Why are businesses classified?

What are the four types of businesses/ business structures in the United States?

1) Sole proprietorships

2) Partnerships

3) Corporations

4) Franchises

Before opening a business what does an entrepreneur need to do?

SOLE PROPRIETORSHIP

What are the advantages of sole proprietorships?

1) Easy to establish because of little government interference

2) Strong incentive to do well because business's profits are the owner's income

3) Decisions are easy to make because one person makes them

What are the characteristics of sole proprietorships?

1) Owner usually hires people to do a lot of the work, but they are responsible for all areas of the business

2) Most businesses in the U.S. are sole proprietorships

What are the disadvantages of sole proprietorships?

1) Resources are very limited

2) Do not have resources to invest and expand

-tend to go out of business when owner dies

3) Proprietors lack necessary skills, training

-may have a good product or service to sell but no idea how to run a business

-must be resourceful and learn everything they don't know

4) Can not specialize in what they're good at

unlimited liability

PARTNERSHIP

What are the advantages of a partnership?

1) Decisions can be made easily

2) Partners can specialize-contribute specific, but different talents and skills to the successful operation of the business

3) Easier to finance, more money available

-financing is the burden of all the partners according to whatever agreement is made

-Can use the combined income and assets of all partners and their spouses when applying for a loan which increases the amount of money available

4)Not required to file and pay income taxes

What are the disadvantages of a partnership?

1) Unlimited liability

2) Arguments between owners can make decisions difficult

3) Possibility that one of the partners leaves or dies

What type of business structure are most businesses in the U.S?

CORPORATION

What are the characteristics of corporations?

1) In the eyes of the law are like a person

-can own property, incur debt, produce and distribute products

2) Sell stocks and bonds to get capital

3) Separation of ownership and control: the stockholders own the corporation, but executives working for the corporation control it

Stock

Partial ownership in a corporation bought and sold in the stock market by investing in the company's stock

-Percentage of stock and individual owns in the percent of the company they own

Bonds

Bought by individuals from corporations and is considered a loan

-Corporation must pay the money back with interest

What are the advantages of corporations?

1) Can sell stocks and bonds and borrow money to raise money for business expenses

2)Can make large-scale investments and expand

3) Achieve economies of scale

4) Limited liability

5) Can find people with specialized skills to handle all aspects of business

5) Usually many owners so it is able to continue for many generations (instead of closing when owner dies)

Incorporation

Economies of scale

Limited liability

Owners of the corporation can share in the profits earned by the corporation, but can only lose the amount of money they put into the company

-Corporations can be sued, stockholders cannot

-Corporations pay the fees if a lawsuit is filed, not the stockholders

Stockholders

What are the disadvantages of corporations?

1) Very costly and time consuming to organize because of many government regulations involved in getting a corporate charter

-all corporations need this government charter

2) Suffer from double taxation

Double taxation

FRANCHISE

Basically an established business or parent company allowing another owner to open that same business

-A type of business where a company is authorized to sell another company's goods or services in a specific area in exchange for a franchise fee

What are the characteristics of a franchise?

1) Usually involves a business that has been highly successful with a product or service allowing other businesses to use its ideas in other geographic locations

2) Each franchise is individually owned

How are franchises arranged and financed?

Steps:

1) Individuals apply to the company for franchise rights and pay a franchise fee for the right to own and operate an already successful business

2) Parent company reviews the application and decides if the person can maintain the business up to the company standard and if they can pay the franchise fees and initial cost of operation

3) Franchise owners borrow money to pay the initial start up costs

-Parent company may provide financing options for someone they consider a "good risk"

What are the advantages of franchises?

1) Fairly easy to open

2) Do not require original ideas

3) Business is already established and has a clientele

4) Parent companies often provide extensive training to ensure their success

What are the disadvantages of franchises?

1) Lack of control: must follow the regulations of the parent company

-because parent companies don't want their name or brand appeal to be damaged by one franchise owner

2) Must maintain an ongoing relationship with the parent company (according to the terms of your franchise agreement)

3) May be required to purchase specialized products, equipment etc that are more expensive than generics

4) If the parent company fails, you fail

In addition to determining the type of business they want what must entrepreneurs also determine?

Why is the location of a business so important?

It impacts the success of any of the four business structures

Businesses need to be located where the can succeed

Economic rights

What are the three economic rights that are granted to businesses?

