Chapter 2:

Understading Economics and How It Affects Business

1. Explain basic economics:

What Is Economics?
 Economics: 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.

 2 branches of economics: macroeconomics and microeconomics

o Macroeconomics: looks at the operation of a nation’s economy as a whole.

- Ex: gross domestic product (GDP), the unemployment rate, and price indexes.

o Microeconomics: looks at the behavior of people and organizations in markets for

particular products or services.
- Ex: employees, advanced ideas, motionless views.

 Resource development: The study of how to increase resouces (by getting oil and
gas from shale and tar sands) and create conditions that will make better use of
them (like recycling and conservation).

 Businesses can contribute to an economic system by inventing products that

greatly increase available resources.
- Ex: Steve Jobs brought the Apple brand into existence such as iPod, iTunnes Store,
iPhone, and iPad, which created a technological revolution for the modern world and
made a great contribution to the global economy.

The Secret to Creating a Wealthy Economy

o New ways of producing goods and services add resources to the economy and create
more employment. Fish farms, for instance, create both food and jobs. Can you think
of other innovations that can help increase economic development ?

 3G,4G network can help people easily access the internet, they can work and study
everywhere. Morover, that can prevent work from stagnation by external elements.
 World Population Is Popping
- Popuplation forecasts from the United Nations estimate that by the year 2050,
global population will increase to 9.7 billion people.
 More than half of the world’s population growth will come from Africa, where the
continent’s will be double to 2.5 billion.
 Nigeria is expected to grow to 413 million people by 2050, making it the third-
largest country in the world.
 The largest decline in population will be Europe, which will see a decrease of 4.3
percent. Over one-third of the population in Europe will be over age 60 by 2050.

- Some of the world’s poorest countries will present significant economic

challenges.
 Combatting hunger and malnutrition, expanding education, providing adequate
health care, and eradicating poverty will not be easy tasks.
 Africa boasts three of the fastest-growing economies in the world and has the
world’s fastest-growing middle class
 India has made significant strides in growing its economy and is expected to be a
strong global competitor.

 With an expanding population, economic development is the key to prosperity

- Some macroeconomists believed that a large population, especially an educated

one, can be a valuable resource.
 The secret to economic development is contained in this saying: ‘Teach a person
start a fish farm farm, and he or she will be able to feed a village for a lifetime.’

 Business owner provide jobs and economic growth for their employees and
communities as well as themselves.

- The challenge for macroeconomists:

 Determine what make some countries relatively wealthy and other countries
relatively poor.
 Implement policies and programs that lead to increase prosperity for everyone
in all countries.
 One way to begin understanding this challenge is to consider the theories of
Adam Smith.

Adam Smith and the Creation of Wealth

 Adam Smith believed freedom was vital to the survival of any economy, especially
the freedom of own land or property and to keep the profits that result from working
land or running a business
 He believed people will work long and hard if the have incentives for doing, so-that
is, if they know they’ll be rewarded
  As the result, the economy will prosper, with plenty of food and kinds of products
available to everyone

How Business Benefit the Community

- As people try to improve their own situation in life, Smith said, their efforts serve
as an ‘invisible hand’ that helps the economy growth and prosper through the
production of neededs goods, services, and ideas.
- The phrase invisible hand is used to describe the process that turns self-directed
gain into social and economic benefits for all.

- How do people working in their own self-interest produce goods, services, and
wealth for others?
 The only way farmers can become wealthy is to sell some of their crops to
others.
 To become even wealthier, they have to hire workers to produce more food.
 The farmers’ self-centered effortsto become wealthy lead to jobs for some and
food for almost all.

- Today, the porverty rate in US remains high and there is a great disparity between
the amount of money the wealthy have and the amount of money the poor have.
 The giving Pledge encourages the world’s weatheriest individuals and families
to donate the majority of their wealth to fight poverty, health issue, and
eduacation.

 It is important for business to be ethical as well as generous. Unthical practise

undermine the whole economic system.

