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Question: Please no handwriting. No copying. Objective: Examine the nature of economics and economic activi...

Please no handwriting. No copying.

Objective: Examine the nature of economics and economic activities that impact small business.

Introduction: You will explore the economic principles and concepts pertinent to small-business ownership. You will determine the characteristics of the economy in which your business will operate, whether your business will provide goods or services, and the potential impact that government decisions will have on your business and how to plan accordingly.

This lesson provides an in depth observation of the economy and government regulations for small business. The first topic provides insight into the types of economic systems.

Deliverables

The essay for this lesson is required to be a minimum of 3- full pages (to exclude title and reference pages) which clearly demonstrate your understanding of the activity. Essays should have a clear introduction, thesis statement and conclusion, written in APA format (APAstyle.org).

Activity Details
Step 1: Read the following questions, and use what you have learned about Economic Activities to summarize your responses in a 3 full pages (to exclude the title and reference pages) (APA formatting required):

Describe your ideal capitalist economy. What indicators would you use to measure goods and services? What happens when the quantity demand is impacted?

Describe your socialist economy. Explain whom goods and services will be produced for. What happens when price flooring is in effect, and how does it impact your labor market?

Step 2: Review the materials and conduct additional topic research to demonstrate application of the concepts in a real world business environment.

Step 3: Write a paper.

Explanation / Answer

Step 1: Ideal capitalist economy as per my understanding would be charcaterized by the following principles:

There is no mystery to what a capitalist economy is. Whether we are talking about the economy of Los Angeles, The US, or the whole world, an economy is just a group of people dealing with one another as they go about their lives. An ideal capitalist economy will be governed by the following characteristics:

- People face trade- offs- We all are familiar with the old saying, “There ain't no such thing as a free lunch." It is quite true because in order to get one thing we usually have to give up another thing i.e. making decisions requires trading off one goal against another. For example- Government face trade off every time it thinks of designing some policy. Consider for instance, policies aimed at equalizing the distribution of economic well-being. Some of these polices, such as welfare system or u reduce efficiency employment insurance, try to help the members of society who are most in need. Others such as the individual income tax, ask the financially successful to contribute more than others to support the government. While achieving greater equality, these policies reduce efficiency. When the government redistribute the income from rich to poor, it reduces the reward of working hard; as a result people work less and produce fewer goods. In other words, when the government tries to cut the economic pie into more equal slices, the pie gets smaller. Therefore, in an ideal capitalist economy, there will always be tradeoffs between available options

- The cost of something is what you give up to get it- Because people face tradeoffs, making decisions require comparing the costs and benefits of alternative courses of action. When a person takes a decision, he should consider the opportunity cost of his alternatives.

- Rational people think at margin- In an ideal capitalist economy, a rational decision maker takes an action if and only if the marginal benefit of the action exceeds the marginal cost

-People respond to incentives- Incentives are crucial to analyzing how markets work. For example- when the price of an apple rises, people decide to eat less apples. At the same time, apple orchards decide to hire more workers and harvest more apples. In other words, a higher price in a market provides an incentive for buyers to consume less and an incentive for sellers to produce more.

- Trade can make everyone better off- Countries benefit from the ability to trade with one another. Trade allows countries to specialize in what they do best and to enjoy a greater variety of goods and services

- Markets are usually a good way to organize economic activity- At first glance success of market is puzzling. In a market economy, no one is looking out for the economic well- being of society as a whole. Free markets contain many buyers and sellers of numerous goods and services, and all of them are interested primarily in their own well-being. Yet despite decentralized decision making and self-interested decision makers, market economies have proven remarkably successful in organizing economic activity to promote overall economic well-being.

- Government can sometimes improve market outcomes- One reason we need government is that the invisible hand can work its magic only if the government enforces the rules and maintains the institutions that are key to a market economy.

- A country’s standard of living depends on it stability to produce goods and services- The relationship between productivity and living standards also has profound implications for public policy.

Society faces a short run trade-off between inflation and unemployment- Policymakers can exploit the short-run tradeoff between inflation and unemployment using various policy instruments. By changing the amount that the government spends, the amount it taxes, and the amount of money it prints, policymakers can influence the combination of inflation and unemployment that the economy experiences in the short run.