1) Right to voluntary exchange

2) Right to competition with other businesses

3) Right to own private property

Economic responsibilities

What is the responsibility of businesses with respect to the right to voluntary exchange?

What is the responsibility of businesses with respect to the right to compete?

Must compete in an honest, truthful and ethical manner in order to compete on a fair and level playing field for the market system to work effectively

-Have a responsibility to be truthful in advertising and not lie about competitors' businesses

What is the responsibility of businesses with respect to the right to own private property?

What is the most important guaranteed right for businesses in a market economy?

Ethics

What must a business do regarding ethics?

Must operate under a code of ethics

Must operate legally to be successful

Code of ethics

Basically guidelines that the business and all employees employed by the business must follow at all times

A set of laws that dictate how a business should conduct itself (in a moral fashion)

Why are ethics/ codes of ethics important for businesses?

A business is only as good as their word and they  must be ethical in order to keep customers: if one customer feels cheated, word will spread and the business will have a hard time getting customers.

-Businesses need a good reputation to beat out the competition

According to a code of ethics, who does a business have a responsibility to?

1) Customers

2) Employees

What responsibilities does a business have to its employees?

1) Provide safe working conditions

2) Equal pay

3) Equal treatment for all employees

What happens if a business does not uphold its responsibilities to its employees?

What guidelines are usually included in most businesses' ethics codes?

1) Act with honesty and integrity, and respect toward others

2) Avoid conflicts with colleagues and customers

3) Comply with federal, state, and local government regulations

4) Act responsibly

5)Protect all confidential information

6) Be an example of ethical (moral) behavior

7) Report all violators of the policy

In order to establish any type of business what must an entrepreneur follow?

What is true of regulations entrepreneurs must follow when opening up a business?

What are the steps to creating a business in Texas?

1) Step 1: Business structure and name

2)  Step 2: Business tax responsibilities

3) Step 3: Business licenses and permits by business type

4) Step 4: Business employer requirements

What does Step 1: Business Structure and Name refer to?

1) The owner must determine the legal structure of their business: if he or she would like to create a sole proprietorship, partnership, or corporation

2) Must properly file the business name with the state

What does Step 2: Business Tax Responsibilities refer to?

1) Owner must determine tax responsibilities for the new business

2) Must file for tax ID numbers

What does Step 3: Business Licenses and Permits by Business Type refer to?

1) Each business must have a current business license

2) Depending on the type of business and the services you offer, many other permits and licenses may be required

What does Step 4: Business Employer Requirements refer to?

Different laws related to employment of personnel:

1) Responsible for safety of workers

2) Must pay taxes to the state and federal government

Let's Check Your Mastery

A franchise is a business started and owned by a single person who makes all the decisions for the business.

(a) true

(b) false

(b) false

This is the description of a sole proprietorship.

Let's Check Your Mastery

An advantage of a corporation is limited liability.

(a) true

(b) false

(a) true

Corporations are, legally, a separate entity.Unlike with sole proprietorships and partnerships, the owners of a corporation can only lose the amount they invested in the business.

Let's Check Your Mastery

A partnership is a business that is owned by more than one individual, allowing owners to specialize.

(a) true

(b) false

(a) true

A partnership offers the advantages of a sole proprietorship, yet the inviduals are allowed to specialize in tasks. For example a good businessman can concentrate on the business end of a restaurant while an excellent chef can cook.

Let's Check Your Mastery

A corporation is always the best type of business to open because of the many advantages it offers.

(a) true

(b) false

(b) false

Each type of business structure offers its own advantages and disadvantages; one type is no better than another.

Let's Check Your Mastery

Corporations sell stock to the public, and as a result all stockholders hold part ownership in and have partial control of the corporation.

(a) true

(b) false

(b) false

Corporations are run by executives, yet they are owned by the stockholders. Stockholders receive dividend checks each year that represent their portion of the corporation's profits.

In order for supply and demand to determine a fair price what must happen? Does this happen?

What are the types of market structures?

1) Monopoly

2) Oligopoly

2) Perfect Competition

4) Monopolistic Competition

MONOPOLY

PURE MONOPOLY

Barriers to entry

Conditions that make it hard for new producers to enter an industry

Ex. patents

Patents

NATURAL MONOPOLIES

Barriers to entry are high and it doesn't make logical sense for two companies to compete

-Monopolies that occur because one business is able to produce a good or service cheaper and more efficiently than other businesses, eventually forcing its competition out of business

-Most monopolies that exist in today's society

What are examples of monopolies?

