Chapter Outline

Economics

Economics:

• the study of producing and distributing goods and services and how those activities relate to buying, selling, and making a profit
• the study of the role of the government in regulating business activities
• the study of how a society accumulates and distributes wealth

Economic Systems

• A primitive economy is an economic system in which the acquisition and distribution of goods and services is completely absorbed within the traditional mode of existence as a whole.
• Capitalism is an economic system that is based on the private ownership of property and the resources of production.
• Socialism is an economic system in which a country’s major industries may be owned privately or publicly but are subject to governmental control.
• Communism is an economic system in which property is owned by the state and all citizens share in the common wealth, more or less according to their need.

Development of the Modern Economy

• The modern economy first developed in Europe during the late Middle Ages.
• Political fragmentation created a situation that allowed for the growth of freedom and the economy.
• The modern economy did not emerge in Europe as the result of deliberate planning, but rather as a response to local conditions.

Supply and Demand

• Supply is the quantity of goods and services available for sale.
• Demand is the desire and ability of consumers to buy a product or service.
• According to the law of supply and demand, the market prices of goods and services are determined by the relationship of supply to demand.

Measures of Economic Activity

Measures of economic activity give an indication of how the economy is doing and where it might be heading.

• The Dow Jones Industrial Average, a widely watched economic indicator, measures the value of the stocks of a group of large companies that are considered central to the United States economy.
• Other economic indicators include the Gross Domestic Product (GDP), the rate of inflation, and the unemployment rate.

The Business Cycle

Both the GDP and the Gross National Product (GNP) tend to fluctuate in a pattern called the business cycle.

• A period of growth, or a boom, is followed by a period of slowdown called a recession.
• If a recession is very severe, it is called a depression.
• The last, as well as the worst, depression in American history, called the Great Depression, occurred in the 1930s.

The Role of Government in the Economy

• Government can help an economy by providing security, requiring dependable standards, providing trustworthy courts, enforcing laws, and maintaining international agreements.
• Government can hurt an economy by being corrupt, conducting unfair trials, oppressing and exploiting residents, and spending unwisely.
• Government can influence economic activity through its taxation policy and enforcement.

Financial Institutions

Financial institutions accept deposits, lend money, safeguard and transfer funds, guarantee creditworthiness, and exchange money.

• Savings banks, savings and loan associations, and credit unions are primarily for individuals.
• Commercial banks work primarily with businesses.
• Central banks are bankers to the government and other banks.
• International financial institutions provide banking and financial services to governments and nations.

Personal Finances

• You have a variety of choices in managing your financial needs through credit cards, checking accounts, and debit cards.
• When selecting how you will manage your finances, you need to be able to read and understand the details of each arrangement, including its advantages and disadvantages for you.

Distribution of Wealth

The distribution of wealth is the way that money is divided among the people in a group, country, or the world.

• The disparity between the rich and the poor is growing larger.
• The unequal distribution of wealth, both between rich and poor individuals and rich and poor nations, is a potentially explosive issue that will almost inevitably have a continuing impact on current events.

Economic Development

Economic development is encouraged by the following practices:

• inventiveness and ingenuity
• organization and efficiency
• utilization of natural and human resources