2. Explain what capitalism is and how free markets work:

Understanding Free-Market Capitalism

- The economic system that has led to wealth creation in much of the world is
known as capitalism.
 Capitalism: an economic system in which all or most of the factors of
production and distribution (such as land, factories, railroads, and stores are
owned by individuals) are privately owned and operated for profit.

- Some countries have noticed the advantages of capitalism and have institutes what
has become known as state capitalism.
 Sate capitalism: is a combination of freer markets and some gorvernment
control. Ex: almost countries are controlled by state like Germany, US, UK.
- Under free-market capitalism, people have four rights:
 The right to own private proverty
 The right to own a business and keep all that business’s profits
  The right to freedom of competition
 The rigth to freedom of choices

How Free Markets Work

 A free market is on in which decisions about what and how much to produce are made
by the market-by buyers and sellers negotiating prices for goods and services.
 You and I and other consumers send signals to tell producers what to make, how
many, in what color, and so on.
 We do that by choosing to buy ( or not to buy) certain products and services.
How Prices Are Determined
 In a free market, prices are not determined by sellers: they are determined by buyers
and sellers negotiating in the marketplace.
The Economic Concept of Supply
 Supply: The quantity of products that manufacturers or owners are willing to sell at
different prices at a specific time.
 The amount sipplied will increase as the price incraese because sellers can make more
money with a higher price.
 FIGURE 2.1/page 35
 All thing being equal, the higher the price, the more the vendor will be willing
to supply

The Economic Concept of Demand

 Demand: the quantity of products that people are willing to buy at different
prices at a specific time.
 The quantity demanded will increase as the price decreases.
 FIGURE 2.2/page 35:
 All thing being equal, the lower the price, the more buyers are willing to buy.

The Equilibrium Point, or Market Price

 Price is the key factor in determining the quantities supplied anf demanded
 Through FIGURE 2.1 and 2.2, at the price of $15 the quantity of T-shirts demanded
and supplied are equal (25 shirts). That crossing point is known as the equilibrium
point or equilibrium price. In long run, that price will become the market price.
 Market price: is the price determined by supply and demand. It is the price toward
which the market will trend.
 Competition within Free Markets
Four different degrees of competition:
1) Perfect competiton: The degree of competition in which there are many sellers
in a market and none is large enough to dictate the price of a product.
2) Monopolistic competition: The degree of competition in which a large number
of sellers produce very similar products that buyers nevertheless perceive as
different.
3) Oligopoly: A degree of competition in which just a few sellers dominate the
market
4) Monopoly: A degree of competition in which only one seller controls the total
supply of a product and service, and sets the price.
Benefits and Limitations of Free Markets
 Benefits of the free markets:
- Allow open competition among companies
- Provide opportunities for poor people to work their way out of poverty
- Encourage businesses to be more efficent so they can successfully compete on
price and quality.
 Limitations:
- Some people let greed dictate how they act.
Ex: some businesspeople have deceived the public about their products, others have
decieved stockholders about the value of their stock, all in order to increase
executives’ personal assets.
 To overcome some of capitalism’s limitations, some countries have adopted an
economic system called socialism

3. Compare socialism and communism:

Understading Socialism
 Socialism: An economic system based on the premise that some, if not most, basic
businesses (e.g., steel mills, coal mines, and utilities) should be owned by the
government so that profits can be more evenly distributed among the people.
The Benefits of Socialism
- The major benefit of socialism is supposed to be social equality.
- Government takes income from wealthier people, in form of taxes, and
redistributes it to poorer people through various government programs.
 - Free education through college, free health care and free child care are some
benefits socialist governments, using the money from taxes, may provide to their
people.
- Workers usually get longer vacations, work fewer hours per week, and have more
employee benefits (e.g., generous sick leave).
The Negative Consequences of Socialism
 Socialism promises to create more quality than capitalism, but takes away some of
businesspeople’s incentives. It leads to brain drain.
 Brain drain: The loss of the best and brightest people to other countries.

 Socialism tends to result in fewer inventions and less innovation, because those
who come up with new ideas usually don’t receive as much reward as they
would in a capitalist system.

 Communism may be considered a more intensive version of socialism.