1) Railroads of the 1800's

2) Polaroid Cameras

3) U.S. Postal Service

4) Public Utilities

5) Microsoft

Why were the Railroads of the 1800's considered a monopoly?

-in the years after the Civil War railroad companies held a natural monopoly in the areas they serviced because it didn't make sense to have two different railroad companies running along the same line because it would cause trains to crash and would be inefficient

-Railroad monopolies set prices, controlled the market in certain geographical areas, and practiced unfair policies: price discrimination and rebates for large companies

-As a result Interstate Commerce Act was created making railroad industry the first industry to be regulated by the federal government

Why were Polaroid cameras a monopoly?

-Throughout the 1970's and 1980's Polaroid has a monopoly on the instant picture industry because of a patent: anyone who wanted an instant picture had to buy a Polaroid camera

-As a result Polaroid had the power to set prices in the instant camera market

Why is the U.S. Postal Service considered a monopoly?

Why are public utilities considered a monopoly?

Public utilities are considered natural monopolies because there are high barriers to entry and it doesn't make sense for two or more businesses to compete; you don't get to pick your utility company

-Regulated by local governments

Ex.If you wanted to start a business that delivered electricity you would need to run your own power lines which would be extremely expensive and ugly so it wouldn't make sense to have competing businesses

Why is Microsoft considered a monopoly?

On any computer other than an Apple computer you get Microsoft software, Microsoft is selling a product for which there is no good substitute

-Government has been attempting to regulate Microsoft since 2000

What are the advantages of monopolies?

1) Offer large economics of scale

2) Have a lot of money to invest in better technology and better products

-not a guarantee they will produce better products because there is no competition pushing them to improve

3) Can sustain the ups and downs of the business cycle

Why are larger businesses able to produce for less than smaller businesses?

More money available to invest in better technology, making them more efficient

Fixed costs are spread out over more units so the cost per unit is less

What are the disadvantages of monopolies?

1) Inefficient because of lack of competition: production inefficient, allocation inefficient

2) They can set prices as high as they would like (supply and demand does not work to determine a fair price for all)

-no drive to keep prices low

-consumers and businesses are forced to pay the high price or forgo it

Production inefficient

Monopolies never produce goods at their lowest possible operating cost because they aren't scared to lose business to competitors so the managers and workers aren't challenged to produce more at a faster rate

-Usually they would want to increase production and produce at a lower cost to beat out competition but there is none and they can just pass along the additional cost to the consumers

Allocation inefficient

What happens as a result of the tendency of monopolies to be inefficient and charge high prices?

The government regulates all monopolies in the U.S.

However it costs a lot to run federal and local agencies and this cost is passed on to consumers in the form of taxes or higher prices on goods and services

OLIGOPOLY

What are the characteristics of oligopolies?

1) Only a few businesses, all of which selling similar products so consumers are offered a few choices but competition is limited

-usually caused by businesses merging together: the cost of running a business can be high and companies can make more money by merging and becoming one company

2) Barriers to entry result in only a few businesses in the industry (large cost of opening and running etc)

3) Interdependence

INTERDEPENDENCE

Because there are so few firms in the industry businesses depend on each other and the actions of one firm will affect the other firms in the industry

Ex. if one businesses lowers its prices it takes business away from the others businesses and they are forced to lower prices to keep business

What are examples of oligopolies?

1) Television of the 1950's: 

2) Local gas stations:

3) Cell phone companies

4) Airline companies

Why is television of the 1950's considered an oligopoly?

Why are local gas stations considered an example of oligopolies?

There are only a few different gas stations in a specific geographic area

Interdependent: if one station lowers its prices other stations will usually follow because the one with lower prices takes business away from those stations with higher prices

Why are cell phone companies considered an example of oligopolies?

There may be 5 companies to choose from but they offer comparable plans

Interdependent: may work together to set prices, or if one company offers a deal it takes business away from the other companies

What are the advantages of oligopolies?

Advantages for business owners:

1) Can work together to control the market: set prices and restrict competition

2) Can withstand economic downturns by setting prices

3) Merging businesses together that results in oligopolies can allow owners to keep their businesses up and running

What are the disadvantages of oligopolies?

Disadvantages for consumers:

1) Lack of competition and price fixing forces consumers to pay higher prices

2) The government doesn't regulate oligopolies as heavily which can lead to collusion

What is the difference in government regulation between monopolies and oligopolies?

