Chapter 1: Understand Economic Systems & Business Flashcards
What is Business?
an organization that strives for a profit by providing goods and services provided by its customers.
Goods vs Services
goods: tangible
services: intangible offerings
What is a “Standard of Living”?
measured by the output of goods and services people can buy with their money.
*businesses create our standard of living.
Revenue
the money a company gets from providing goods and services.
Cost
expenses a company incurs from creating the good or service.
Profit
The money left over from revenue after costs are paid.
REVENUE - COSTS = PROFIT
Not-For-Profit (NFP)
- Does not strive for profit
- Does not compete with other NFPs.
- Provides service for
NFP and For-Profit similarities
- Need resources to meet their goals
* Need to develop strategy, budget carefully, measure performance, foster an ethical workplace, etc.
Five Factors of Production
- Natural Resources
- Labor
- Capital
- Entrepreneurship
- Knowledge
Capital vs Money
Capital: inputs
Money: buys the inputs
Natural Resources
land, materials, oil, etc.
Labor
people that are capable of working for you.
Entrepreneurship
combines natural resources, labor, and capital to create a product.
Knowledge
- Combined talents and skills of the workforce
- Key role in the success of business
- Essential to economic growth
General Types of Business
- Manufacturing
- Services
- Reselling
Manufacturing (business)
makes things
Services (business)
provides a service (tax prep., doctor, etc.)
Reselling (business)
buys from suppliers, sells to businesses or consumers
External factors that have a direct influence business
- economics
- political & legal
- demographic
- social
- competitive
- global
- technological
Internal factors that affect business
- entrepreneurs
- managers
- workers
- customers
How does economic changes affect business?
- creates business cycles
- supply and demand determine prices and quantities
- strong economic activity = low unemployment rates and higher income levels
How does political changes affect business?
- affect day-to-day operations.
* the types of laws it passes (affect competition, min. wage, environmental protection, worker safety, etc.)
How can the government affect the level of economic activity?
- change policies –> affect taxes and interest rate level –> stimulate business cycle.
- affect supply and demand
Why do demographic shifts and technological developments create both challenges and new opportunities for business?
- demographics: help define the market and workforce.
* technology: increases productivity, communication, etc.
How does technology affect wealth and standard of living?
advancement in technology –> increased productivity –> increased profits & lower costs –> lower price for customers –> increase in standard of living.
What is economics?
the study of how a society uses scarce resources to produce and distribute goods and services.
Economic System
the combination of polices, laws, and choices made by its government to establish the systems that determine what goods and services are produced and how they are allocated.
Major Economic Systems
- Capitalism ( Free Market)
* Communism and Socialism (Planned Economies)
Capitalism
- ” Private Enterprise System “
- Competition in the marketplace
- Private Ownership
- Large number of businesses
- Buy and sell freely
- Guaranteed economic rights
Communism
- Government owns all
- All economic decisions made by the government.
- No competition
- Less motivation, productivity, and quality of life
Socialism
Basic industries owned by government. Smaller businesses owned privately Healthcare and unemployment offered to citizens. Higher unemployment rate Higher taxes
Mixed Economy
use more than one economic system.
Macroeconomics
study of the economy as a whole.
Microeconomics
individual parts of the economy.
households or firms
Capitalism Economic Rights
right to own property
right to make a profit
right to make free choices
right to compete
Why Is competition good for businesses and customers?
quality and diverse products
Three Sectors of US Economy
Individual, Business, and Government
How are the three sectors linked?
Individual provides inputs to businesses, recieve rent, wages, interest, and ownership profiles.→
businesses converts inputs to outputs for consumers, recieve revenue from customers→
government purchases from business, supply goods and services, recieve taxes from individuals and businesses. →
Three Major Microeconomic Goals
- Economic Growth
- Full Employment
- Price Stability
- Indicates nation’s economic health
Economic Growth
- an increase in the nation’s output
- measured by the GPD
Full Employment
- jobs for everyone wanting and willing
- measured by unemployment rate
- always defined as under 100 %
Why is unemployment under 100% ?
- People may not work for many reasons ( school, family, though they are still employable )
Types of Unemployment
- Frictional Unemployment
- Structural Unemployment
- Cyclical Unemployment
- Seasonal Unemployment
Real GDP
GDP adjusted for inflation
Price Stability
Measured by income vs. inflation
Demand- Pull Inflation
happens when the demand is greater than the supply
Cost- Push Inflation
triggered by increase in production costs
Business Cycle and its Phases
- up and down of economic activity
- rise in output → rise in income → rise in employment → rise in prices → declines
Recession
decline in GDP that lasts for two consecutive quarters (each a three month pernod)
How do businesses adapt to periods of contraction and expansion ?
- Expansion : hard time hiring good employees and finding natural resources.
- Contraction: more supply than demand.
Purchasing Power
The value of what money can buy.
*measured from inflation and income
Inflation
average of all prices of goods and services rising.
Monetary Policy
goverment program for controlling the amount of money circulating in the economy and interest rates.
Who implements monetary policy in the US?
the Federal Reserve System
