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Chapter_2 - Chapter 2 How Economics Affects Business What...

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Chapter 2 How Economics Affects Business What is Economics? Economics is the study of how society chooses to employ resources to produce goods and services and distribute them for consumption among various competing groups and individuals. Macroeconomics looks at the operation of a nation’s economy as a whole. Microeconomics looks at the behavior of people and organizations in particular markets. While macroeconomics looks at how many jobs exist in the whole economy, microeconomics examines how many people will be hired in a particular industry or a particular region of the country. Resource development is the study of how to increase resources and to create the conditions that will make better use of those resources (e.g., recycling and oil conservation). Growth Economics and Adam Smith Adam smith was one of the first people to imagine a system for creating wealth and improving the lives of everyone. Rather than believing that fixed resources had to be divided among competing groups and individuals, Smith envisioned creating more resources so that everyone could become wealthier. He authored The Wealth of Nations in 1776. He believed that freedom and incentives would create wealth for people. The theory is: Businesspeople don’t deliberately set out to help others . . . their goal is their own profit. Farmers sell their crops to others . . . they have to hire people to produce more crops . . . those workers would have jobs and money to buy those crops and other things. As people become wealthier, they would naturally reach out to help others. Understanding Free Market Capitalism Capitalism is an economic system in which all or most of the factors of production and distribution are privately owned and are operated for profit. Businesspeople decide what to produce, how much to pay workers, how much to charge for goods and services, etc…. 1. The right to private property. 2. The right to own a business and to keep all of that business’s profits. 3. The right to freedom of competition (good for consumers) 4. The right to freedom of choice How Free Markets Work Prices are determined by the buyers and sellers negotiating the price of an item.
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