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Chapter 6 ECONOMICS Economics – is the study of how societies decide what to produce, how to produce it, and how to distribute what they produce. Scarcity – refers to the fact that too few resources are available for everyone in the world to consume as much as he or she would like. Opportunity cost – of taking an action refers to the loss associated with the best opportunity that is passed up. What factors might make the opportunity cost of going back to school for an M.B.A. worth the expense? TYPES OF ECONOMIC SYSTEMS Command Economy – the government decides what goods and services are produced. Government planners decide how many tons of steel factories produce. Decisions are made by command, not in response to consumer tastes. Market Economy – private companies and individuals decide what to produce and what to consume. Government plays a minor role, regulating businesses to make sure that they compete fairly. Most countries in the world today, including the U.S., have market economies. Based on competition, to attract customers in hope of earning profits from a successful product or service Each company makes its own decisions THE LAW OF SUPPLY AND DEMAND 1. How do producers in an economy know what to produce? 2. How do they know how much to produce? 3. How do they know how much to charge for their products? The Law of Demand Demand – the quantity of a good or service individuals are willing to purchase at various prices. Depends on individuals needs or wants, also depends on their incomes. As the price of a good increases, the quantity of the good demanded falls. The Law of Supply - describes how price affects the amount of a good producers produce. As the price of a good rises, producers are willing to supply more of the good. Determining Price - the law of supply and demand determines prices in a market economy. - This law states that the price of a good or service adjusts until the amount producers are willing to produce equals the amount consumers are wiling to consume Equilibrium price – The price at which supply equals demand. DETERMINING PROFITS Estimating Revenue Test Markets Estimating Costs Fixed Costs – Costs that a business absorbs regardless of the number of units it produces Variable Costs – Costs that rise or fall depending on how much of a good or service is produced. Includes labor and materials. Breakeven Analysis – reveals how many units of a good or service a business needs to sell before it begins earning a profit. Breakeven Point – the point at which revenue is sufficient to cover all costs. 6.2 THE BUSINESS CYCLE Business cycle – expansion and contraction by many industries at once. Called the cycle because it consists of several phases, which occur every few years. Expansionary Phase – occurs when consumer spending is strong and companies invest in new factories and equipment. Unemployment declines, wages, prices and interest rates usually rise because people generally have more money to spend. When companies stop expanding the next phase of the business cycle begins Contractionary Phase – consumers reduce their purchases and business investment slows. Unemployment rises, consumer spending falls, both businesses and consumers are pessimistic about their future. Economic growth declines.. Recession – when growth falls for two three-month periods in a row Depression – when business activity remains far below normal for years. Economic indicators – data that show how the economy is performing.. Ex. Housing loans and bankruptcy.