ECONOMY

Economy is the sum of all the economic activity within a given region.
Economics is the study of how a society uses its scarce resources to produce and distribute goods and
services.
Microeconomics is the study of how consumers, businesses, and industries collectively determine the
quantity of goods and services demanded and supplied at different prices. (small-scale perspective)
Macroeconomics is the study of “big-picture” issues in an economy, including competitive behavior
among firms, the effect of government policies, and overall resource allocation issues. (large-scale
perspective)

FACTORS OF PRODUCTION
Natural resources are land, forests, minerals, water, and other tangible assets usable in their natural state.
Human resources are all the people who work in an organization or on its behalf.
Capital is the funds that finance the operations of a business as well as the physical, human-made
elements used to produce goods and services, such as factories and computers.
Entrepreneurship is the combination of innovation, initiative, and willingness to take the risks required
to create and operate new businesses.
Knowledge is expertise gained through experience or association.

THE ECONOMIC IMPACT OF SCARCITY

Scarcity is a condition of any productive resource that has finite supply.
It has two powerful effects:
 creates competition for resources, and forces trade-offs on the part of every participant in the
economy
 consumers, companies, and governments are constantly forced to make trade-offs, having to give
up one thing to get something else
Opportunity cost is the value of the most appealing alternative not chosen or is a way to measure
the value of what you gave up when you pursued a different opportunity.

ECONOMIC SYSTEM
Economic system is the policies that define a society’s particular economic structure; the rules by which
a society allocates economic resources.
Free-market system is economic system in which decisions about what to produce and in what quantities
are decided by the market’s buyers and sellers.
Mixed economy is when government influencing allocations of resources through tax incentives,
prohibiting, or restricting the sale of certain goods and services, or setting price controls. (USA)
Capitalism and private enterprise are the terms most often used to describe the free market
system, one in which private parties (individuals, partnerships, or corporations) own and
operate the majority of businesses
Public/government ownership of
Communism productive resources; centralized
economic planning and control
• State ownership of all major productive resources
• Absence of economic classes
• Few opportunities for entrepreneurship

Socialism
Private ownership of productive
• State ownership of certain productive resources resources; emphasis on free market
• Managed efforts to minimize dramatic differences between economic classes economic principles
• Opportunities for entrepreneurship, with varying degrees of restrictions
Capitalism
• Private ownership of most productive resources
• Few efforts to minimize differences between economic classes
• Government policies actively support entrepreneurship

Planned system is economic system in which the government controls most of the factors of production
and regulates their allocation.
Socialism is economic system characterized by public ownership and operation of key industries
combined with private ownership and operation of less-vital industries. (transportation, health care,
communication)
Communism is the planned system that allows individuals the least degree of economic freedom (North
Korea, China)

Nationalizing is a government’s takeover of selected companies or industries.

Privatizing is turning over services once performed by the government to private businesses.

THE FORCES OF DEMAND AND SUPPLY

Demand is buyers’ willingness and ability to purchase products at various price points.
Supply is a specific quantity of a product that the seller is able and willing to provide at various prices.

UNDERSTANDING DEMAND
Demand curve is a graph of the quantities of a product that buyers will purchase at various prices.
 demand curves typically slope downward, implying that as price drops, more people are willing
to buy

Demand curve shifts right if one or more of
these conditions occur: (increased demand)
- Customer income increases
- Customer preferences toward product improve
- Prices of substitute products increase
- Prices of complementary products decrease
- Marketing expenditures increase
- Customers become more optimistic
- Number of customers increases
Demand curve shifts left if one or more of
these conditions occur: (decreased demand)
- Customer income decreases
- Customer preferences toward product decline
- Prices of substitute products decrease
- Prices of complementary products increase
- Marketing expenditures decrease
- Customers become more pessimistic
- Number of customers decreases

UNDERSTANDING SUPPLY
Supply curve is a graph of the quantities of a product that sellers will offer for sale, regardless of
demand, at various prices.
 movement along the supply curve typically slopes upward: As prices rise, the quantity that sellers
are willing to supply also rises.

