The PROFILE at the beginning of this chapter focuses on GREG SLYNGSTAD and STEVE MURCH of VACATIONSPOT.COM and how the chances for starting a business vary from country to country depending on the social and economic conditions.

1. THE IMPORTANCE OF THE STUDY OF ECONOMICS.
1. Compare and contrast the economics of despair with the economics of growth. CONCEPT CHECK
2. Much of American’s business success is due to an economic and social climate that allows businesses to operate freely.
1. The world economic situation and world politics have a major influence on U.S. business.
2. The three basic objectives of this chapter are to teach students:
1. HOW THE FREE-MARKET SYSTEM WORKS TO CREATE WEALTH AND PROSPERITY.
2. HOW FREE MARKETS DIFFER FROM GOVERNMENT-CONTROLLED MARKETS.
3. SOME BASIC ECONOMIC TERMS AND CONCEPTS FROM ECONOMICS THAT STUDENTS WILL READ IN BUSINESS PERIODICALS.
3. WHAT IS ECONOMICS?
1. ECONOMICS is the study of how society chooses to employ resources to produce various goods and services and to distribute them for consumption among various competing groups and individuals.
2. MACROECONOMICS is that part of economic study that looks at the operation of a nation’s economy as a whole.
3. MICROECONOMICS is that part of economic study that looks at the behavior of people and organizations in particular markets.
4. RESOURCE DEVELOPMENT is the study of how to use technology to increase the known resources of the world and to create the conditions that will make better use of those resources.
4. THE ECONOMICS OF DESPAIR.
1. English economist Thomas Malthus called economics "the dismal science."
1. Many still believe that the solution to poverty is birth control.
2. Others believe that a large population can be a valuable resource, especially if people are educated.
2. Business owners provide jobs and economic growth for their employees as well as for themselves.
3. Technological advances have provided the means to increase production of food and other resources.
4. The challenge is to determine what makes some countries relatively rich and other countries relatively poor, then to implement policies that lead to increased prosperity for everyone.
5. GROWTH ECONOMICS AND ADAM SMITH.
1. ADAM SMITH advocated creating wealth through entrepreneurship.
1. Rather than divide fixed resources, Smith envisioned creating more resources so that everyone could be wealthier.
2. In 1776, Smith wrote a book called THE WEALTH OF NATIONS in which he outlined steps for creating prosperity.
2. Smith believed that FREEDOM was vital to the survival of any economy.
3. Also, he believed that people will work hard if they have INCENTIVES for doing so.
4. Smith is considered by some to be the FATHER OF MODERN ECONOMICS.
6. THE "INVISIBLE HAND ."
1. Adam Smith called the mechanism for creating wealth and jobs an INVISIBLE HAND, which turns self-directed gain into social and economic benefits for all.
2. Basically, what this meant was that a person working hard to make money for his or her own personal interest would (like an invisible hand) also benefit others.
1. For example, a farmer trying to make money would grow as many crops as possible.
2. This provides needed food for others.
3. If everyone worked hard in his or her own self interest, Smith said, society as a whole would prosper.
3. Many U.S. businesspeople are becoming concerned about social issues and their obligation to return to society some of what they’ve earned.
2. UNDERSTANDING FREE-MARKET CAPITALISM.
1. Explain the nature of capitalism and how free markets work.
2. Following the ideas of Adam Smith, businesspeople created more wealth than every before.
1. Great disparities in wealth began to appear.
2. Although it is not easy, opportunities to start one’s own business have always been there, especially in a free market.
3. CAPITALISM is an economic system in which all or most of the means of production and distribution are privately owned and operated for profit.
