| | | * FREE ENTERPRISE is where individuals are free to decide what to produce, how to produce it, and at what price to sell it. * A BUSINESS is any activity that seeks to provide goods and services to others while operating at a profit. * REVENUE is the total amount of money a business takes in during a given period by selling goods and services. * PROFIT is the amount a business earns above and beyond what it spends for salaries and other expenses. * A LOSS occurs when a business’s expenses are more than its revenues. * An ENTREPRENEUR is a person who risks time and money to start and manage a business. * RISK is the chance an entrepreneur takes of losing time and money on a business that may not prove profitable. * STANDARD OF LIVING refers to how well off an individual or a society is, mainly in terms of want satisfaction though goods and services. * STAKEHOLDERS are all the people who stand to gain or lose by the policies and activities of a business. * SERVICE ECONOMY - more effort is devoted to the production of services than to the production of goods. * e-BUSINESS - producing and selling through the internet for a profit. | | * The English economist Thomas Malthus believed that population growth would outstrip resources. * In response, Thomas Carlyle called economics “THE DISMAL SCIENCE.” * ADAM SMITH advocated creating wealth through entrepreneurship. Rather than divide fixed resources, Smith envisioned creating more resources so that everyone could be wealthier. * The INVISIBLE HAND is a phrase coined by Adam Smith to describe the process that turns self-directed gain into social and economic benefits for all. * Basically, this meant that a person working hard to make money for his or her own personal interest would (like an invisible hand) also benefit others. | | * The INVISIBLE HAND is a phrase coined by Adam Smith to describe the process that turns self-directed gain into social and economic benefits for all. * Basically, this meant that a person working hard to make money for his or her own personal interest would (like an invisible hand) also benefit others. | | The FACTORS OF PRODUCTION are the resources used to create wealth * CAPITAL (e.g., machines, tools, and buildings; but not money—money is used to buy factors of production) | | * Free market economies exist when the market largely determines what goods and services get produced, who gets them, and how the economy grows. * Command economies are economic systems in which the government largely decides what goods and services will be produced, who will get them, and how the economy will grow. | | * People under free-market capitalism have FOUR BASIC RIGHTS: * The right to private property. * The right to own a business and to keep all of that business’s profits after taxes. * The right to freedom of competition. * The right to freedom of choice. * One benefit of such rights is that people are willing to take more RISKS than they would otherwise. | | * SOCIALISM is an economic system based on the premise that some, if not most, basic businesses should be owned by the government so that profits can be distributed among the people. * COMMUNISM is an economic and political system in which the state (the government) makes almost all economic decisions and owns almost all the major factors of production. | | * MIXED ECONOMIES are economic system in which some allocation of resources is made by the market and some by government. * THE U.S. HAS A MIXED ECONOMY. * For instance, the government has become the largest employer in the U.S. | | * PRODUCTIVITY is the amount of output you generate given the amount of input (e.g. hours worked.) * GROSS DOMESTIC PRODUCT (GDP) is the total value of goods and services produced in a country in a given year. * Business cycles are the periodic rises and falls that occur in economies over time.
proper information. Thus, these decisions may be inefficient.
5. Centrally planned economies have failed because they did not allow the market to work.
6. FYI: Adam Smith and the Invisible Hand
a. Adam Smith’s 1776 work suggested that although individuals are motivated by self-interest, an invisible hand guides this self- interest into promoting society’s economic well-being.
b. Smith’s astute perceptions will be discussed more fully in the chapters to come.
C. Principle #7: Governments…
wide factors like interest rates, inflation and unemployment. Also looks at the study of economics growth/how governments use monetary and fiscal policy to try to moderate the harm of recessions
GDP (Gross Domestic Product)- value of all goods and service produced in the economy in a given time period, usually quarter or year
Vital because you must be able to measure how the economy is doing so you can determine whether government policies are effective or not
Inflation- measure how the economy changes…
of the money supply c. the inflation rate b. the interest rate d. none of the above
ANS: D 2. In the long run, the actual inflation rate depends primarily on: a. the expected inflation rate b. the Phillips curve trade-off c. the rate of growth of the quantity of money d. the unemployment rate
ANS: C 3. The Phillips curve implies that the economy faces a: a. long-run trade-off between price inflation and the level of real wages b. short-run trade-off between inflation and unemployment c. short-run…
firms and households as they interact in markets
Households decide who to work for and what to buy and firms decide who to hire and what to produce
Adam Smith said households and firms interact in markets as if they are guided by an “invisible hand” (invisible hand=prices)
7. Governments can sometimes improve economic outcomes and promote efficiently and equity during market failures
Market failures happens
i. When the market fails to allocate (distribute) resources efficiently
ii. Because of an…
markets for goods and services.
* Organizations organize who to hire and what to make, who works for them and what to buy with their incomes.
* When the government prevents prices from adjusting naturally to supply and demand, it impedes the invisible hand’s ability to coordinate the decisions of the households and firms that make up the economy.
Principle 7: Governments Can Sometimes Improve Markets Outcome
* Property rights are the ability of an individual to own and exercise control over…
citizenry caused the separation of Great Britain’s most prosperous colonies because they did not do the greatest amount of good for the greatest amount of people (with-in the colonies). In John Smiths book, The Wealth of Nations, he discusses an invisible hand that leads the market to equality; this model has been the primary economic philosophy for the United State’s until the nineteen thirties and lead the United States into its most prosperous economic output in world history (Smith W.A.). This prosperity…
Adam Smith — Father of economics
The law of the invisible hand
“Wealth of Nations”
Irving Fisher (Stocks, Inflation)
Invested all his money into the stock markets right before the Depression in 1929
Thomas Malthus (Population)
Natural sources and factor are limited to a given population. Population grows exponentially, while natural resources grow arithmetically – Against population growth
“Essays on Principle of Population”
Michael Kremer (Population)
Population advances societies…
Utility- the pleasure or satisfaction that people get from doing or consuming something
7) Opportunity Cost- the invisible hand, market forces, economic forces
8) Rational Behavior- a decision-making process that is based on making choices that result in the most optimal level of benefit or utility for the individual
9) Economic Forces- Factors such as level of employment, rate of inflation, rate of interest, demographic changes, and fiscal and monetary policies, which determine the state of competitive…
markets for good and services.
Market – a group of buyers and sellers organize economic activity – determining what goods to produce? How to produce them? How much of each to produce? And who buys them?
Adam Smith – Wealth of Nations 1776 – invisible hand
System – the interaction of buyers and sellers determines price.
7. Governments can sometimes improve market outcomes.
Property rights – the ability of an individual to own and exercise control over scare resources.
Market failure – a…