TEST 1 - ALL NOTES - Chapter 1 Free Enterprise the system...

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Chapter 1 Free Enterprise - the system of business in which individuals are free to decide what to produce, how to produce it, and at what price to sell it. Business - the organized effort of individuals to produce and sell, for a profit, the goods and services that satisfy society’s needs Business Profit – Sales Revenue- Business Expenses=Profit (Loss)* (*Profit becomes the property of its owners ) Ultimate Objective of Every Firm - to satisfy the needs of its customers. We should add: If you delight them, your prosperity should increase! Economics - the study of how wealth* is created and distributed**. (* “anything of value,” including products produced and sold by business)( ** “who gets what”) Economy - The total sum of product and service transactions in a region, country, or group of nations. Economic Perspectives – Microeconomics - The study of decisions made by: Individuals…Businesses Macroeconomics - The study of: National economy…Global economy Types of Economic Systems – Capitalism: Free enterprise…Adam Smith (Wealth of Nations)…The invisible hand…Laissez-faire capitalism…. Command: Socialism…Communism…Karl Marx Adam Smith Wealth of Nations (1776) - Society pursues self-interest/People work hard if: Earn more pay …Earn more profit/Promotes good of community Basic Assumptions for Adam Smith’s Laissez-Faire Capitalism (top to bottom) Laissez-Faire capitalism… Right to create wealth…Right to own private property and resources…Right to economic freedom and freedom to compete…Right to limited government intervention Invisible Hand - describes how an individual’s own personal gain benefits others and a nation’s economy. Capitalism - an economic system in which capital assets are privately owned and items are brought to the market for to make a profit. U.S. = Mixed Economy - …an economy that exhibits elements of both capitalism and socialism. Command Economy - an economic system in which the government decides what goods and services will be produced, how they will be produced, for whom available goods and services will be produced, and who owns and controls the major factors of production. Command Economies – Socialism…Communism Socialism - Key industries are owned/controlled by government. Land, buildings, and raw materials may be property of state. Private ownership is permitted to varying degrees. People chose their own occupations. National goals determine what is produced and how. Uses taxes, rents, and wages to control distribution.
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Communism - Karl Marx: Father…Advocated classless society…Citizens own all economic resources….Workers contribute based on their ability and receive benefits based on need. Examples: North Korea and China. Centralized planning to set prices and wages. Emphasis on government’s needs, not consumers’. No job choice; professionals better off than factory workers Measuring Economic Performance - Economic Indicators: Gross domestic product (GDP)…Inflation… Deflation…Unemployment rate…Consumer price index (CPI)…Producer price index (PPI)
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