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How Economics Affects Business: The Creation and Distribution of Wealth
Nickels
2
2-1
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McHugh
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McHugh
1-1
McGrawHill/Irwin Understanding Business, 8e
2008 The McGrawHill Companies, Inc., All Rights Reserved.
CHAPTER
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The MAJOR BRANCHES of ECONOMICS
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What Is Economics? LG1
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Economics -- The study of how society employs
resources to produce goods and services for consumption among various groups and individuals.
Macroeconomics -- Concentrates on the
operation of a nation's economy as a whole.
Microeconomics -- Concentrates on the behavior
of people and organizations in markets for particular products or services.
2-2
2-2
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Four "What's" of an Economic System
$ What is produced? $ What amount is produced? $ What is the method of output distribution? $ What is the rate of economic growth?
Adapted from: Edwin Mansfield Economics (New York: W.W. Norton, 1976), p.8
2-3
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Economic Theories
Thomas Malthus (Early 1800s)
"Dismal Science" Too many people
Adam Smith (1776)
Freedom is vital "Invisible Hand"
2-4
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UNDERSTANDING the INVISIBLE HAND THEORY
A farmer earns money by selling his crops. To earn more, the farmer hires farmhands to produce more crops. When the farmer produces more, there is plenty of food for the community. The farmer helped his employees and his community while helping himself.
How Businesses Benefit the Community
LG1
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2-5
2-5
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Questions
Progress Assessment
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What's the difference between macroeconomics and microeconomics? What's better for an economy than giving a man a fish? What does Adam Smith's term "invisible hand" mean? How does the invisible hand create wealth for a country?
2-6
2-6
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Three Economic Systems
Mixed Socialism
(Highly Controlled)
(Little Control)
Communism
Capitalism
2-7
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Free-Market Capitalism
Private Property Business Ownership/ Profits Freedom of Competition Freedom of Choice What are some countries with capitalist foundations?:
2-8
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CAPITALISM'S FOUR BASIC RIGHTS
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The Foundations of Capitalism
LG2
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1. The right to own private property. 2. The right to own a business and keep all that business' profits. 3. The right to freedom of competition. 4. The right to freedom of choice.
2-9
2-9
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Free-Market Competition
Oligopoly
One
Monopoly
Many
Perfect Competition
Sellers
2-10
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Many Sellers With Perceived Differences
Fast Food Colleges
2-11
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Oligopoly: Few Sellers Automobiles Tobacco
2-12
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Monopoly: One Seller
Utilities
2-13
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Limits of Free-Markets
Inequality of Wealth- Causes National & World Tension Greed Compromises Ethics Limitations Push Country towards Socialism = Government Regulation
2-14
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Private & Public Ownership Some Choices are Limited
Socialism
Creates Social Equality Reduces Individual Incentive - Brain Drain
What are some countries with a high degree of socialism?
2-15
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SOCIALISM BENEFITS
The Benefits of Socialism LG3
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Social equality Free education Free healthcare Free childcare Longer vacations Shorter work weeks Generous sick leave
2-16 2-16
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The NEGATIVES of SOCIALISM
*The Negative
Consequences of Socialism LG3
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Few incentives for businesspeople to take risks. Brain Drain: Some of a countries best and brightest
workers (i.e. doctors, lawyers and business owners) move to capitalistic countries.
Fewer inventions and innovations because the reward is not as great as in capitalistic countries.
2-17 2-17
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Communism
Public Ownership
Almost all major factors of production
Central Planning/Controlled Economy Shortages of food and other products
may develop Lack of motivation to work hard for business people
2-18
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Mixed Economies
Free-Market Economy = Capitalism Command
Socialism Economy
Communism
Trend Results in Blend/Mix
Capitalism > Socialism Socialism > Capitalism
2-19
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Why is the U.S. an Economic Success?
Major Reason
Constitution Free Elections Free Enterprise System Abundant Resources Cultural Diversity
* Respondents could choose more than one.
