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Chapter 02 - Understanding Economics and How It Affects Business
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1. America's business success is largely due to an economic and social climate that allows
businesses to operate freely.
2. Global economics and politics have no significant influence on businesses in the United
States.
3. The study of how society chooses to employ resources to produce goods and services and
to distribute them for consumption among various competing groups and individuals is
known as sociology.
4.
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Economists study how people use resources to produce and distribute goods and services
for consumption among competing groups and individuals.
5. Macroeconomics is the economic perspective that looks at the operation of a nation's
economy as a whole.
6. Microeconomics focuses on the decisions and behavior of people and organizations in
particular markets.
7. Resource development is concerned with finding the best way to utilize the fixed amount
of resources a society has available.
8.
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Resource development is the study of how to increase resources and to create the
conditions that will make better use of those resources.
9. Peace and prosperity will flourish if we can find the one best way to divide existing
resources among nations.
10. Thomas Malthus believed that overpopulation was a major cause of poverty.
11. In developing nations of the world, population has leveled off and is not expected to
increase dramatically in the future.
12.
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Studies about the effects of population growth on the economy are part of
macroeconomics.
13. Economic progress can occur when business owners provide jobs and economic growth
for their employees, their communities, and themselves.
14. Economist Adam Smith's important contribution was an inquiry as to why some nations
are wealthy, while others remain poor.
15. Adam Smith believed the self-interest of businesspeople would lead them to create needed
goods, services, and jobs.
16.
Chapter 02 - Understanding Economics and How It Affects Business
The "invisible hand" in Adam Smith's theory turns self-directed gain into social and
economic benefits for all.
17. According to Adam Smith, the "invisible hand" refers to the government's effort to always
keep a check on the wealth creation of individuals, so that no one business would control a
market for a particular good or service.
18. A contemporary economic challenge is creating profitable businesses by selling goods and
services that contribute toward a healthier environment.
19. An economist is examining how consumers in the automobile market have responded to
recent price increases by car manufacturers. He is examining a microeconomic situation.
Feedback: Microeconomics examines the economic behavior of consumers and organizations
in particular markets.
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34.
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Free-market capitalism has made it more difficult for individuals to gain wealth.
35. Due to the fundamental rights afforded to us by a free-market capitalistic system; persons
are more willing to take calculated risks.
36. A free-market economic system is one in which the market of buyers and sellers decides
what is produced, how much is produced, and how it is distributed.
37. Under the basic principle of supply, as the price goes down, manufacturers and suppliers
of a product tend to supply less of the product to the market.
38.
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Demand refers to the quantity of a good that consumers are willing and able to buy at
different prices at a specific time.
39. At the equilibrium price, the quantity consumers desire to buy equals the quantity sellers
desire to sell.
40. If the quantity supplied in a market exceeds the quantity demanded, a shortage will exist.
41. If a shortage exists in a market for a good, the price of that good will tend to fall.
42.
Chapter 02 - Understanding Economics and How It Affects Business
The point of intersection between the supply and demand curves is called the stress
point.
43. In the long run, the market price tends to adjust toward the equilibrium point.
44. Countries that rely on a free market system are plagued by persistent shortages or
surpluses of goods and services.
45. One of the drawbacks of free markets is the fact that competition in such markets
undermines the ability of price to adjust to its equilibrium value in the long run.
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46. In perfect competition, each firm produces a product that is clearly differentiated from the
products of other firms in the same market.
47. A monopoly occurs when there is a single seller for a product or service.
48. Economists refer to a market in which a few sellers dominate the supply side as
monopolistic competition.
49. Product differentiation is a key to success in monopolistic competition.
50.
Chapter 02 - Understanding Economics and How It Affects Business
In the United States, laws prohibit the creation of most types of monopolies.
51. One strength of a free-market economic system is that it emphasizes the fair and humane
treatment of the less fortunate in society.
52. The greed of businesspeople represents one of the greatest dangers to the operation of a
free market system.
53. Fetna resides in a country where the economic system is primarily based on free market
capitalism. Fetna is likely to have the freedom to buy and sell property.
Feedback: The right to private property is the most fundamental of all rights under capitalism.
This right means that people can buy, sell, and use land, buildings, machinery, inventions, and
other forms of property. They can also pass the property on to their children.
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54. A surplus currently exists for a product called widgets. In a free market system, the
government must step in and buy any widgets that consumers do not buy in order to
eliminate the surplus and establish equilibrium.
