FBP C2 - Economics Flashcards
Economics
is the study of how society choses to employ resources to produce goods and services and distribute them for consumption among various competing groups and individuals. // the study of how we create wealth
What are the two branches for economies
- Macroeconomics
2. Microeconomics
Macroeconomics
studies the operations of a nation’s economy as a whole
- Whole economy
- Inflation (general price level)
- Employment / unemployment
- Aggregate demand (AD), total amount of demand for all finished goods and services
- Productive capacity of economy
Microeconomics
studies the behavior of people and organizations in particular markets (e.g., why people buy smaller cars when gas prices go up)
- Individual markets
- Effect on price of a good
- Individual labor market
- Individual consumer behavior
- Supply of goods
The invisible hand theory, Adam smith’s theory
Businesspeople don’t necessarily deliberately set out to help others. They work for their own prosperity and growth. Yet as people try to improve their own situation in life, their efforts serve as the “invisible hand” that helps the economy grow and prosper.
Therefore, the invisible hand is used to describe the process that turns self-directed gain into social and economic benefits for all.
Adam Smith
The creation of Wealth
- Rather than believing resources had to be divided among competing groups and individuals, Smith envisioned creating more resources so everyone could become wealthier.
- Smith believed freedom was vital to the survival of the economy. The freedom to own land and to keep all the profits it generates.
- He believed people will work long and hard if they have incentives to do so
Resource development
is the study of how to increase resources and create the conditions that will make better use of them.
Capitalism
is an economic system in which all or most of the means of production and distribution are privately owned (individuals) and operated for profit. The gov role is restricted to providing rules and regulations to protect individuals in business. Most capitalism systems have elements of socialism systems are actually mixed economies.
How does capitalism create a climate for economic growth?
Under capitalism, businesspeople don’t often deliberately set out to help others; they work mostly for their own prosperity and growth. Yet people’s efforts to improve their own situation in life act like an invisible hand to help the economy grow and prosper through the production of needed goods, services, and ideas.
State capitalism
is a combination of freer markets and some governments control.
What are the basic rights people have under capitalism?
The four basic rights under capitalism:
Other freedoms are also said to be important…
- The right to own private property
- The right to own a business and to keep all of what the business produces
- The right to freedom of competition
- The right to freedom of choice
- Right to freedom of speech and expression
- Right to worship in your own way
- Freedom of want and fear
Free market
a market where buyers and sellers negotiate prices of goods and services influence the decision about what gets produced and in what quantities.
Buyers’ decisions in the marketplace tell sellers what to produce and in what quantity.
How are prices determined in the free market economy?
Increased demand = Prices go up = Signals to produce more
(the higher the price the more goods and services suppliers are willing to produce)
They are determined by buyers and sellers negotiating prices in the marketplace
- The concept of a free-market economy is the cornerstone of capitalism and the key principles by which capitalism operates:
- It has open competition
- Government’s role is to protect the entrepreneur’s ability to compete in the market.
Supply
refers to the quantities of products manufactures, or owners are willing to sell at different prices at a specific time. The amount supply will increase the price increases because sellers can make more money with a higher price.
Demand
refers to the quantity of products that people are willing to buy at different prices at a specific time. Demand quantity will increase as the price decreases.
The key factor in determining quantities supplied and demand is
price.
Equilibrium point / price
the crossing point if you were to lay two graphs on top of each other, the lines would cross where the quantity demand and quantity supplied is equal.
There are FOUR different degrees of competition
- Perfect competition – exists when there are many sellers in one market, but none are large enough to dictate the price of the market, based off supply n demand (Farmers markets)
- Monopolistic competition – A large number of sellers produce very similar products but product differentiation affects their market price. (Different companies all selling phones)
- Oligopoly – Just a few sellers dominate a market because the initial investment to enter the market is so high. (Aircrafts, tobacco, gasoline). Prices of the same product from different companies tend to be similar.
- Monopoly – When one seller controls the total supply of something and sets the price. (public utilities, gas, water, electrical power). Occurs when duplication is too costly.
Benefits and limitations of free market economies
Benefits:
- Allows open competition amount companies, so businesses must provide high quality products at fair prices with good services.
- Creates wealth that industrialized countries enjoy. Provides the opportunity for poor people to work their way out of poverty.
- Capitalism encourages businesses to be more efficient so they can successfully compete on price and competition.
Limitations:
- Has brought inequality. Owners and managers usually make more money than lower-level workers. People who are elderly, disabled or sick may not be able to start and manage a business.
- Some people let greed dictate how they act. This can result in criminal or ethic charges against companies and even deceiving the public about their products in order to increase personal assets.
Socialism
government controls vital industries (utilities, coal mines, steel mills) so that profits can be more evenly distributed among the people through income and transfer benefits (medical insurance, benefits, pensions, subsidies). They set national goals.
Advantages and Disadvantages of Socialism
Advantages
- Create more social equity. Government takes taxes from wealthier people and distribute it to poorer people.
- Free education through collage, free health care and free childcare as some benefits socialist government’s provide using money from taxes.
- Workers normally receive longer vacations, fewer work hours and have more employed benefits.
Disadvantages
- An increase in taxes, lowers the incentive to start your own business or to work hard
- The loss of the best and brightest people to other countries, brain drain.
- Socialist economies tend to have fewer inventions and less innovation because people who come up with those ideas don’t receive as much rewards as they do in the capitalist system.
Communism
economic / political system in which the government makes almost all economic decisions and owns almost all major factors of production. It intrudes further into the lives of people than socialism does.
› Advocates a classless society where all citizens would contribute based on their ability and receive benefits based on their needs
› Redistribution of wealth should be managed by the government
› There is no private ownership
› Competition is the basis for success of capitalism.
Problems with communism:
the government has no way of knowing what to produce, because prices don’t reflect supply and demand as they do in free markets. The government must guess what people need instead. As a result, shortages of items can occur more often.
Eliminates market competition, creating a stagnate economy because there are limited benefits and rewards. It doesn’t inspire businesspeople to work hard because incentives are not there.
Difficult to monitor because all benefits are distributed by the government
- China is controlled by a communist party
Nations have been divided into those that follow the concepts of capitalism and those who follow the concept of communism and socialism.
We can now further contrast the two major economic systems as follow:
- Free market economy
2. Command economies