Monopolies: are considered dangerous to the market and are highly regulated

Oligopolies: are not regulated as much which can lead to collusion and price fixing

Collusion

PERFECT COMPETITION

What criteria must a market meet to have perfect competition?

1) There must be many buyers and sellers in the marketplace and none of the sellers can be big enough to influence (set) prices

2) Barriers to entry are low so there is freedom of entry and exit into and out of the market

3) Businesses earn only a normal profit: bare minimum profit needed to keep them in business

4) Buyers and sellers are fully informed

5)Products are homogeneous

What is meant by products are homogeneous in perfect competition?

Since products in perfect competition are homogeneous, what kind of competition occurs?

Only competition is price competition

Because goods are homogeneous, businesses are not competing to make the best product, only offer the best price

What is meant by businesses can only earn a normal profit, or the bare minimum profit needed to stay is business, in perfect competition?

Does perfect competition occur?

Probably not because consumers don't always buy the cheapest good

They buy more expensive goods for better quality, brand name, better fit etc.

MONOPOLISTIC COMPETITION

What factors are required for monopolistic competition?

1) There must be many buyers and sellers in the marketplace and none of the sellers can be big enough to influence (set) prices.

2) Barriers to entry are low so there is freedom of entry and exit with the market and businesses can establish themselves in the marketplace quickly

3) Buyers and sellers are fully informed

4) There are differentiated products offered for sale

What is meant by there being differentiated products for sale in monopolistic competition?

What is the difference between perfect competition and monopolistic competition?

Monopolistic competition is much more realistic because it allows for product differentiation where perfect competition calls for homogeneous products

-Monopolistic competition does have 3 of the same characteristics, the ones that are easily attained

What is an example of monopolistic competition?

Jeans market: many buyers and sellers, low barriers to entry, buyers and sellers are fully informed, differentiated products available

Many different styles, colors, brands of jeans available for purchase and we make our purchases based on these differences

What type of market structure are most markets?

What are the advantages of monopolistic competition?

1) Most efficient market structure because it is made up of many buyers and sellers who are all fully informed making decisions based on many factors

2) Wide variety of choices for consumers

3)Businesses can market their products to customers through advertising: try to convince buyers their products are better than all similiar products on the market

4) Prices are set by supply and demand so goods are offered at the best prices for all

What are the disadvantages of monopolistic competition?

Let's Check Your Mastery

A(n) ______is an industry composed of one company selling a product for which there are no good substitutes.

Pure monopoly

A pure monopoly results when there are no adequate substitutes for a good.

Let's Chec Your Mastery

An example of a ______ is an electrical company regulated by the government.

Natural monopoly

Natural monopolies are created when the barriers to entry are high, and it is not logical for two companies to compete. It is not logical to run two separate electrical cables through neighborhoods. As a result the natural monopoly (electrical company) has to be regulated by the government in order to assure fair prices.

Let's Check Your Mastery

A ________ is dominated by a small number of firms who have to keep a close eye on each other.

Oligopoly

Oligopolies are typically created by business mergers, which evolve into a business being dominated by a few large companies. They each depend on business from the same market, so they need to keep track of each other so one business does not take business from the other.

Let's Check Your Mastery

______ is a perfect situation developed by economists that most likely will never happen.

Perfect competition

Perfect competition requires perfect information, normal profits, and homogeneous goods. The only fluctuation is price, and therefore it can be predicted that individuals will always buy the cheapest good.

Let's Check Your Mastery

______ is a revised form of perfect competition in which product differentiation (different brands) can occur.

Monopolistic competition

Monopolistic competition allows for product differentiation and reflects more real markets than perfect competition does.

Why is measuring the economy important?

What is the system of economic indicators used by economists called?

DEPARTMENT OF COMMERCE

What do economists do with economic data/ economic indicators?

What are the major economic indicators?

1) GDP

2) inflation (rate)

3) unemployment (rate)

4) Stock market indexes

Also CPI and business cycles

What is the most important measure of economic activity?

GROSS DOMESTIC PRODUCT (GDP)

Who are the goods and services measured in the GDP produced by?

1) Businesses

2) Government

3) Foreign companies

(in U.S.)

What are the sectors of the economy that are included in GDP?

1) Government (G)

2) Investment (I)

3) Consumers (C)

4) Net Exports (NX)

How is GDP calculated?