Understanding Communism
 Communism: is an economic and politiacal system in which the government makes
almost all economic decisions and owns almost all the major factors of production.

 Communism intrudes further into the lives of people than socialism does.

 One problem is that the government has no way of knowing what to produce, because
the prices don’t reflect supply and demand as they do in free markets.
 The government must guess what the people need.
 Shortages of many items, including food and clothing, may develop

 Another problem is that communism doesn’t inspire businesspeople to work hard

because the incentives are not there.

 Therefore, communism is slowly disappearing as an economic form.

UNDERSTANDING ECONOMICS AND HOW IT AFFECTS

BUSINESS (tóm tắt 4-5-6)
LO 2-4
ANALYZE THE TREND TOWARD MIXED ECONOMIES
The Trend Toward Mixed Economies
-The two major economic systems:
1.Free-market economies: exist when the market largely determines what
goods and services get produced, who gets them, and how the economy grows
=> Capitalism is the popular term for this economic system
2. Command economies: exist when the government largely decides what
goods and services will be produced, who gets them, and how the economy
will grow
=> Socialism and communism are variations on this economic system.
*neither free market nor command economies have resulted in optimal
economic conditions:
+Free- market mechanisms don't seem to respond enough to the needs of
those who are poor, elderly, or disabled
+ Some people: businesses in free-market economies have not done enough to
protect the environment.
+ Over time, free-market countries (the US) have adopted many social
(welfare) and environmental programs ( clean air, water acts)
+ Socialism and communism haven't always created enough jobs or wealth to
keep economies growing fast enough.
=>Communist governments are disappearing, and somne socialist
governments have been cutting back on social programs and lowering taxes on
businesses and workers to generate more business growth and more revenue.
The trend:
Mostly capitalist countries (like the United States) to move toward socialism
(more government involvement in health care).
For some socialist countries to move toward capitalism (more private
businesses, lower taxes)
=>Thus, the long-term global trend is toward a blend of capitalism and
socialism
=>The net effect: the emergence throughout the world of mixed economies.
Mixed economies: exist where some allocation of resources is made by the
market and some by the government.
Test pre:
1. What led to the emergence of socialism?( này kh tìm dc đáp án)
2. What are benefits and drawbacks of socialism?
– Benefits:
+ The government takes income from wealthier people, in forms of taxes…
+ Worker get longer vacations, work fewer hours, have more employer
benefits.
– Drawbacks: take away incentives, fewer intention and less innovation
3. What countries still practice communism?
– China, Vietnam, North Korea
5. What are the characteristics of a mixed economy?
- Government control of some institutions

Figure 2.4 ( cái hình này kh tìm dc)

Lo 2-5 :
UNDERSTANDING THE U.S ECONOMIC SYSTEM
Key Economic Indicator
-Three major:
+GDP
+ the unemployment
+ price indexes
1.Gross Domestic Product (GDP): the total value of final goods and services
produced in a country in a given year.
- Both domestic and foreign-owned companies can produce the goods and
services included in GDP (are located within)
- If growth in GDP slows or declines, businesses may feel many negative effects
- A major influence on the growth of GDP – The productivity of the workforce
- productivity: how much output workers create with a given amount of input
- The level of U.S. economic activity is actually larger than the GDP figures
show => those figures don't take into account the underground economy
- High GDP in the United States is what enables its citizens to enjoy a high
standard of living
- Gross output (GO) is a measure of total sales volume at all stages of
production
=> GO is almost twice the size of GDP=> Shows that consumer spending is the
effect, not the cause, of prosperity.
2. The Unemployment Rate: The unemployment rate refers to the percentage
of civi ians at least 16 years old who are unemployed and tried to find a job
within the prior four weeks.
- in 2013: unemployment rate : over 7%
- in 2017: unemployment rate : below 5%
- Many argue that the unemployment statistics don't accurately measure the
pain being felt by those who have been unemployed for a long time or those
who have simply given up looking for a job
4 types of unemployment:
- Frictional unemploymen:
+ have quit work because they didn't like the job, the boss, or the working
conditions
+ haven't yet found a new job
+ Whose entering the labor force for the first time (e.g., new graduates) or are
returning to the labor force after significant time away
-Structural unemplovment:
+ unemployment caused by the restructuring of firms or by a mismatch
between the skills (or location) of job seekers and the requirements (or
location) of available jobs 
- Cyclical unemployment:
+ because of a recession or a similar downturn in the business cycle
- Seasonal unemployment:
+ demand for labor varies over the year, as with the
harvesting of crops.
3. Price Indexes: help gauge the health of the economy by mea Suring the
levels of inflation, disinflation, deflation, and stagflation.
- Inflation is a general rise in the A situation in which price prices of goods and
services over time "too many dollars chasing too few goods"
- Disinflation: price increases are slowing.
- Deflation: when price increases when countries produce so many goods that
people cannot afford to buy them all (too few dollars are chasing too many
goods).

