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Contemporary Business Chapter 3

The study of how society employs resources to produce goods and services for distribution among various groups and individuals.

Analysis of the choices people and governments make in allocating resources.

Concentrates on the operation of a nation’s economy as a whole.
Concentrates on the behavior of people and organizations in markets for particular products or services (The study of small economic units, such as individual consumers, families, and businesses)
All or most of the factors of production are owned by individuals, not the government, and operated for profit (Countries with capitalist foundations:
United States, England, Australia, Canada)
Free Market
Decisions about what and how much to produce are made by the market
tells companies how much of a product they should produce. If something is wanted but hard to get, the price will rise until more products are available.
Amount of goods and services for sale at different prices
: Willingness and ability of consumers to purchase goods and services at different prices
Market Price (Equilibrium Point)
– Determined by supply and demand, this is the negotiated price.
Four degrees of competition
-Pure competition
-Monopolistic competition
Monopolistic Competition
Many Sellers With Perceived Differences. I.e- Fast food, colleges
Few Sellers. I.e – Automobiles, Aircraft, Tobacco, Soft drinks
One Seller. I.e – Diamond, Utilities
Limits of Free-Markets
– Inequality of Wealth – Causes National & World Tension
– Greed Compromises Ethics
– Potential Environmental Damage
– Limitations Pushes country Towards Government Regulation = Socialism
Government controls determine business ownership, profits, and resource allocation.
Government ownership and operation of major industries, such as health care, communications, and airlines
-Social equality
-Free education
-Free healthcare
-Free childcare
-Longer vacations
-Shorter work weeks
-Generous sick leave
-Few incentives for businesspeople to take risks.
-Fewer inventions and innovations because the reward is not as great as in capitalistic countries
-Brain Drain: Some of a countries best and brightest workers (i.e. doctors, lawyers and business owners) move to capitalistic countries.
Citizens are highly taxed
Citizens are highly taxed
Government controls determine business ownership, profits, and resource allocation.
Property owned and shared by the community under a strong central government.
Adopted in early 20th century by many nations, but government-owned monopolies often suffered from inefficiency
Free-Market Economies
The market largely determines what goods and services are produced, who gets them, and how the economy grows
Command (Planned) Economies
The government largely determines what goods and services are produced, who gets them, and how the economy will grow.
Mixed Market Economies
-Economic systems that combine features of private enterprise and planned economies.
-Mixture of public and private enterprise can vary widely from country to country.
-Process of converting a publicly owned company to a private one is called privatization
U.S.A – Key Economic Indicators
-Gross Domestic Product
-Unemployment Rate
-Price Indexes
USA – Business Cycles
-Economic Boom
USA Stabilization
-Fiscal Policy
-Monetary Policy
-National Debt
Consumer Price Index (CPI)
Monthly stats that measure pace of inflation or deflation
rising prices caused by a combination of excessive consumer demand and increases in the costs of raw materials
when price increases are slowing.
Inflation devalues money. People can purchase less with what they have (decreased purchasing power).
when prices continue to fall. Deflation can cause a weakened economy.
High consumer confidence, businesses expanding
Cyclical economic contraction lasting for six months or longer
Extended recession
Declining unemployment, increasing business activity
Monetary Policy
The management of the money supply and interest rates by the Federal Reserve Bank (the Fed).
The Fed’s most visible role is increasing and lowering interest rates
When the economy is booming, the Fed tends to increase interest rates.
When the economy is in a recession, the Fed tends to decrease the interest rates
Fiscal Policy
The federal government’s efforts to keep the economy stable by increasing or decreasing taxes or government spending
Tools of Fiscal Policy
Government Spending
National Deficit
The amount of money the federal government spends beyond what it gathers in taxes.
National Surplus
When government takes in more than it spends.
National Debt
The sum of government deficits over time.
Monetary Policy
government actions to increase or decrease the money supply and change banking policy and interest rates to influence consumer spending.
(*Expansionary monetary policy: Efforts to increase the money supply to reduce costs of borrowing and encourage new investment.
*Restrictive monetary policy: Efforts to decrease the monetary supply to curb rising prices and overexpansion)

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