1. In capitalist countries, businesspeople decide how to use their resources and how much to charge. CONCEPT CHECK
2. No country is purely capitalist, but the FOUNDATION OF THE U.S. IS CAPITALISM.
4. THE FOUNDATION OF CAPITALISM.
1. Individuals living in a capitalist system have FOUR BASIC RIGHTS:
1. THE RIGHT TO PRIVATE PROPERTY.
2. THE RIGHT TO KEEP ALL OF A BUSINESS’S PROFITS AFTER TAXES.
3. THE RIGHT TO FREEDOM OF COMPETITION.
4. THE RIGHT TO FREEDOM OF CHOICE.
2. One benefit of these rights is that people are willing to take more RISKS than they would otherwise.
5. HOW FREE MARKETS WORK.
1. In a free-market system, decisions about what to produce and in what quantities are made by THE MARKET.
2. Consumers send signals to producers what to make, how many, and so on through the mechanism of PRICE.
3. In the U.S. the price tells producers how much to produce, reducing the changes of a long-term shortage of goods.
6. HOW PRICES ARE DETERMINED.
1. In a free market, prices are not determined by sellers; they are determined by BUYERS AND SELLERS NEGOTIATING IN THE MARKETPLACE.
2. Price is determined through the economic concepts of supply and demand.
7. THE ECONOMIC CONCEPT OF SUPPLY.
1. SUPPLY refers to the quantity of products that manufacturers or owners are willing to sell at different prices at a specific time CONCEPT CHECK .
2. The amount supplied will increase as the price increases.
3. The quantity producers are willing to SUPPLY a certain prices are illustrated on a SUPPLY CURVE.
8. THE ECONOMIC CONCEPT OF DEMAND.
1. DEMAND refers to the quantity of products that people are willing to buy at different prices at a specific time.
2. The quantity demanded will decrease as the price increases.
3. The quantity consumers are willing to buy at certain prices are illustrated on a DEMAND CURVE.
9. THE EQUILIBRIUM PRICE, or MARKET PRICE, is the price at which the quantity demanded and the quantity supplied are equal.
1. In free-market economies it is the INTERACTION between SUPPLY and DEMAND that determines the market price in the long-run.
1. If SURPLUSES develop, a signal is sent to sellers to lower the price.
2. If SHORTAGES develop, a signal is sent to sellers to increase the price.
2. In countries without a free-market system, there is no such mechanism, so there are often shortages or surpluses.
3. One benefit of the free-market system is that it allows competition among companies.
10. COMPETITION WITHIN FREE MARKETS CONCEPT CHECK .
1. Competition exists in different degrees, ranging from perfect to nonexistent.
2. PERFECT COMPETITION exists when there are many sellers in the market and no seller is large enough to dictate the price of a product.
1. Sellers produce products that appear to be identical.
2. There are no true examples of perfect competition, but agricultural products are often used as an example.
3. MONOPOLISTIC COMPETITION exists when a large number of sellers produce products that are very similar but are perceived by buyers as different.
1. Product differentiation, making buyers think similar products are different, is a key to success.
2. Under monopolistic competition, individual sellers set prices.
3. The fast food industry is an example.
4. An OLIGOPOLY is a form of competition in which just a few sellers dominate a market.
1. The initial investment is usually high.
2. Prices tend to be close to the same.
3. c. Examples include breakfast cereal, beer, automobiles, and soft drinks.
5. A MONOPOLY occurs when there is only one seller for a product or service.
1. In the U.S. laws prohibit the creation of monopolies, but do permit approved monopolies such as public utilities.
2. New legislation is likely to result in fewer, larger utilities and lower prices.
11. LIMITATIONS OF THE FREE-MARKET SYSTEM.
1. Capitalism brought prosperity to the U.S. and much of the world, but also brought inequality.
2. When countries introduced capitalist principles, inequality increased dramatically, causing national and world tension.
3. Free-market capitalism may lead to environmental damage and cause other environmental problems.
4. Some government regulations are necessary to protect the environment and people who are unable to work.
3. UNDERSTANDING SOCIALISM.
1. Discuss the major differences between socialism and communism.
2. SOCIALISM is an economic system based on the premise that some businesses should be owned by the government.
1. Advocates of socialism acknowledge the major benefits of capitalism, but believe that wealth should be more evenly distributed.
2. Socialism became the economic platform for many countries in Europe and Africa.
3. Businesses are expected to prosper, but businesses and workers also are required to pay very high taxes.
4. Socialist nations rely heavily on government to provide education, health care, retirement, and care for those not able to work.