Calculating and adding up the expenditures (goods and services) of each sector

G + I + C + NX=GDP

EXPENDITURES

What does Government (G) refer to?

The government provides many goods and services to the nation and the money spent on the goods and services is added to the GDP

Ex. police protection, education, roads etc.

What does Investment (I) refer to?

What does Consumers (C) refer to?

Consumers spend a lot of money on many goods and services and this consumer spending is added into the GDP

Ex. Rent, healthcare, entertainment

What is Net Exports (NX)?

Exports-imports=net exports

Total amount of exports (what U.S. exports to other countries)-total amount of imports (what the U.S. imports into the country)=net exports

What is the smallest factor in determining GDP?

Is GDP an accurate measure of the economy?

What are the specific limitations of GDP?

1) Only measures final products

2) Only measures legal transactions

3) Does not measure all transactions

4) Is not a measure of the well-being of the economy

What is meant by GDP only measures final products?

Does not measure any product that is used in the production of a new good

Ex. does not count tires placed on new cars

What is meant by GDP only measures legal transactions?

Does not measure black-market transactions: illegal purchases or trades of goods or services

Ex. does not measure illegal transactions like prostitution; buying and selling of illegal drugs or weapons

What is meant by the GDP does not measure all transactions?

Does not measure household transactions or volunteer work because althought they make up a portion of the services in our economy there is no way to measure them

Ex. babysitting, mowing lawns, raking leaves, housework, volunteer work

What is meant by GDP is not a measure of the well-being of the economy?

What are the ways to calculate GDP?

1) Nominal GDP

2) Real GDP

NOMINAL GDP

REAL GDP

NOMINAL DATA

REAL DATA

INFLATION (RATE)

Rise in the overall price of goods and services

-Some prices may rise faster than the inflation rate, some may drop

What do economists use to adjust GDP data for inflation?

Why do economists need to adjust GDP for inflation?

PRICE INDEX

How are price indexes calculated?

1. Economists determine a base year

2. Establish a market basket of goods

3. Determine the individual average prices for all the goods in the market basket

4. Find the total price of all goods in the market basket

5. Do the same for any other year, using same market basket and find percent change in price

What years can the base year be?

MARKET BASKET

a sample of all goods and services consumers purchase for everyday living used to calculate CPI

ex. grocery items, medical expenses, housing, transportation, recreation

What is the base year's CPI?

CPI (CONSUMER PRICE INDEX)

How do you find the CPI for previous or later years?

Follow the same process: 

1) Add the prices of all the same goods in the market basket

2) Determine the percent change

3) Add or subtract that number from 100 (add if a price increase, subtract if a price decrease)

What are the uses of CPI?

1) Used as an economic indicator to show the state of the economy and provides information to the government on price change so it can determine economic policies

2) Used to adjust dollar values for inflation

-used by businesses to compared data year to year

3) Used to determine the purchasing power of the dollar

4) Used to adjust government payments from programs like social security and welfare to consumers

How is the inflation rate calculated?

Percent change in CPIs

(CPI year 2-CPI year 1)/ CPI year 1

x100 for percent

What is true of high inflation rates?

Means consumers have less purchasing power because money doesn't go as far

Indicator of a slow economy

What does a low inflation rate indicate?

What is the formula for calculating relative value/ purchasing power of money from year to year?

Use price indexes

 x            =     CPI target year

dollars             CPI current year

or dollars x target CPI/ current CPI

What is the opposite of inflation?

What impact does deflation have on the economy?

Doesn't happen often in our modern economy but can cause catastrophic problems for the economy:

1) Hurts businesses because products are worth less

2)If businesses aren't doing good economy is not doing good:

-lay people off, no raises, so people can't afford to buy as much

3) You want the value of certain things to increase (like houses)

Who determines the unemployment rate in the U.S.?

UNEMPLOYMENT (RATE)

How is the unemployment rate calculated?

In order to be counted in the unemployment rate what must be true of unemployed workers?

Must actively be pursuing a job to be counted

Those that have given up looking for a job (discouraged workers) are not part of the labor force and aren't counted

When is the economy operating at full employment?

What is considered a high unemployment rate?

What does a high unemployment rate indicate?

What is a good unemployment rate considered?

What does a low unemployment rate indicate?

What are the types of unemployment?

