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Chapter 02 - Understanding Economics and How It Affects Business
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64. As you scan the national news online, you read about the BXY Utility Company's latest
problems. The story describes an expansive retaining wall that collapsed during a flood
last week, spewing toxic coal ash, burying homes, and causing a few fatalities. An
editorial claims that the company will not be held accountable to the same standards as the
asbestos companies of a few years back that paid severe fines and even went out of
business due to their lack of attention to environmental clean-up. You agree with the
writer because you recently studied about the various competitive markets and utility
companies clearly fall under monopolistic competition.
Feedback: Utility companies are considered regional monopolies. The U.S. legal system has
permitted monopolies in the markets for public utilities that sell natural gas, water, and
electric power. As is often the case, when there is only one company serving a wide area,
consumers do not have a choice, and the firms are not as eager to maintain their capital
investments.
65. The PowerHouse Utility Company recently built a nuclear power plant in a southern state
and started competing against BXY Utility Company that has served customers in that
region for 65 years. Due to deregulation, consumers now have a choice among utility
companies in this area. Although PowerHouse has made a sizeable capital investment, if it
successfully grows market share, eventually prices for electricity may stabilize or fall.
Feedback: New legislation has ended the monopoly status of utilities in some areas of the
U.S., permitting new competitors to seek customers in regions where they could not operate in
the past. The purpose of deregulation is to increase competition among these utility
companies, and to eventually lower prices for consumers.
66.
Chapter 02 - Understanding Economics and How It Affects Business
Socialists believe that the primary economic function of the government is to promote
rapid economic growth.
67. In socialist economies, the government owns some, if not most basic businesses such as
telecommunications systems and utilities.
68. The top tax rate on personal income in most socialist economies is usually lower than the
top tax rate on personal income in capitalist economies.
69. The major benefit of socialism is that it creates strong incentives to work hard and take the
risks associated with starting and operating a business.
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81. Countries that wish to avoid shortages and surpluses of goods should adopt a communist
system.
Feedback: In a communist system, prices do not reflect supply and demand as they do in a
free market system. Thus, the government has no way of knowing what to produce to best
satisfy the wants of consumers.
82. Workers in nations who are strong proponents of communism work much harder and
longer hours.
Feedback: Communism is a political system of a command economy that favors government
ownership of most property and government control over most economic decisions. Under a
communist system, the government generally maintains a great deal of control over its
citizen's lives. Businesspeople are not inspired to work hard because the government takes
most of their earnings.
83.
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In the small nation of Equalia, the government owns several of the key businesses and
provides a wide range of social services. The government places a great deal of emphasis
on eliminating large disparities in people's incomes. These features of Equalia's economy
are consistent with a socialist economic system.
Feedback: Socialism is based on the premise that the government should own basic
businesses in order to distribute profits more evenly. In most socialist economies, the
government provides a wide range of social services and emphasizes an even distribution of
income.
84. Abby left her native land in Eastern Europe in order to become a nanny for a family in a
western suburb of Chicago, Illinois. One of the benefits of her arrangement was that she
could attend the community college near her family's residence. When she arrived at her
new job, she experienced the differences from a predominately socialist nation and a
capitalist nation. Abby noted that public transportation in northern Illinois was limited and
expensive, making it difficult to get to school. For a negligible fee, the government in her
native country provided public transportation for everyone. Abby's native country's
economic system was more characteristic of socialism.
Feedback: Socialism is an economic system based on the premise that some, if not most,
basic businesses such as steel mills, coal mines, and utilities should be owned by the
government so that profits can be more evenly distributed among the people. Nations that
practice socialism usually collect higher taxes than those that practice capitalism, in order to
pay for things such as transportation that are offered to everyone.
85.
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Socialism and communism are both variations of a free-market economy.
86. In command economies, the government plays a major role in deciding which goods are
produced and who will get them.
87. Governments that were predominantly capitalistic are moving toward socialism, while
governments that were predominantly socialistic are moving toward capitalism.
88. Like most nations, the United States has a mixed economy.
89.
Chapter 02 - Understanding Economics and How It Affects Business
Most countries throughout the world can be classified as either purely capitalist or purely
socialist.
90. There is general agreement in the United States on the degree to which the government
should be involved in the economy.
91. Subtle differences such as the right to one's religious preference make the command
economic system known as communism more like a mixed economy than a socialistic
system.
Feedback: Mixed economies evolve when governments recognize the negative effects of
purely capitalist or purely socialist or communist systems, and implement programs that
capture the characteristics of the other economic systems in the hopes of creating a more
balanced economy.
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92. In the past, socialist nations have realized that some of the government run businesses do
not grow as quickly as businesses that operate for a profit.
Feedback: Under socialism, basic industries such as telecommunications, utilities, and,
broadcasting are usually owned and managed by the government. Tax revenues pay for the
maintenance of these industries. They often lag behind similar industries in other countries
that are privately owned and operated for a profit. In socialist nations, the taxes collected to
support these industries are not enough.
93. Although mixed economies tend to improve economic conditions, moral values prevent
communist nations such as China and Vietnam from progressing in this direction. Overall,
economic progress continues to be very slow in these nations.
Feedback: China and Vietnam recognize the economic benefits of opening their doors to new
business and permitting these businesses to operate without government intervention.
94.
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In a mixed economy, the government's goal is to grow the economy and maintain some
measure of social equality.
