The American Economic System - Assignment Example

1. Business is best defined as the organized effort of individuals to produce and sell the goods and services that satisfy society’s needs, for a profit. In order to start and operate a business, the four kinds of resources that must be combined are material, human, financial, and informational. 2. Capitalism is an economic system where individuals own and operate the majority of businesses that provide goods and services. There are two types of command economies called socialism and communism. In socialism, the state owns the key industries and possibly the raw materials or resources used in the industry. In communism, the government owns almost all economic resources and the people work to contribute to the benefit of the society. Since the governments in the command economies decide the products that will be produced, usually considering the need of the government only, the consumer has the greatest influence in the capitalist economy. 4. A free enterprise is a system where individuals decide what to produce, how to produce it, and at what price to sell it. The American economic system allows for a large amount of freedom individuals and businesses. Within reason, businesses can produce any legal good or service they choose and sell it at the price they set. This is why our system is called a free enterprise system. 5. The four economic questions are: what goods and services, and how much of each, will be produced; how will these goods and services be produced; for whom will these goods and services be produced; and who owns and who controls the major factors of production. In a free enterprise economy, the individuals or businesses are free to answer each question within the limit of the laws of the government. The consumer has a voice in answering these questions by demanding that specific products are offered. Without a demand, there is no production in a capitalist economy. The government simply looks out for the best interests of the consumer and ensures that competition can exist within each industry for businesses to grow and prosper. 6. There are four types of competition that include perfect competition, monopolistic competition, oligopoly competition, and a monopoly. Perfect competition exists where there are many buyers and sellers of a product and no single buyer or seller is powerful enough to impact the price of the product. Monopolistic competition exists where there are many buyers and sellers, but the sellers all provide a similar product and using product differentiation to compete. An oligopoly is a situation where there are few, very large sellers. Although the number of competitors is low, it takes high investments to compete within this market. Lastly, a monopoly is where there is only one seller and the seller is likely able to control the price of the product. Monopolistic competition is usually most existent within the markets of the United States economy because the government has formulated anti-trust laws to ensure that competition does exist, and product differentiation allows for multiple companies to promote their products slightly different. With business competition, each business is working to outperform the competitors and make the highest profit possible. This forces businesses to be as efficient as possible in the production and to deliver the best product that is high in quality so that the customer will buy from them. 7. The circular flow of resources works in a clockwise and counter-clockwise motion. Each motion shows the relationship of businesses, product markets, households, resource markets and government in their relation to one another. For instance, businesses provide goods and services to the product markets, which then are provided to the households or individuals. These individuals pay with money or services for the products and this is sent into the resource markets, which is sent back to the businesses so they can continue to provide goods and services. In the other direction, businesses hire individuals to work for them which provide wages, rent, and interest to the resource markets, which in turn provides income to the household or individual. The individuals or households spend their money as consumers to the product markets on goods and services, which goes back to the businesses to pay their employees wages. The government acts as a participant in the system by offering services that private companies and individuals cannot provide for themselves, such as national defense, public safety and education. These services cost money, so the businesses and households pay taxes for the government to provide them. This is a very simple process and works very efficiently for each player involved. 9. An absolute advantage is the ability to produce a specific product more efficiently than any other nation. A comparative advantage is the ability to produce a specific product more efficiently than any other product. With absolute advantage, a country can produce a product more efficiently than any other country; however, with comparative advantage, the country can produce a product more efficiently than any other product can be produced. The difference is that the products may be in the same country, but one product is produced better than the other for comparative. In absolute, no country can produce the same product as efficiently as the other. Specialization comes in to play because countries may take pride in producing a specific product over any other product, which makes them more likely to have an absolute advantage in the international marketplace. On the other hand, specialization of rice may not be as efficiently produced as another country’s specialization of steel, so the comparative advantage is different and harder to assess. 10. A tariff is a tax levied on a particular foreign product entering a country. Nontariff barriers, or nontax measures, also help favor domestic products over foreign-supplied products. These barriers include an import quota or limit on the amount of a particular good, an embargo or complete halt of trading with a particular nation or in a particular product, a foreign-exchange control that restricts the amount of a foreign currency that can be purchased or sold, and finally currency devaluation reduces the value of a nation’s currency as it relates to currencies of other countries. These restrictions can be used to equalize a nation’s balance of payments, to retaliate for another nation’s trade restrictions, or to protect new or weak inductions, national security, and the health of citizens or domestic jobs. Harsh restrictions can negatively impact the trade with another country and can hurt the nation’s economy. Weak restrictions can also negatively impact the economy by hurting the domestic companies and their abilities to compete in the international marketplace. 14. A sole proprietorship is a business that is owned and usually operated by one person. Advantages of a sole proprietorship are that they are easy to start up or close down, individuals have a sense of pride of ownership; the individual retains all profits and has flexibility of being their own boss without having any special taxes. Disadvantages of a sole proprietorship are that they have unlimited liability, a lack of continuity, lack of money, limited management skills, and difficulty in hiring employees. An owner-owned and owner-operated LLC can be a little bit different because there may be special taxes that must be paid. An LLC also has limited liability and personal-asset protection, while a sole proprietorship does not. The LLC would be preferred if there is a potential for multiple owners so that the company could end up getting the benefits of a partnership, while not have some of the taxes of a partnership. 15. A general partnership is a co-owned business by two or more general partners who are each liable for everything the business does. Depending on the number of owners, the partnership may have unlimited liability, similar to that of a sole proprietorship. A partnership can also be more appealing to a customer because of the multiple talents and managerial skills of the owners that are running the company. Partnerships usually reduce or completely eliminate the lack of money, managerial skills and difficulty in hiring employees that are all disadvantages of a sole proprietorship. Read More