Indicators used to measures good and services are mentioned below:

Since question doesn’t specifically mentioned whether quantity demanded decreased or increased, I will explain the both:

When quantity demanded increased – it means that as price decreases, the quantity demanded increases. Any change or movement to quantity demanded is depicted as a movement of the point along the demand curve and not a shift in the demand curve itself. ... A shift in the demand curve itself only happens in the long run and comes as a change to equilibrium.

When quantity demanded decreased- a decrease in quantity demanded is the result of an increase in price. The decrease in quantity demanded moves along the demand curve but does not shift the curve itself.

Socialist economy- Socialism is very easily pinned down to 2 characteristics that are interdependent on one another.

Worker Ownership and Control of the Means of Production-This basically means that the workers that work at the factory, own the factory and run it themselves, basically everyone owns all the businesses together, in more modern times, as socialism has evolved from Marx’s times, this could also mean ownership by the whole of society of certain things, for instance everyone in the community owns all the houses, and when they reach a certain age, they can move into one.

Abolition of Wage Labor-Basically what this means is you get the full value of your labor, let’s say you’re a chair maker, you obviously make chairs, under capitalism, your boss tells you to make 10 chairs an hour, each of these chairs gets sold to a distributor for 15 dollars, so you just created $150 in one hour, minus overhead cost, that leaves the value of your labor, at let’s just say $50, but you don’t get $50, in fact you’re lucky if you even make $15. Now under Socialism, you show up to work, there’s no boss to tell you what to do, depending on how your fellow workers decide to run the business, you may have an hourly goal, or you might just work at your own pace, so let’s say that you make 10 chairs an hour, same as before, they also sell to a distributor for $15 dollars, giving you $150, minus overhead, let’s just assume overhead costs are the same as under capitalism, although they might change, after all why would a company owned and managed by workers need an entire bureaucracy of managers, CEO’s, etc.? Although some real life co-operatives have decided to keep managers, remember it’s whatever the workers decide. But anyway, you have $50 left over after all the overhead, and it’s 100% yours to keep for yourself.

Effects of price floor on the market outcomes

Let us take an example of the government which is persuaded by the pleas of the National organization of Ice cream makers whose members feel the $ 3 equilibrium price is too low. In this case government might institute a price floor (an attempt by the government to maintain prices at the other than equilibrium levels). Now as government imposes a price floor on the ice cream market, two outcomes are possible. If government imposes a price floor of $2 per cone when equilibrium is $3. We obtain the outcome in panel a) In this case because the equilibrium price is above the price floor, the price floor is not binding. Market forces naturally move the economy to the equilibrium, and price floor has no effect. Panel b) shows what happens when the government imposes price floor of $4 per cone. In this case, because the equilibrium price of $3 is below the floor, the price floor is a binding constraint on the market. The market forces will tend to drive prices upward but when the market price hits the floor, it can fall no further. Binding price floor cause a surplus.

There is no mystery to what a capitalist economy is. Whether we are talking about the economy of Los Angeles, The US, or the whole world, an economy is just a group of people dealing with one another as they go about their lives. An ideal capitalist economy will be governed by the following characteristics:

- People face trade- offs- We all are familiar with the old saying, “There ain't no such thing as a free lunch." It is quite true because in order to get one thing we usually have to give up another thing i.e. making decisions requires trading off one goal against another. For example- Government face trade off every time it thinks of designing some policy. Consider for instance, policies aimed at equalizing the distribution of economic well-being. Some of these polices, such as welfare system or u reduce efficiency employment insurance, try to help the members of society who are most in need. Others such as the individual income tax, ask the financially successful to contribute more than others to support the government. While achieving greater equality, these policies reduce efficiency. When the government redistribute the income from rich to poor, it reduces the reward of working hard; as a result people work less and produce fewer goods. In other words, when the government tries to cut the economic pie into more equal slices, the pie gets smaller. Therefore, in an ideal capitalist economy, there will always be tradeoffs between available options

- The cost of something is what you give up to get it- Because people face tradeoffs, making decisions require comparing the costs and benefits of alternative courses of action. When a person takes a decision, he should consider the opportunity cost of his alternatives.