Grouped by cause:

1) Frictional unemployment

2) Structural unemployment

3) Cyclical unemployment

4) Seasonal unemployment

5) Technological unemployment

FRICTIONAL UNEMPLOYMENT

results from day-to-day changes in the economy;  occurs because of the time and effort it takes to find a new job

Ex. old industries die, new industries develop, people get tired of bosses and quit jobs, new people enter the labor force

Why is there always frictional unemployment?

STRUCTURAL UNEMPLOYMENT

Why does structural unemployment exist?

Mostly due to minimum wage laws

But would exist if minimum wage was zero because certain people will never contribute to economy-criminals etc

CYCLICAL UNEMPLOYMENT

When the economy is doing well, what happens in terms of jobs?

When the economy is on a downturn, what happens in terms of jobs?

SEASONAL UNEMPLOYMENT

exists because of the changing seasons and affects people whose jobs depend a lot on the season

Ex. snowplower drivers are unemployed in the summer; construction workers and landscapers are unemployed in the winter

What other factors cause seasonal unemployment?

Harvests, school schedules, major holidays

TECHNOLOGICAL UNEMPLOYMENT

exists when new technology replaces existing jobs and workers

Ex. U.S. manufacturing industry

What is true of unemployment?

Other than the unemployment rate what do economists calculate related to jobs/ employment?

Why do economists calculate the number of jobs created each month?

To predict the future unemployment rate

If a lot of jobs are created one month there is a greater potential for the unemployed to find jobs and the unemployment rate will probably decrease

How can you calculate the number of new jobs created monthly?

What effect does the creation of new jobs have?

Decreases the unemployment rate

Increases production

What are the costs of unemployment?

Costs are high:

1) Loss out output

2) Decrease in upward mobility

What is the stock market?

How can you learn the status of the stock market?

What are the two stock market indicators?

1) Dow Jones Industrial Average

2) NASDAQ

Why is the stock market a good indicator of how the economy is doing?

If the Dow Jones and NASDAQ are low what does this mean? High?

Economy is doing poorly

High: economy is doing well

DOW JONES INDUSTRIAL AVERAGE

stock market indicator that is a group of stocks and bonds selected from the entire stock market as a sample of how all stocks are performing

-measures stocks on the New York Stock Exchange, American Stock Exchange, and NASDAQ

What is the role of the Dow Jones Average?

Investors and economists can watch it to monitor the condition of the stock market

Influences how and when investors purchase stocks

NASDAQ

(National Association of Securities Dealers Automated Quotation)

measures smaller stocks that are usually technology and computer related businesses and only measures stocks bought and sold "over the counter" (not exchanged in an actual location, usually the internet)

What is the NASDAQ a good indicator of?

BUSINESS CYCLES

What is true of business cycles?

They take many years to complete but are never the same and the causes and lengths of the business cycle are always different

-Can go from expansion to peak to recession and a depression, or may never hit a depression

What does a typical business cycle look like?

Peak

a positive uptrend in business activity (business is making a profit, employing laborers and doing well overall)

highest point it reaches before a downturn

RECESSION

an overall downturn of many economic indicators such as employment and production (GDP)

-on average lasts about a year

-below axis

Depression

EXPANSION

fast upward growth spike-lots of money flowing, jobs created and positive activity

increased on graph

CONTRACTION

TROUGH

Let's Check Your Mastery

an increase in the price of overall goods and services

inflation

Inflation means the overall increase in prices.

Let's Check Your Mastery

An overall downturn of many economic indicators, such as employment and production 

Recession

A recession exists when the economy is decreasing and economic indicators are on the downturn.

Let's Check Your Mastery

the ratio of job seekers to the total labor force

Unemployment rate

The unemployment rate is the percent of jobseekers in the labor force. It is an economic indicator.

Let's Check Your Mastery

an overall increase in many economic indicators, such as employment and production

expansion

Expansion means the economy is increasing, which means the economic indicators are also increasing.

Let's Check Your Mastery

used to calculate the price index

market basket

The price of the same market basket for each year is calculated in order to determine the price index.

Let's Check Your Mastery

the measure of the average change in price over time

price index

While inflation and deflation are increasing and decreasing prices over time, the CPI measures the average change in price.

Let's Check Your Mastery

the market value of all final goods and services produced in a year

GDP

The GDP measures the production of the economy, so it measures the value of the final goods produced.

