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Understanding Economic
Systems and Business
Chapter 1
I. Nature of Business
A. Business - an organization that strives
for a profit by providing goods and services
desired by its customers.
B. Not-for-profit Organizations organization that exists to achieve some
goal other than usual goal of profit.
II. Key Stakeholders in a Business
A. owners (entrepreneur, stockholders)
B. creditors
C. employees/managers
D. suppliers
E. customers
III. Key Functions of Business
A. Management
B. Marketing
C. Finance
D. Accounting
E. Information Systems
F. Human Resource Management
G. Production
IV. Factors of Production
1. Natural resources
2. Labor
3. Capital
4. Entrepreneurship
5. Knowledge
V. How Business and Economies Work
Economics - The study of how a society uses
scarce resources to produce and distribute goods
and services.
A. Macroeconomics and microeconomics
1. Macroeconomics - focus on economy as a
whole; considers aggregate data
2. Microeconomics - focus on individual parts of
economy, such as households or firms
B. Circular Flow Between 3 Sectors
of the Economy
taxes, revenues,
inputs, outputs,
public goods and services
VI. Macro Econ: The Big Picture
A. Striving for economic growth
1. Benefits:
a. increased standard of living
b. increased employment
c. increased income
2. Drawbacks:
a. pollution
b. strain on facilities
B. Keeping people on the job
1. Measuring unemployment
2. Types of unemployment
a. frictional unemployment
b. structural unemployment
c. cyclical unemployment
d. seasonal unemployment
C. Keeping prices steady
1. Types of inflation
a. Demand-pull inflation: demand > supply
b. Cost-push inflation: in costs
2. How inflation is measured
Rate of inflation is measured by changes in the
consumer price index (CPI).
FYI--- Inflation rates in the US:
1979 - 13.3%
1987- 4.4% 1998 - 2.0% 2002 - 1.6%
VII. Achieving Macroeconomic Goals
A. Monetary Policy
– government programs for controlling the
amount of money circulating in the economy
and interest rates
– contractionary policy vs. expansionary policy
B. Fiscal Policy
– government’s use of taxation and spending to
affect the economy
VIII. Microeconomics: Looking at
Businesses and Consumers
A. Nature of demand
demand curve - a graph showing the
quantity of a good or service that people
are willing to buy at various prices
B. Changes in demand:
1. change in customer income
2. changes in fashion or taste
3. change in price of related products
C. Nature of supply
supply curve - a graph showing the quantity of
a good or service that a business will provide
at various prices
D. Changes in supply:
1. new technology
2. change in price of resources
3. change in price of related products
E. How demand and supply determine
1. Equilibrium point - the point at which
quantity demanded equals quantity supplied
IV. Types of Market Structures
A. Perfect competition - large number of
small firms sell similar products
B. Pure monopoly - a single firm accounts for
all industry sales
C. Monopolistic competition - many firms
offer products that are close substitutes, entry is
D. Oligopoly - a few firms produce most or all of
the output, factors limit entry
IV. Types of Market Structure
A. Perfect competition
C. Monopolistic competition
B. Pure Monopoly
D. Oligopoly
V. Characteristics of Economic
A. Capitalism - right to private ownership; entitle
to all profits; right to choose one’s occupation
B. Socialism - State owns basic industries, private
industries exist; profits exist only in private
sector; gov’t can influence one’s job choice
C. Communism - state owns all industries; profits
not officially recognized; state decides one’s
D. Mixed Economy - more than one economic
VI. Major Trends in Business
Social trends
Demographic trends
Americans on the move
Diversity in America