- Rational people think at margin- In an ideal capitalist economy, a rational decision maker takes an action if and only if the marginal benefit of the action exceeds the marginal cost

-People respond to incentives- Incentives are crucial to analyzing how markets work. For example- when the price of an apple rises, people decide to eat less apples. At the same time, apple orchards decide to hire more workers and harvest more apples. In other words, a higher price in a market provides an incentive for buyers to consume less and an incentive for sellers to produce more.

- Trade can make everyone better off- Countries benefit from the ability to trade with one another. Trade allows countries to specialize in what they do best and to enjoy a greater variety of goods and services

- Markets are usually a good way to organize economic activity- At first glance success of market is puzzling. In a market economy, no one is looking out for the economic well- being of society as a whole. Free markets contain many buyers and sellers of numerous goods and services, and all of them are interested primarily in their own well-being. Yet despite decentralized decision making and self-interested decision makers, market economies have proven remarkably successful in organizing economic activity to promote overall economic well-being.

- Government can sometimes improve market outcomes- One reason we need government is that the invisible hand can work its magic only if the government enforces the rules and maintains the institutions that are key to a market economy.

- A country’s standard of living depends on it stability to produce goods and services- The relationship between productivity and living standards also has profound implications for public policy.

Society faces a short run trade-off between inflation and unemployment- Policymakers can exploit the short-run tradeoff between inflation and unemployment using various policy instruments. By changing the amount that the government spends, the amount it taxes, and the amount of money it prints, policymakers can influence the combination of inflation and unemployment that the economy experiences in the short run.

Indicators used to measures good and services are mentioned below:

Since question doesn’t specifically mentioned whether quantity demanded decreased or increased, I will explain the both:

When quantity demanded increased – it means that as price decreases, the quantity demanded increases. Any change or movement to quantity demanded is depicted as a movement of the point along the demand curve and not a shift in the demand curve itself. ... A shift in the demand curve itself only happens in the long run and comes as a change to equilibrium.

When quantity demanded decreased- a decrease in quantity demanded is the result of an increase in price. The decrease in quantity demanded moves along the demand curve but does not shift the curve itself.

Socialist economy- Socialism is very easily pinned down to 2 characteristics that are interdependent on one another.

Worker Ownership and Control of the Means of Production-This basically means that the workers that work at the factory, own the factory and run it themselves, basically everyone owns all the businesses together, in more modern times, as socialism has evolved from Marx’s times, this could also mean ownership by the whole of society of certain things, for instance everyone in the community owns all the houses, and when they reach a certain age, they can move into one.

Abolition of Wage Labor-Basically what this means is you get the full value of your labor, let’s say you’re a chair maker, you obviously make chairs, under capitalism, your boss tells you to make 10 chairs an hour, each of these chairs gets sold to a distributor for 15 dollars, so you just created $150 in one hour, minus overhead cost, that leaves the value of your labor, at let’s just say $50, but you don’t get $50, in fact you’re lucky if you even make $15. Now under Socialism, you show up to work, there’s no boss to tell you what to do, depending on how your fellow workers decide to run the business, you may have an hourly goal, or you might just work at your own pace, so let’s say that you make 10 chairs an hour, same as before, they also sell to a distributor for $15 dollars, giving you $150, minus overhead, let’s just assume overhead costs are the same as under capitalism, although they might change, after all why would a company owned and managed by workers need an entire bureaucracy of managers, CEO’s, etc.? Although some real life co-operatives have decided to keep managers, remember it’s whatever the workers decide. But anyway, you have $50 left over after all the overhead, and it’s 100% yours to keep for yourself.

Effects of price floor on the market outcomes

Let us take an example of the government which is persuaded by the pleas of the National organization of Ice cream makers whose members feel the $ 3 equilibrium price is too low. In this case government might institute a price floor (an attempt by the government to maintain prices at the other than equilibrium levels). Now as government imposes a price floor on the ice cream market, two outcomes are possible. If government imposes a price floor of $2 per cone when equilibrium is $3. We obtain the outcome in panel a) In this case because the equilibrium price is above the price floor, the price floor is not binding. Market forces naturally move the economy to the equilibrium, and price floor has no effect. Panel b) shows what happens when the government imposes price floor of $4 per cone. In this case, because the equilibrium price of $3 is below the floor, the price floor is a binding constraint on the market. The market forces will tend to drive prices upward but when the market price hits the floor, it can fall no further. Binding price floor cause a surplus.

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