Feedback: Markets for products tend to move toward equilibrium through price adjustments.
If there is a surplus of widgets, the price of widgets will fall, and buyers and sellers will adjust
until equilibrium is achieved. Thus, adjustments in market price will restore equilibrium
without government intervention.
55. In a free market economic system, the lack of government control and regulation means
that businesses find it easy to take advantage of customers by offering poor quality
products at high prices.
Feedback: One of the fundamental characteristics of free markets is competition. Because
businesses compete with each other, they must provide customers with quality products at fair
prices and offer good service. Firms that produce poor products, charge high prices, or
provide poor service will lose business to companies that provide customers with a better
deal.
56.
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History shows that free-market capitalism leads to a fair and equitable distribution of
wealth.
Feedback: In many nations, capitalism has led to an unequal distribution of wealth. In fact,
some businesspeople have sought personal gain through the exploitation of workers.
Examples of this sort of exploitation include child labor, sweatshops employing immigrants
for long hours at low wages under dismal working conditions, and even outright slavery.
57. Jill owns a bakery that specializes in cheesecakes. Until recently, Jill charged a price of
$12 for each cheesecake. At this price Jill's customers bought an average of 84
cheesecakes each week. For the last few weeks, she has reduced her price to $10.50 per
cheesecake, and her customers have purchased an average of 96 cheesecakes each week.
These results are consistent with the economic concept of demand.
Feedback: Generally speaking, the quantity demanded tends to rise when the price of a good
falls.
58.
Chapter 02 - Understanding Economics and How It Affects Business
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Monica notices that just a few big companies produce the vast majority of soft drinks. She
would be correct in describing the soft drink industry as an oligopoly.
Feedback: An oligopoly exists when a few large sellers dominate a market. Examples of
oligopolistic markets include aircraft, automobiles, soft drinks, and breakfast cereals.
59. GLAMOR GAL, a popular women's cosmetics company is gaining popularity among
younger women. Differentiating itself from the sea of companies that compete for the
same business, it focuses on products for sensitive, youthful skin. GLAMOR GAL clearly
operates in an oligopolistic environment.
Feedback: GLAMOR GAL competes against several companies. Monopolistic competition
refers to a large number of sellers who produce very similar products. Buyers perceive the
products to be different due to the firms' ability to differentiate themselves from each other.
An oligopoly is a market in which just a few sellers dominate the market.
60.
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GLAMOR GAL is a popular cosmetics company. Although it is gaining in popularity
among younger women, its promotional strategy continues to focus on the shadow-free
finish that it produces on almost any skin type. Due to the fact that its industry faces
monopolistic competition, the company knows that it must continue to differentiate itself
from the competition.
Feedback: GLAMOR GAL competes against several companies. Monopolistic competition
refers to a large number of sellers who produce very similar products. Buyers perceive the
products to be different due to the firms' ability to differentiate themselves from each other.
61. As you drive to school in the morning, you will probably flip through several radio
stations before deciding to settle on one for the duration of the drive. For instance: you can
listen to a "fair and balanced" talk show; an "intelligent talk" program; an interactive
"call-in" talk show; a "right-wing" political talk show; a "self-improvement" talk show;
and, even an "all sports" talk show. With so much monopolistic competition in radio
programming, radio stations focus on offering you something just a little different.
Feedback: Monopolistic competition refers to a large number of sellers who produce very
similar products. Buyers perceive the products to be different due to the firms' ability to
differentiate themselves from each other.
62.
Chapter 02 - Understanding Economics and How It Affects Business
Roland is a nation with an economic system that closely approximates pure capitalism.
While Roland's economy is likely to generate a great deal of wealth, it may do a poor job
of providing an acceptable level of income for the elderly or disabled.
Feedback: A strength of capitalism is its ability to generate wealth. A weakness of capitalism
is that it results in a very unequal income distribution that may not be very responsive to those
who are too old or infirmed to compete in the market system.
63. In the newspaper this morning, you read about the downfall of a multi-national
entertainment business, and a report that the company's CEO enjoyed a 9% increase in his
salary during the same year that the company's profits were down 35%. As you read
further, you learn that the company's board of directors approved undeserved salary
increases. Clearly, this is an example of how inequality and greed can infiltrate the free-
market economic system.
Feedback: One of capitalism's limitations is the fact that it has brought "inequality" to many
parts of the world. Without government regulation, greed can perpetuate in this type of
economic system. Business owners and business executives can often negotiate higher
salaries and bonuses that are not based on performance.
