Chapter 3: Economics and Business - Fundamentals of Business, 4th Edition

What Is Economics?

• Economics: Study of production, distribution, and consumption of goods and services.
• Resources: Inputs used to produce outputs. Types include:
  • Land and natural resources
  • Labor (physical and mental)
  • Capital (buildings, equipment)
  • Entrepreneurship
  • Knowledge

Input and Output Markets

• Households provide businesses with labor, land, buildings, and capital.
• Businesses produce goods/services sold to households; households consume these goods/services.
• Circular flow: Businesses and households interact in a continuous cycle of production and consumption.

Economic Systems

• Economists ask three main questions regarding resource allocation and product distribution.
• Economic Systems:
  • Planned Systems: Government controls allocation/distribution (e.g., communism, socialism).
  • Free Market Systems: Individuals/businesses have more freedom (e.g., capitalism).

Planned Systems

• Communism: Government owns most enterprises; central planning.
• Socialism: Government owns essential industries; some private ownership.

Free Market System

• Capitalism: Competition dictates allocation; limited government regulations.
• Private Property Rights: Essential for economic development.

Mixed Market Economies

• Combination of planned and free-market systems.
• Privatization: Conversion of state-owned enterprises to private ownership.
• Nationalization: Government takeover of private industries.

The U.S. Economic System

• Mixed market leaning towards free market principles.
• Government controls basic services and provides social security.
• Influenced by Adam Smith's "The Wealth of Nations" and the concept of laissez-faire.

Perfect Competition and Supply and Demand

• Perfect Competition: Many consumers buy standardized products from numerous small businesses.
• Supply: Quantity sellers are willing to sell at various prices.
• Demand: Quantity buyers are willing to purchase at various prices.
• Equilibrium Price: Price where supply equals demand.

Types of Competition

• Monopolistic Competition: Many sellers; differentiated products.
• Oligopoly: Few sellers; large market share.
• Monopoly: Single seller dominates market; controls prices.

Measuring Economic Health

Economic Goals

• Growth
• High Employment
• Price Stability

Economic Indicators

• GDP: Market value of all goods/services produced domestically in a year.
• Unemployment Rate: Percentage of labor force unemployed and seeking work.
• Inflation: Rise in overall price level; measured by Consumer Price Index (CPI).

Economic Cycles

• Business Cycle: Expansion and contraction phases (prosperity, recession, depression, recovery).
• Full Employment: When 95% of those wanting to work are employed.

Government's Role in Managing the Economy

Monetary Policy

• Controlled by the Federal Reserve System.
• Contractionary Policy: Decrease money supply, raise interest rates.
• Expansionary Policy: Increase money supply, lower interest rates.

Fiscal Policy

• Government spending and taxation.
• Budget Surplus: Government takes in more than it spends.
• Budget Deficit: Government spends more than it takes in; leads to national debt.

Key Economic Concepts

• Supply and Demand Curves: Determine pricing in competitive markets.
• Consumer Price Index (CPI): Measures inflation through price changes of a "basket of goods".
• Economic Indicators: Lagging (past data) and Leading (future trends) indicators.