3. The MAJOR BENEFIT OF SOCIALISM is social equality.
1. Income is taken from the richer people and redistributed to the poorer members of the population.
2. Workers in socialist countries are given free education, free health care, free child care, and more employee benefits.
4. NEGATIVE CONSEQUENCES OF SOCIALISM.
1. Socialism creates more equality, but it takes away some work incentives.
2. Marginal tax rates (the rate you pay on the additional money earned after a certain income level) in some nations once reached 85%.
3. Professionals who earn a lot of money are taxed very highly, and many of them leave socialist countries for countries with lower taxes.
4. Socialist systems tend to discourage the best from working as hard as they can and result in fewer inventions and less innovation.
4. UNDERSTANDING COMMUNISM CONCEPT CHECK
1. KARL MARX believed that workers should take over ownership of businesses and share in the wealth.
1. He wrote THE COMMUNIST MANIFESTO in 1848, becoming the FATHER OF COMMUNISM.
2. COMMUNISM is a system where all economic decisions are made by the state and the state owns all the major forms of production .
2. PROBLEMS WITH COMMUNISM.
1. The government has no way of knowing what to produce because prices don’t reflect SUPPLY and DEMAND.
2. Shortages of many items may develop.
3. Communism doesn’t inspire businesspeople to work hard, and is slowly disappearing as an alternative economic form.
3. Most communism countries today are suffering severe economic depression, including North Korea and Cuba.
5. THE TREND TOWARD MIXED ECONOMIES.
1. Explain the trend toward mixed economies.
2. There are two economic systems vying for dominance in the world:
1. FREE MARKET ECONOMIES.
1. The marketplace largely determines what goods and services get produced, who gets them, and how the economy grows.
2. Commonly known as CAPITALISM, these economies are based on the principles of Adam Smith.
2. COMMAND ECONOMIES CONCEPT CHECK .
1. The government largely decides what goods and services will be produced, who’ll get them, and how the economy will grow.
2. These economies, known as SOCIALISM and COMMUNISM, are based on the principles of Karl Marx.
3. NO ONE ECONOMIC SYSTEM IS PERFECT BY ITSELF
1. Free-market mechanisms weren’t responsive enough to a nation’s social and economic needs.
2. Socialism and communism didn’t create enough jobs or wealth to keep economies growing fast enough.
3. NO COUNTRY IS PURELY CAPITALIST OR PURELY CAPITALIST, rather some mix of the two systems.
4. However, the long-term global trend is toward a BLEND OF CAPITALISM AND SOCIALISM.
4. MIXED ECONOMIES exist where some allocation of resources is made by the market and some by government .
5. THE U.S. HAS A MIXED ECONOMY.
1. There is much debate about the role of government in many parts of the economy.
2. The basic principles of freedom and opportunity remain so that economic growth is sustainable.
6. In the U.S., the government serves as a means to SUPPLEMENT the basic capitalist system.
7. It is an interesting time to watch how the INTERNET affects business and government.
6. UNDERSTANDING THE ECONOMIC SYSTEM OF THE UNITED STATES.
1. Use key terms (e.g., GDP, CPI, PPI, productivity, inflation, recession, monetary policy, fiscal policy, and national debt) to explain the U.S. economic condition CONCEPT CHECK .
2. While most of the world was moving toward free-market economies, in recent years the U.S. was moving toward MORE SOCIAL PROGRAMS.
1. There was much conflict between business leaders and government leaders on issues such as taxes, regulations, and social programs.
2. Currently the U.S. economic system is in a state of flux.
3. KEY ECONOMIC INDICATORS.
1. GROSS DOMESTIC PRODUCT (GDP).
1. GDP is the total value of a country’s output of goods and services in a given year.
2. A major influence on the growth of GDP is how productive the work force is.
3. The total U.S. GDP in 1999 was over $6 trillion.
2. THE UNEMPLOYMENT RATE.
1. The UNEMPLOYMENT RATE refers to the number of civilians, 16 years old or older, who are unemployed and tried to find a job within the prior four weeks.
2. FOUR TYPES OF UNEMPLOYMENT
1. FRICTIONAL UNEMPLOYMENT— refers to those people who have quit work because they did not like the job, the boss, or working conditions.