Source: Investors Business Daily Survey
Percent*
85 84 81 78 71
2-20
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U.S. Economy
Key Economic Indicators Productivity in the U.S. Productivity in the Service Sector Business Cycles
Recession Depression Recovery
Stabilization
Fiscal Policy National Debt
Economic Growth through Monetary Policy
2-21
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Key Economic Indicators
Gross Domestic Product (GDP) Unemployment Rate Price Indexes
Consumer Price Index (CPI) Producer Price Index (PPI)
2-22
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The UNITED STATES GDP
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Gross Domestic Product
LG5
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Source: U.S. Bureau of Economic Analysis, www.bea.gov, March 2009.
2-23 2-23
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PLAYING CATCH UP
Countries Challenging the U.S. in GDP
Gross Domestic Product
LG5
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Source: Fortune Magazine, www.fortune.com July21, 2008.
2-24 2-24
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UNEMPLOYMENT
*The
Unemployment Rate LG5
Unemployment Rate -- The percentage of
civilians at least 16-years-old who are unemployed and tried to find a job within the prior four weeks.
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Four Types of Unemployment
1. 2. 3. 4. Frictional Structural Cyclical Seasonal
2-25 2-25
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*The
UNEMPLOYMENT RATE of the U.S.
Unemployment Rate LG5
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Source: U.S. Bureau of Labor Statistics, www.bls.gov, March 2009.
2-26 2-26
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What Makes Up The Consumer Price Index?
Recreation Apparel 5% 6% Medical Care/ Insurance 7% Medical Care 6% Food & Beverage 16% Transportation 18%
Source: U.S. Bureau of Labor Statistics
Other 5%
Housing & Util. 39%
2-27
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INFLATION
Inflation and Price Indexes LG5
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Inflation -- The general rise in the prices of goods
and services over time.
Disinflation -- When the price increases are slowing
(inflation rate declining).
Deflation -- Prices are declining because too few
dollars are chasing too many goods.
Stagflation -- Economy is slowing but prices are
going up.
2-28 2-28
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250 200 150 100 50 0
Consumer Price Index
1982-84 = 100
1940 1950 1960 1970 1980 1990 2000 2002 Apr. 2006
Source: U.S. Dept. of Labor, Bureau of Labor Statistics
2-29
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9 8 7 6 5 4 3 2 1 0 -1
Percent Change in Labor Productivity- U.S.
1950
1960
1970
1980
1990
2000
2002
Source: U.S. Dept. of Commerce, Bureau of Labor Statistics
Q1 2006
2-30
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Federal Spending
50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%
Source: Congressional Budget Office
http://www.usgovernmentspending.com/yea
1966 2006
Medicare & Medicaid
Social Security
Interest
Defense
Other
2-31
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6 5 4 3 2 1 0
Number of Workers per Social Security Recipient
1960
Source: Investors.com
2000
2075(Est.)
2-32
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Rising U.S. Trade Deficit
0 -100000 -200000 -300000
Deficit in Millions
-400000 -500000 -600000 -700000 -800000 1980 1985 1990 1995 1999 2001 2003 2005
Source: US Dept of Commerce, Bureau of Economic Analysis
2-33
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Healthcare Expenditure Projections
(Percent of National GDP)
18.00% 17.50% 17.00% 16.50% 16.00% 15.50% 15.00% 14.50% 14.00%
2004
2006
2008
2010
2012
% of GDP
Source: FORTUNE May 3, 2004
2-34
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What is the National Debt?
The debt has reached 10 trillion (2009) If $1,000 bills were stacked:
$1 Million = 4.29 Inches $1 Billion = 357.5 Feet $1 Trillion = 67 Miles
The debt is equal to 560.1 miles in $1,000 bills National Debt Clockhttp://www.brillig.com/debt_clock/
2-35
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Biggest Economic Challenges
Over the Next 3-5 years the U.S. can be expected to face these challenges:
Pension & Health care costs The Federal Deficit High Energy and Commodity Costs Balance of payments Terrorism
2-36
Source: Investors Business Daily January 9, 2006