- Stagflation: when the economy is slowing but prices are going up anyhow
Consumer price index (CPI) consists of monthly statistics that measure the
pace of inflation or deflation. The government is relying more on the measure
of core inflation. That means the CPI minus food and energy costs.
Producer price index (PPI): change in prices at the wholesale level. => tracks
price changes in nearly all industries in the goods-producing sectors of the U.S.
economy.
Productivity in the United States
- increase in productivity = worker can produce more goods and services than
before in the same time period, usually thanks to machinery, technology, or
other equip-ment.
- Computer and other technology => make production faster and easier.
- The higher productivity is, the lower the costs are of producing goods and
services, and the lower prices can be
- High productivity through comput-ers and robots can lead to high
unemployment.
- the U.S. economy is a service eco omy. productivity is an issue because
service firms are so laborintensive.
The Business Cycle
The Business Cycle: the periodic rises and falls that occur in economies over
time.
Four phases of long-term business cycles
1.economic boom is just what it sounds like-business is booming.
2.Recession: two or more consecutive of decline in the GDP. In a recession
prices fall, people purchase fewer products, and businesses fail.=> high
unemployment, increased business failures, and an overall drop in living
standards.
3.Depression is a severe recession, usually accompanied by deflation.
4.Recovery occurs when the economy stabilizes and starts to grow. This
eventually leads to an economic boom, starting the cycle all over again.
- One goal of economists is to predict such ups and downs.( cannot predict
with certainty)
LO 2-6
Stabilizing the Economy through Fiscal Policy
- Fiscal policy refers to the federal government's efforts to keep the economy
stable by increasing or decreasing taxes or government spending. When the
government employs fis- cal policy it is following
- Keynesian economic theory is the theory that a government policy of
increasing spending and cutting taxes could stimulate the economy in a
recession.
- The first fiscal policy tool is taxation. Theoretically, high tax rates tend to slow
the economy because they draw money away from the private sector and put
it into the govern- ment. High tax rates may discourage small-business
ownership because they decrease the profits businesses can earn and make
the effort less rewarding. It follows, then, that low tax rates will theoretically
give the economy a boost.
- The second fiscal policy tool is government spending on highways, social
programs education., infrastructure (e.g., roads, bridges, and utilities), defense,
and so on. Such spend ing, however, can increase the national deficit. The
national deficit is the amount of money the federal govern ment spends
beyond what it collects in taxes for a given fiscal year.
One way to lessen deficits is to cut government spending. That doesn't happen
very often.
Using Monetary Policy to Keep the Economy Growing
- Monetary policy is the management of the money supply and interest rates
by the Federal Reserve Bank. The Fed a semiprivate organization that is not
under the direct control of the government but does have members appointed
by the president.
- The Fed's most visible role is the raising and lowering of interest rates. EX:
when the Eco is Booming => the Fed tends to raise interest rates.=> More
expensive to borrow money.
- The Fed also controls the money supply. the more money the Fed makes
available to businesspeople and others, the faster the econ- omy is supposed
to grow. To slow the economy (and prevent inflation), the Fed lowers the
money supply.
Sum up:
- two major tools for managing the economy of the United States
1.Fiscal policy (using government taxes and spending)
2. Monetary policy (the Fed's control over interest rates and the money
supply).