1. Chapter 2: Understanding Basic Economics
Business Studies
Chapter 2: Understanding Basic Economics

2. The economy
The sum total of all the economic activity within a given region
For example, a city, province, country, region (EU)

3. Economics
Economics is the study of how individuals, companies, and governments use scarce resources to produce the goods and services that meet the society’s needs
Scarcity is a key concept in economics because it creates competition and forces everyone to make trade-offs (decisions about what alternative to choose) in the use of resources
Scarcity means that a resource has a finite (limited) supply
In economics, scarcity does not mean a shortage
Opportunity cost – the value of the most appealing alternative not taken

4. The 2 main divisions of economics
Microeconomics – the study of how small units (individuals, businesses, etc.) collectively determine the quantity of gods and services demanded and supplied at different prices.
Macroeconomics – the study of the “big picture” issues in the economy, including:
competitive behavior among firms
Effect of government policies
Overall resource allocation issues

5. Factors of production How societies deal with scarce resources
Key divisions:
Natural resources – land, forests, minerals, water and other tangible assets usable in their natural state
Human resources – all the people who work in an organization
Capital – the physical, human-made elements used to produce goods and services (factories, machines)
Also refers to funds needed to finance the operations of an organization

6. Factors of production
Entrepreneurship – the combination of innovation, initiative, and willingness to take the risks required to create and operate a new business
Knowledge – expertise gained through experience or association

7. Economic systems
The means by which a society distributes its resources to satisfy its people’s needs
Free-market system – decisions about what to produce and in what quantities are decided by the market’s buyers and sellers
Success or failure are left to your own efforts
Capitalism or free enterprise – a system based on economic freedom and competition
Mixed economy
High risk, but high rewards

8. Economic systems
Planned system – the government controls most of the factors of production and regulates their allocation
Socialism – public ownership and operation of key industries combined with private ownership and operation of less vital industries.
A system that lies between capitalism and communism

9. Nationalization & Privatization
Nationalizing—government takeover of selected companies or industries
U.S. takeover of GM 2009
U.K. takeover of the Royal Bank of Scotland
Privatization—turning over services by government to private businesses
U.S. prisons, some infrastructure projects, military support
The belief that private firms motivated by profit will operate the projects more efficiently

10. The forces of supply & demand
Demand—buyers’ willingness and ability to purchase products
Supply—specific quantity of a product that the seller is able and willing to provide

11. What effects demand? Customer income Customer preferences
The price of substitute products – what can be purchased instead of a particular product
Airplane ticket
Train ticket
Automobile
Bus ticket

12. What effects demand?
The price for complementary products – what can be purchased along with the product
Airline ticket + hotel reservation
iPhone 4 + Apps
HP printer + ink cartridges
Marketing expenses
Customer expectations about future prices and their own well-being

13. When supply = demand
Equilibrium point—the point at which quantity supplied equals quantity demanded
The equilibrium price is established when the amount of a product that suppliers are willing to sell at a given price equals the amount that consumers are willing to buy at that price.

14. The interaction of demand & supply
How demand and supply affects price
When the price goes up, demand goes down, but the suppliers incentive to produce more goes up
When the price goes down, demand goes up, but the quantity supplied may or may not go down
When point at which demand and supply are equal is the equilibrium point.
Can a manager predict supply, demand, and equilibrium price?

15. Competition in a free-market
Competition—rivalry among businesses for the same customers
Pure competition—there are so many buyers and sellers that no single buyer or seller can individually influence market prices (toothpaste)
Monopoly—one company dominates a market so that it controls prices (Xerox)
Monopolistic competition—many sellers compete in at least a small way (Google Chrome)

16. Business cycle
Business cycle—fluctuations in the growth of an economy over the period of several years
Recession—two consecutive quarters of decline in GDP (2007)
Depression—collapse of the financial markets (1920’s)
Recovery—rise in employment, income, production, spending

17. Business cycle indicators
Inflation—prices rise steadily throughout the economy
Deflation—prices fall steadily throughout the economy

18. Government’s role in the business cycle
Regulation and deregulation to foster competition and protect stakeholders
Stabilize and stimulate the economy through monetary and fiscal policy
Monetary policy—regulation of the money supply
Fiscal policy--use of taxation and spending to influence the business cycle