

What are the characteristics of a mixed economy?

Mixed economies exist where some allocation of resources is made by the market and some by the government.
The trend has been for mostly capitalist countries to move toward socialism, and for some socialist countries to move toward capitalism. All countries have some mix of the two systems.
Thus, the long-term global trend is toward a blend of capitalism and socialism.

13

Name the three economic indicators and describe how well the US is doing based on each indicator.

1. GDP -- A major influence on the growth of GDP is the productivity of the workforce--that is, how much output workers create with a given amount of input. The level of US economic activity is actually larger than the GDP figures because those figures don't take into account illicit activities. The high GDP in the US is what enables its citizens to enjoy a high standard of living.
2. Unemployment Rate -- The US has high rates that raise the question of what the US can do to increase employment.
3. price indexes -- Some economists fear the US may face stagflation in the near future

14

Whats the difference between a recession and a depression?

Recession-- two or more consecutive quarters of decline in the GDP. In a recession prices fall, people purchase fewer products, and businesses fail. A recession brings high unemployment, increased business failures, and an overall drop in living standards.

Depression-- a severe recession, usually accompanied by deflation. Business cycles rarely go through a depression phase. IN fact, while there were many business cycles during the 20th century, there was only one severe depression.

15

How does the government manage the economy using fiscal policy?

Fiscal policy refers to the federal government's efforts to keep the economy stable by increasing or decreasing taxes or government spending.
The first fiscal policy tool is taxation. High tax rates tend to slow the economy because they draw money away from the private sector and put it into the government. Low tax rates will theoretically give the economy a boost.
The second fiscal policy tool is government spendings on highways, social programs, education, infrastructure, defense, and so on. One way to lessen deficits is to cut government spending.

16

What does the term monetary policy mean? What organization is responsible for monetary policy?

Monetary policy is the management of the money supply and interest rates by the Federal Reserve Bank.

The Federal Reserve Bank is responsible for this policy. It is a semiprivate organization that is not under the direct control of the government, but does have members appointed by the president.

The Fed's most visible role is raising and lowering of interest rates. The Fed also controls the money supply.

17

Deflation

Means that prices are declining.

It occurs when countries produce so many goods that people cannot afford to buy them all (too few dollars are chasing too many goods)

18

Keynesian economic theory

the theory that a government policy of increasing spending could stimulate the economy in a recession.