Let's Check Your Mastery

the loss of jobs to technological improvements

technological unemployment

Technological unemployment is the unemployment of workers due to technological improvements

Let's Check Your Mastery

the reason that there will always be some unemployment in the economy

frictional unemployment

Frictional unemployment results from the day-to-day changes in the economy. It is always going to occur as people quit jobs and new people enter the labor force.

Let's Check Your Mastery

raw data that has not been adjusted for inflation

nominal data

Nominal data has not been adjusted for inflation. Nominal GDP is the actual value of goods and services produced.

Let's Check Your Mastery

data this is adjusted for inflation and can be used to accurately compare economic data year to year

real data

Real data is adjusted for inflation. This mean the data is in constant dollars and can be compared.

What do economists measure to determine economic growth?

1) Savings

2) Investment

3) Interest rates

ECONOMIC GROWTH

The expansion period of the business cycle: occurs when the total output of the economy increases over time and usually refers to a rising GDP

What happens when the GDP rises?

1) Increase in savings

2) Increase in investments

3) Improvement in technology

4) Increasing population

What can businesses, consumers and government do when they have money?

1) Save it

2) Spend it

During periods of economic growth what is true regarding consumers and businesses?

DISCRETIONARY INCOME

How is discretionary income spent?

1) Spent on non-essential items

2) Saved

Financial system

How does a financial institution work?

What happens to money saved?

What occurs as individuals and businesses have more discretionary income?

What is the real interest rate?

How do loans/interest rates work?

1) Consumers and businesses save money

2) Bank pays an interest rate set by the Federal Reserve to the consumer or business who saves the money

3) Bank loans the money to someone who will spend it right away and collects and interest rate from the borrower

What impact does borrowing money have on the economy?

How will the government increase economic growth with interest rates?

Decrease interest rates as a way to give consumers and businesses an incentive to take out loans

-So when interest rates are low houses are built, businesses expand and economic growth occurs

What happens when interest rates are high?

How does unexpected inflation effect people?

1) Hurts savers and people on fixed incomes because their money doesn't go as far

2) Helps people who have borrowed money at a fixed rate because although prices are increasing they still pay the same rate (pay back less than they should)

3) Hurts banks who still only receive the fixed percent because it doesn't account for rising costs

What most effects peoples' savings and investment decisions?

INVESTMENT

putting money into businesses, stocks, bonds, retirement plans and so on and so forth in order to gain a profit

-Also, saving money for the future because the money is growing to be used in the future

How can investing cause economic growth?

Investing in businesses can potentially increase the production of the businesses (cause economic growth)

-Investments can be used to hire more workers, expand facilities, open a new branch of the business or develop new technology to increase production

Why does uneven economic growth occur?

1) Different areas of the U.S. focus on different types of production so economic growth is concentrated in a few areas

-majority of businesses are centered in large cities so they tend to be focus areas of economic growth

2) Movement of workers

3) Increasing importance of technology and education

Why does a movement of workers cause uneven economic growth?

Why does the increasing importance of technology and education cause uneven economic growth?

Wealthier areas of the U.S. can afford the best educations and newest technology and people in less wealthy areas who cannot afford the best technology and educations find it hard to compete in today's market

-gives people and businesses with access to education and technology an edge

Ex. You can't get a job making computers if you've never seen one

You can't run a successful business in a town where the people don't have the skills/ education to produce as efficiently as people would elsewhere

Let's Check Your Mastery

Economic growth always occurs at the same rate in all regions of the United States.

(a) true

(b) false

(b) false

Uneven growth patterns occur in the United States because of unequal distribution of weath, declining regional populations, and demographics.

Let's Check Your Mastery

Investment, the creation of new businesses, and entrepreneurs are some of the "driving forces" of our economy.

(a) true

(b) false

(a) true

These forces drive out economy because they encourage and develop production.

Let's Check Your Mastery

Investment is putting money into businesses, stocks, bonds, retirement plans, and so forth, in order to gain a profit.

(a) true

(b) false

(a) true

Investment is putting money anywhere you expect to receive a profit. You can invest in businesses, retirement, the government, a savings account, and so forth.

Let's Check Your Mastery

Discretionary income is money that is spent on bills.

(a) true

(b) false

(b) false

Discretionary income is actually the amount of money left over after the bills are paid. As the economic growth occurs, businesses and consumers have more discretionary income.

Let's Check Your Mastery

Economic growth only occurs for one reason: investment.

(a) true

(b) false

(b) false

Although investment encourages economic growth, it is not the only factor.