Help with assgn due in 24 hours
combs
Nickels_12e_UB_PPT_Student_Ch02.pptxChapter 2
Understanding Economics and How It Affects Business
©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
1
Learning Objectives
LO 2-1 Explain basic economics.
LO 2-2 Explain what capitalism is and how free markets work.
LO 2-3 Compare socialism and communism.
LO 2-4 Analyze the trend toward mixed economies.
LO 2-5 Describe the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.
LO 2-6 Contrast fiscal policy and monetary policy, and explain how each affects the economy.
©McGraw-Hill Education.
2
How Economic Conditions Affect Businesses 1 of 7
LO 2-1
What Is Economics?
Economics — The study of how society chooses to employ resources to produce goods and services and distribute them for consumption among various competing groups and individuals.
Macroeconomics — The part of economics study that looks at the operation of a nation’s economy as a whole.
Microeconomics — The part of economics study that looks at the behavior of people and organizations in particular markets.
©McGraw-Hill Education.
How Economic Conditions Affect Businesses 2 of 7
LO 2-1
What Is Economics? continued
Resource development — The study of how to increase resources and to create conditions that will make better use of those resources.
Examples of ways to increase resources
New energy sources
New ways of growing foods
New ways of creating goods and services
©McGraw-Hill Education.
4
How Economic Conditions Affect Businesses 3 of 7
LO 2-1
The Secret to Creating a Wealthy Economy
Thomas Malthus and the dismal science
Malthus believed that if the rich had most of the wealth and the poor had most of the population, resources would run out.
This belief led the writer Thomas Carlyle to call economics “the dismal science.”
Latest world statistics show population growing more slowly than expected.
©McGraw-Hill Education.
How Economic Conditions Affect Businesses 4 of 7
LO 2-1
The Secret to Creating a Wealthy Economy continued
Population as a resource
Contrary to Malthus, some macroeconomists believe a large population can be a resource.
An educated population is highly valuable.
Business owners provide jobs and economic growth for their employees and communities as well as for themselves.
©McGraw-Hill Education.
How Economic Conditions Affect Businesses 5 of 7
LO 2-1
Adam Smith and the Creation of Wealth
Smith believed that:
Freedom was vital to any economy’s survival.
Freedom to own land or property and the right to keep the profits of a business is essential.
People will work hard if they believe they will be rewarded.
©McGraw-Hill Education.
How Economic Conditions Affect Businesses 6 of 7
LO 2-1
How Businesses Benefit the Community
Invisible hand theory
As people improve their own situation in life, they help the economy prosper through the production of goods, services and ideas.
Invisible hand — A phrase coined by Adam Smith to describe the process that turns self-directed gain into social and economic benefits for all.
©McGraw-Hill Education.
8
How Economic Conditions Affect Businesses 7 of 7
LO 2-1
How Businesses Benefit the Community continued
Understanding the invisible hand theory
A farmer earns money by selling his crops.
To earn more, the farmer hires workers 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.
©McGraw-Hill Education.
9
Understanding Free-Market Capitalism 1 of 8
LO 2-2
Capitalism — An economic system in which all or most of the factors of production and distribution are privately owned and operated for profit.
Countries with capitalist systems:
United States
England
Australia
Canada
©McGraw-Hill Education.
10
Understanding Free-Market Capitalism 2 of 8
LO 2-2
State capitalism — A combination of freer markets and some government control.
China has experienced rapid growth using state capitalism.
©McGraw-Hill Education.
11
Understanding Free-Market Capitalism 3 of 8
LO 2-2
Capitalism’s Four Basic Rights
The right to own private property
The right to own a business and keep all that business’s profits
The right to freedom of competition
The right to freedom of choice
©McGraw-Hill Education.
Understanding Free-Market Capitalism 4 of 8
LO 2-2
Roosevelt’s Four Additional Freedoms
Freedom of speech and expression
Freedom to worship in your own way
Freedom from want
Freedom from fear
©McGraw-Hill Education.
13
Understanding Free-Market Capitalism 5 of 8
LO 2-2
How Free Markets Work
Free market — Decisions about what and how much to produce are made by the market.
Consumers send signals about what they like and how they like it.
Price tells companies how much of a product they should produce.
If something is wanted but hard to get, the price will rise until more products are available.
How Prices Are Determined
A seller may want to sell shirts for $50, but only a few people may buy them at that price.
If the seller lowers the price, quantity demanded increases.
©McGraw-Hill Education.
14
Understanding Free-Market Capitalism 6 of 8
LO 2-2
Supply — The quantity of products that manufacturers or owners are willing to sell at different prices at a specific time.
Demand — The quantity of products that people are willing to buy at different prices at a specific time.
Market price (equilibrium point) – The price determined by supply and demand.
©McGraw-Hill Education.
15
Figure 2.1 The Supply Curve at Various Prices
LO 2-2
©McGraw-Hill Education.
16
Figure 2.2 The Demand Curve at Various Prices
LO 2-2
©McGraw-Hill Education.
17
Figure 2.3 The Equilibrium Point
LO 2-2
©McGraw-Hill Education.
18
Understanding Free-Market Capitalism 7 of 8
LO 2-2
Competition within Free Markets
Perfect Competition
Monopolistic Competition
Oligopoly
Monopoly
©McGraw-Hill Education.
19
Understanding Free-Market Capitalism 8 of 8
LO 2-2
Benefits and Limitations of Free Markets
Benefits:
It allows for open competition among companies.
It provides opportunities for poor people to work their way out of poverty.
