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Summary - The Influence of the Economy on Businesses
1 The Influence of the Economy on Businesses
What did Keyned believe the government should do when in a recession?The government should increase spending and cut taxes to stimulate the economy for a short term.
What is economics?The study of how society chooses to use its resources to create goods and services and how to distribute these among the different groups and individuals.
What are macroeconomics?Concentrates on the operation of a nation's economy as a whole
What are microeconomics?Concentrates on the behaviour of people and organisations in markets for particular products or services.
What is resource development?The study of how to increase resources and create conditions that will make better use of them.
What do people think of large population?1. Malthus: there are not enough resources to satisfy everyone's need --> birth control
2. People are valuable asset --> learn them how to produce and they can make resources.
What did Adam Smith believe?People need incentives to work hard and freedom is vital to the survival of any economy, especially freedom to land or profits.
What is the invisible hand theory?Self-directed gain leads to social and economic benefits for the whole community.
What is capitalism?Production factors are private property and used to make a profit, this led to the creation of wealth.
What is state capitalism?The state, instead of private owners, run some businesses (China/Russia)
What are the four basic rights of capitalism?1. Own private property
2. Set up and own a business and keep all the profits
3. Freedom of competition
4. Freedom of choice
What were Roosevelt's four additional rights?1. Freedom of speech/expression
2. Freedom to worship in your own way
3. Freedom from want
4. Freedom from fear
How do free markets work?Decision about what to produce and how much are made by the market.
- The price tells producers how much to produce.
- If something is wanted but hard to get, the price rises.
Explain the circular flow modelIn a free market economy, business activity involves two major players: individuals (households) who own the resources that are the key inputs into the productive process, and businesses who use these inputs (factors of production) to create goods and services.
1. In the Resource Market (top part of the model)
a. Businesses demand resources.
b. Households own the resources (factors of production).
c. Income from providing these resources flows back to the households.
d. The prices of these resources are set by the laws of supply and demand.
2. In the Product Market (lower part of the model)
a. Businesses use these resources to create goods and services.
b. Households (individuals) demand these goods and services.
c. Individuals use their income to purchase goods and services.
What is supply?The quantities of products businesses are willing to sell at different prices
Supply increases, when price increases
What is demand?The number of products consumers want to buy at different prices.
Demand will be higher when the price decreases
What is the market price?the price determined by supply and demand=negotiated price.
What are the 4 forms of competition in free markets?1. Perfect competition; many sellers, identical goods & no domination
2. Monopolistic competition; many sellers, products almost identical, product differentiation
3. Oligopoly; A few dominant producers, product differentiation
4. Monopoly; One producer
What are the benefits and limitations of the free market?Benefits: open competition among companies & provides opportunities for poor people to work their way out of poverty.
Limitations: inequality, not everyone can do it, people get greedy.
What is socialism?An economic system based on the premise that some basic businesses, like utilities, should be owned by the government in order to more evenly distribute profits among the people.
What are the benefits and limitations of socialism?Benefits: social equality, free childcare, education, etc.
limitations: few incentives for businesspeople tot are risks, brain drain (some of a country's best and brightest workers move to capitalistic countries), fewer inventions/innovations, high taxes.
What is communism?An economic and political system in which the government makes almost all economic decisions and owns almost all the major factors of production.
-> The state doesn't know what to produce, because prices don't reflect supply/demand.
What's the difference between free-market economies and command economies?In free-market economies the market determines and in command economies the government determines what goods/services are produced, who gets them and how the economy grows.
What are mixed economies?The division of resources is partly done by the government and partly by the market. The government is uses as a supplement to promote economic growth as well as social equality.
What led to the emergence of socialism?Socialists believe that wealth should be more evenly distributed than in free-market capitalism. Government should be empowered to carry out the distribution of wealth
What are the three indicators of economic conditions?1. Gross domestic product (GDP); total value of final goods/services produced in a country in a year.
2. Unemployment rate: over 16, unemployed, tried to find job within the last 4 weeks.
3. Prince indexes; helps to measure the health of the economy.
What are the 4 types of unemployment?1. Frictional (in between jobs, short period)
2. Seasonal (demand varies over year)
3. Structural (longer period, no job prospects)
4. Cyclical (recession)
What is inflation?The general rise in the prices of goods/services over time, measured by CPI
What is disinflationThe price increases are slowing (inflation rate declines)
DeflationPrices are declining because too few dollars are chasing too many goods
What's PPI?An index that measures prices at the wholesale level
What's the result of productivity?Productivity has risen due to technological advances -> production faster/easier, but it also caused unemployment
What does productivity in the service sector mean?Technologies only improve the quality of the service not the quantity.
What are business cycles + name 4 termsPeriodic rises and falls that occur in economies over time
1. economic boom
2. recession; 2 or more consecutive quarters of decline in the GDP
3. depression; severe recession, accompanied by deflation
What is monetary policy?The management of the money supply and interest rates by the Federal Reserve.
What do the Fed's do?Increasing/lowering interest rates
- economy booming? increase rates
- economy in recession? decrease rates
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Example questions in this summary
What did Keyned believe the government should do when in a recession?
What is economics?
What are macroeconomics?
What are microeconomics?