Feedback: Mixed economies exist when the market and the government are both involved in
the allocation of resources. Socialist economies have adopted some elements of free market
systems in order to stimulate more growth, while free market economies have adopted a larger
role for the government to promote a more equitable distribution of income.
95. Sweetland is a nation that publicly supports a free market economy with private
ownership of businesses. Over time, the government of Sweetland has developed policies
designed to help the needy and reduce the level of income inequality. It pays for these
programs by levying relatively high taxes on businesses and workers. These arrangements
suggest that the economy of Sweetland is trending toward pure capitalism.
Feedback: Pure capitalism is a system that emphasizes individual freedom and the profit
motive. Socialism, on the other hand, emphasizes wealth equality. To achieve that goal,
socialist countries levy high taxes to provide for social programs designed to bring about a
more equitable distribution of wealth. Sweetland has elements of both capitalism and
socialism, so it is best classified as a mixed economy.
96.
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Deanne is a vocal critic of socialism. She likes to point out that in recent years the
governments in many socialistic nations have cut back on government services and have
reduced taxes. Deanne believes that this trend will ultimately result in all nations adopting
pure capitalistic ideals. Recent evidence suggests that Deanne's views are essentially
correct.
Feedback: It is true that the governments of many socialist nations have reduced their social
programs and have cut taxes, which suggest a movement to become more like free-market
economies. However, they have not totally abandoned the socialist approach. Also, Deanne's
observations ignore the increasing government involvement in many free-market economies.
The result of these trends is the emergence of mixed economies rather than a move toward
pure free-market or pure command economies.
97. Recently, Hugo Chavez, the Prime Minister of Venezuela announced that he is standing
behind the concept of state owned utilities and public schools in his nation. Although not
all industry is owned and managed by the government, his ideas would lead one to believe
that he has a preference for socialism.
Feedback: Socialism is a command economic system where the government owns and
operates some of the major industries such as the transportation industry, utilities,
telecommunications and broadcasting, and the school system.
98.
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Most nations recognize that private enterprise is detrimental to business growth and
what is best for consumers. Recently, a nation had the opportunity to sell its
government-owned telecommunication system to a private firm. Instead it realized that
it would be better off if it raised taxes so that it could maintain the status quo.
Feedback: Privately owned businesses tend to grow and prosper as compared to businesses
that are owned by governments. Governments are often unable to financially support these
businesses at much beyond a level of subsistence. Most countries that have sold or privatized
their government held businesses have found that these particular industries have expanded at
a faster rate.
99. We use indicators such as (1) the gross domestic product (GDP), (2) the interest rate,
and (3) the price indexes to measure the health of our economy.
100. The total value of a country's output of final goods and services in a given year is
known as the gross domestic product (GDP).
101.
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As of 2010, total GDP in the United States was around $14 trillion.
102. Any output produced by U.S. firms is included in the value of U.S. GDP, even if the
output was produced in a foreign country.
103. GDP figures do not include the value of illegal activities.
104. To be classified as unemployed, a person must be at least 16 years old and trying to
find a job within the past four weeks.
105.
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In 2010, the U.S. unemployment rate was at its lowest point in 10 years.
106. Frictional unemployment occurs because the economy is experiencing a recession.
107. Structural unemployment refers to 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.
108. Inflation refers to a general rise in the prices of goods and services over time.
109.
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Inflation refers to the persistent rise in the purchasing power of money.
110. Disinflation refers to a situation in which prices continue to rise, but not at the rate
they were rising previously.
111. Deflation means prices are declining.
112. The consumer price index (CPI) measures what is happening to prices at the wholesale
level.
113.
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The CPI measures the pace of inflation or deflation.
114. The CPI is based on the prices of a carefully selected market basket of goods, all of
which consumers can purchase at a supermarket.
115. Some wages, tax brackets, interest rates, and government benefits are based on the
CPI.
116. Core inflation figures omit healthcare prices, but not energy prices.
117.
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The producer price index measures what is happening to prices at the wholesale level.
118. Productivity of workers in the U.S. is helped by the use of better machinery.
119. The higher the measurement of productivity, the higher the likely costs of production.
120. An increase in productivity means that a worker is now able to produce more goods
and services in the same amount of time.
121.
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As productivity increases, the cost of producing goods and services is likely to fall.
122. In the service sector of the economy, the influx of machinery such as computers
increases output per worker, but does little to improve the quality of services.
123. Current measures of productivity in the service sector provide an accurate measure of
changes in the quality of output.
124. An economy is said to be in a recession if GDP declines for two or more consecutive
quarters.
125.
Chapter 02 - Understanding Economics and How It Affects Business
A depression is a severe recession that is often accompanied by deflation.
126. A prediction that GDP will increase significantly over the next six months is bad news
for most businesspeople.
Feedback: An increase in the GDP would indicate that the output of final goods and services
is rising. This indicates a healthy and growing economy, which would be good news to most
businesses.
127. Although changes in the CPI provide interesting insights into the overall performance
of the economy, these changes have little practical impact on the lives of ordinary
people.
Feedback: Changes in the CPI indicate whether the economy is experiencing inflation,
disinflation, or deflation. For example, a significant increase in the CPI indicates that prices of
a wide variety of consumer goods are rising. Moreover, changes in the CPI can directly
influence the wages some people receive (through cost of living adjustments), the interest
rates some people pay, the benefits the government pays to various recipients, and the tax
brackets that are used to determine the income tax rate applied to earnings.
128.