Supply curve shifts left if one or more of
these conditions occur: (decreased supply)
- Cost of production increases
- Competition increases
- Technology increases production costs
- Taxes and regulatory costs increase
Supply curve shifts right if one or more of
these conditions occur: (increased supply)
- Cost of production decreases
- Competition decreases
- Technology decreases production costs
- Taxes and regulatory costs decrease
UNDERSTANDING HOW DEMAND AND SUPPLY INTERACT
Equilibrium point is the point at which quantity supplied equals quantity demanded.
 Buyers want to buy at the lowest possible price, and sellers want to sell at the highest possible
price.
 Because the supply and demand curves are dynamic, so is the equilibrium point. As variables
affecting supply and demand change, so will the equilibrium price.

THE MACRO VIEW: UNDERSTANDING HOW ECONOMY OPERATES

COMPETITION IN A FREE-MARKET SYSTEM
Competition is rivalry among businesses for the same customers.
Pure competition is a situation in which so many buyers and sellers exist that no single buyer or seller
can individually influence market prices.
Monopoly is a situation in which one company dominates a market to the degree that it can control prices

Monopolistic competition is a situation in which many sellers differentiate their products from those of
competitors in at least some small way.
Oligopoly is a market situation in which a small number of suppliers, sometimes only two, provide a
particular good or service.
Monopolies can happen “naturally,” as companies innovate, or markets evolve (a pure monopoly) or by
government mandate (a regulated monopoly)
The risk/reward nature of capitalism promotes constant innovation in pursuit of competitive advantage,
rewarding companies that do the best job of satisfying customers.

BUSINESS CYCLES
Business cycles are fluctuations in the rate of growth that an economy experiences over a period of
several years.
Recession is a period during which national income, employment, and production all fall; defined as at
least six months of decline in the GDP.
 a deep and prolonged recession can be considered a depression

FACTORS AFFECTING FLUCTUATIONS IN BUSINESS CYCLES:

UNEMPLOYMENT
Unemployment rate is the portion of the labor force (everyone over 16 who has or is looking for a job)
currently without a job

INFLATION
Inflation is an economic condition in which prices rise steadily throughout the economy.
Deflation is an economic condition in which prices fall steadily throughout the economy.
 When prices go up, purchasing power goes down. If wages keep pace with prices, inflation is less
worrisome, but if prices rise faster than wages, consumers feel the pinch.

GOVERNMENT’S ROLE IN A FREE-MARKET SYSTEM

Regulation is relying more on laws and policies than on market forces to govern economic activity.
Deregulation is removing regulations to allow the market to prevent excesses and correct itself over time.

Four major areas in which the government plays a role:

1. Protecting stakeholders = managers who are too narrowly focused on generating wealth for
shareholders might not spend the funds necessary to create a safe work environment for
employees or to minimize the business’s impact on the community.

2. Fostering competition=if a company has a monopoly, it can potentially harm customers by raising
prices or stifling innovation and harm potential competitors by denying access to markets.
  Antitrust legislation=Antitrust laws limit what businesses can and cannot do, to ensure that all
competitors have an equal chance of succeeding.
 Merger and acquisition approvals=To preserve competition and customer choice, governments
occasionally prohibit companies from combining through mergers or acquisitions

3. Encouraging innovation and economic development= Governments can use their regulatory and
policymaking powers to encourage specific types of economic activity (promoting growth of
alternative energy sources)
4. Stabilizing and stimulating the economy
 Monetary policy is government policy and actions taken by the Federal Reserve Board to
regulate the nation’s money supply. (by increasing or decreasing interest rates)
 Fiscal policy is use of government revenue collection and spending to influence the business
cycle.

ECONOMIC MEASURES AND MONITORS

Economic indicators are statistics such as interest rates, unemployment rates, housing data, and
industrial productivity that measure the performance of the economy.

TYPES OF ECONOMIC INDICATORS:

1. Price indexes offer a way to monitor the inflation or deflation in various sectors of the economy.

 Consumer price index (CPI) is a monthly statistic that measures changes in the prices of a
representative collective of consumer goods and services
 Producer price index (PPI) is statistical measure of price trends at the producer and
wholesaler levels

2. Gross domestic product (GDP) is the value of all the final goods and services produced by
businesses located within a nation’s borders; excludes outputs from overseas operations of
domestic companies.
 To count it as your GDP, the products may be produced by either domestic or foreign
companies, but the production must take place within a nation’s boundaries.