2. STRUCTURAL UNEMPLOYMENT— refers to unemployment caused by restructuring of businesses or by a mismatch between the skills (or location) of job seekers and the requirements (or location) of available jobs (i.e. coal miners in areas where mines have been closed.)
3. CYCLICAL UNEMPLOYMENT—unemployment caused by a recession or similar downturn in the business cycle.
4. SEASONAL UNEMPLOYMENT— unemployment which occurs when the demand for labor varies over the year (i.e. harvesting of crops.)
3. THE PRICE INDEXES.
1. CONSUMER PRICE INDEX (CPI) .
1. The CPI consists of monthly statistics that measure the pace of inflation or deflation.
2. Some government benefits, wages, and interest rates are based on the CPI.
2. The PRODUCER PRICE INDEX (PPI) measures prices at the wholesale level.
4. DISTRIBUTION OF GDP.
1. The percentage of GDP taken by all levels of government in the U.S. is around 35.7% (compared with 28% in 1959.)
2. When you add in all the fees and sales taxes, the government’s share can exceed 50%.
3. After many years running a BUDGET DEFICIT, the U.S. government is not taking in more money than it is paying out, resulting in a BUDGET SURPLUS.
4. PRODUCTIVITY IN THE UNITED STATES.
1. PRODUCTIVITY is the total volume of goods and services one worker can produce in a given period of time.
1. Productivity in the U.S. has gone up in recent years because computers have made production faster.
2. The higher productivity is, the lower costs are in producing goods and services, and the lower prices can be.
2. The same amount of labor producing more goods and services is known as an INCREASE IN PRODUCTIVITY.
1. An increase in farm productivity used to be the basis of American economic growth.
2. The use of machines led to the increase in productivity in the manufacturing industry.
3. We are now focusing on ways to increase productivity in the service sector.
5. PRODUCTIVITY IN THE SERVICE SECTOR.
1. The service sector uses machines such as word processors and computers to increase productivity.
2. Actually these machines may add to the quality of the services but not to the output per worker which is the definition of productivity.
3. New measures of productivity for the service economy need to be developed that include quality as well as quantity of output.
6. INFLATION AND THE CONSUMER PRICE INDEX.
1. INFLATION refers to a general rise in the price level of goods and services over time.
2. The CPI measures the price of an average basket of goods for an average family over time.
3. DISINFLATION describes a condition where the increase in prices is slowing (the inflation rate is declining.)
4. DEFLATION means that prices are actually declining, occurring when countries produce so many goods that people cannot afford to buy them all.
7. RECESSION VERSUS INFLATION.
1. A RECESSION is two consecutive quarters of decline in the GNP.
2. For years the government has tried to prevent another recession or depression.
3. A DEPRESSION is a severe recession, usually accompanied by deflation.
4. To understand the economic situation today, you must understand the government and the Federal Reserve System rules.
8. MONETARY POLICY.
1. MONETARY POLICY is the management of the money placed into the economy and the management of interest rates.
2. The Federal Reserve System is responsible for managing the MONEY SUPPLY.
3. The Fed is one of the sources of money in the economy; it can add or subtract money from the economy as it sees fit.
4. The Federal Reserve System operates independently of the president and Congress and has the goal of keeping the economy growing without causing inflation.
9. FISCAL POLICY.
1. FISCAL POLICY refers to the Federal government’s efforts to keep the economy stable by increasing or decreasing taxes and/or government spending.
2. For many years, government tended to rase taxes to fund more programs.
3. When the government spends more than it raises in taxes, it creases a budget deficit and the government borrows money to pay this deficit.
4. NATIONAL DEBT is the result of a series of government deficits (when the government spends more money than it collects in taxes) over time.
5. In 2000, the national deft was $5.6 trillion.
6. In the late 1990s, the economy grew faster than expected, and for the first time in years, the government now has a surplus.
7. The debate now is how to handle the surplus:
1. The debate now is how to handle the surplus:
2. Another is paying off the national debt and/or creating more social programs.
8. The economic goal in the future is to keep the economy growing .