Ch 3 & 5 Economics and Free Enterprise

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economy

Organized way a nation provides for the wants/needs of its people

scarcity

the difference between unlimited wants/needs and resources; forces everyone (nations and people) to make economic choices

resources

All things used in the production of goods and services

factors of production

land, labor, capital and entrepreneurship

land

everything contained in the earth or found in the seas

labor

all the pople who work

capital

money to start and operate a business

infrastructure

the physical development of a country; roads, bridges, etc.

entrepreneurship

the skills of people who are willing to invest their time and money to run a business

3 Questions Economies must Answer

What to produce? How to produce? For whom?

surplus

when supply exceeds demand

Market economy

in a pure market economy there is no government involvement in economic decisions

Command economy

also called a Planned Economy; government answers questions and controls the factors of production

Mixed economy

philosophy of government affects economic structure; all economies in the world today are considered to have this type

communism

totalitarian form of gov't; one political party; people share common economic and political goals; ex: Cuba, North Korea, China

socialism

gov't tries to reduce differences between the rich and poor; lots of gov't assistance social service programs; key industries run by gov't; ex: Germany, Great Britain, Canada, France

capitalism

democratic government; marketplace competition and private ownership = free enterprise; ex: US, Japan

Characteristics of Free Enterprise

freedom of ownership, competition, risk, profit, supply and demand

supply

the relationship between the amount of a good or service that businesses are willing and able to make available and the price

demand

the relationship between the amount of a good or service that consumers are willing and able to purchase and the price

market price/equilibrium

point at which supply and demand intersect

developing economies characteristics

literacy level, technology, agricultural dependency

productivity

output per worker per hour; specialization increases productivity

Gross domestic product (GDP)

output of goods and services produced by labor and property located within a country; 2008 US GDP = $14.2 Trillion

inflation rate

rising prices; 1-5% is stable; 10% or more is devastating to an economy; CPI is used to measure inflation

Gross National Product (GNP)

goods and services produced by a nation, including goods produced abroad by a country's citizens and companies

Consumer Price Index (CPI)

measures the change in price of goods over time of 400 retail goods/services used by the average household

Unemployment rate

% of labor force that is unemployed; current US rate is 9.7%; GA = 10.5%

business cycle

recurring changes in economic activity

Expansion/Prosperity

stage when the economy is flourishing/growing; unemployment low, consumer confidence and spending is high

Recession

economic slowdown; companies reduce workers; less $ to spend

Depression

prolonged recession; nearly impossible to find a job

Recovery

increase in economic activity; increase in jobs; increase in demand for goods and services

How can the gov't affects the business cycle?

laws and programs such as bailouts, social services, stimulus packages

shortage

when demand exceeds supply

business plan

outlines a strategy to turn a business idea into a reality

trough

low point in the business cycle, transition from recession to recovery, economy stops slowing and begin to see signs of recovery

free enterprise

encourages individuals to start and operate their own business in a competitive system without government involvement

freedom of ownership

personal property (cars, homes, land, etc.) and business ownership and intellectual property (patent, trademark, copyrights)

competition

struggle for customers
price (focus on sale price of the product) vs. non-price competition (focus on quality, service, location and reputation)

risk

potential for loss or failure

profit

money earned from conducting business after all costs and expenses have been paid

monopoly

exclusive control over a product or means of producing it

public sector

government financed agencies such as education, military, social security, medicare, etc.

private sector

business not associated with the government

organizational chart

diagram of the company's departments and jobs with lines of authority clearly shown

liability

a debt that you owe to others

asset

anything of monetary value that you own such as cash, real estate, etc.

personal financial statement

a summary of your current personal financial condition

income statement

a summary of income and expenses during a specific period such as a month

net income

amount left after the total expenses are subtracted from gross profit

balance sheet

a summary of a business's assets and liabilities

economic utility

the satisfaction/value that a consumer receives from the product

form utility

changing raw materialsor putting parts together to make them more useful

place utility

having a product where customers can buy it

time utility

having a product available at a certain time of year or a convenient time (ex: 24 hr ATM, or selling bathing suits in Feb/March)

possession utility

exchange of a product for money; retailers may accept cash, credit or finance the purchase

information utility

involves communicating with the consumer; salespeople provide information or the product's package/label displays information

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