Limitations:
People may start to let greed drive them.
©McGraw-Hill Education.
Understanding Socialism 1 of 3
LO 2-3
Socialism — An economic system based on the premise that some, if not most, basic businesses should be owned by the government so that profits can be more evenly distributed among the people.
Entrepreneurs run smaller businesses.
Citizens are highly taxed.
Government is more involved in protecting the environment and the poor.
©McGraw-Hill Education.
21
Understanding Socialism 2 of 3
LO 2-3
The Benefits of Socialism
Social equality
Free education
Free health care
Free child care
Longer vacations
Shorter work weeks
Generous sick leave
©McGraw-Hill Education.
22
Understanding Socialism 3 of 3
LO 2-3
The Negative Consequences of Socialism
Few incentives for businesspeople to take risks.
Brain drain — The loss of the best and brightest people to other countries.
Fewer inventions and less innovation because the reward is not as great as in capitalistic countries.
©McGraw-Hill Education.
Understanding Communism
LO 2-3
Communism — An economic and political system in which the government makes almost all economic decisions and owns almost all the major factors of production.
Prices don’t reflect demand, which may lead to shortages of items, including food and clothing.
Most communist countries today suffer severe economic depression.
©McGraw-Hill Education.
24
The Trend Toward Mixed Economies 1 of 2
LO 2-4
Two Major Economic Systems
Free-market economies — Economic systems in which the market largely determines what goods and services get produced, who gets them, and how the economy grows.
Command economies — Economic systems in which the government largely decides what goods and services will be produced, who will get them, and how the economy will grow.
©McGraw-Hill Education.
The Trend Toward Mixed Economies 2 of 2
LO 2-4
Neither free-market nor command economies have created sound economic conditions.
Communist governments are disappearing.
Socialist governments are cutting back on social programs, lowering taxes, and moving toward capitalism.
Capitalist countries are increasing social programs and moving more toward socialism.
Mixed economies — Economic systems in which some allocation of resources is made by the market and some by the government.
©McGraw-Hill Education.
Understanding the U.S. Economic System 1 of 9
LO 2-5
Key Economic Indicators
Gross domestic product (GDP) — The total value of final goods and services produced in a country in a given year.
As long as a company is within a country’s border, their numbers go into the country’s GDP (even if they are foreign-owned).
When the GDP changes, businesses feel the effect.
Gross output (GO) — A measure of total sales volume at all stages of production.
©McGraw-Hill Education.
27
Understanding the U.S. Economic System 2 of 9
LO 2-5
Key Economic Indicators continued
Unemployment rate — The number of civilians at least 16 years old who are unemployed and tried to find a job within the prior four weeks.
Four Types of Unemployment
Frictional
Structural
Cyclical
Seasonal
©McGraw-Hill Education.
28
Figure 2.5 U.S. Unemployment Rate 1989–2017
LO 2-5
©McGraw-Hill Education.
Figure 2.6 Four Types of Unemployment
LO 2-5
Structural unemployment
Cyclical unemployment
Seasonal unemployment
Frictional unemployment
©McGraw-Hill Education.
30
Understanding the U.S. Economic System 3 of 9
LO 2-5
Key Economic Indicators continued
Inflation and price indexes
Inflation — A general rise in the prices of goods and services over time.
Disinflation — A situation in which price increases are slowing (the inflation rate is declining).
Deflation — A situation in which prices are declining.
Stagflation — A situation when the economy is slowing but prices are going up anyhow.
©McGraw-Hill Education.
31
Understanding the U.S. Economic System 4 of 9
LO 2-5
Key Economic Indicators continued
Inflation and price indexes continued
Consumer price index (CPI) — Monthly statistics that measure the pace of inflation or deflation.
Core inflation — CPI minus food and energy costs.
Producer Price Index (PPI) — An index that measures the change in prices at the wholesale level.
©McGraw-Hill Education.
32
Understanding the U.S. Economic System 5 of 9
LO 2-5
Productivity in the United States
Productivity in the U.S. has risen due to the technological advances that have made production faster and easier.
High productivity through computers and robots can lead to high unemployment.
Productivity in the Service Sector
New technology adds to the quality of the services provided, but not to the worker’s output.
A new form of measurement needs to be created to account for the quality as well as the quantity of output.
©McGraw-Hill Education.
Understanding the U.S. Economic System 6 of 9
LO 2-5
The Business Cycle
Business cycles — The periodic rises and falls that occur in economies over time.
Four phases of long-term business cycles:
Economic Boom
Recession — Two or more consecutive quarters of decline in the GDP.
Depression — A severe recession, usually accompanied by deflation.
Recovery — When the economy stabilizes and starts to grow, eventually leading to an economic boom.
©McGraw-Hill Education.
34
Understanding the U.S. Economic System 7 of 9
LO 2-6
Stabilizing the Economy through Fiscal Policy
Fiscal policy — The federal government’s efforts to keep the economy stable by increasing or decreasing taxes or government spending.
Tools of fiscal policy:
Taxation
Government spending
©McGraw-Hill Education.
35
Understanding the U.S. Economic System 8 of 9
LO 2-6
Stabilizing the Economy through Fiscal Policy continued
National deficit — The amount of money the federal government spends beyond what it collects in taxes for a given fiscal year.
National debt — The sum of government deficits over time.
National surplus — When the government takes in more revenue than it spends.
©McGraw-Hill Education.
Understanding the U.S. Economic System 9 of 9
LO 2-6
Using Monetary Policy to Keep the Economy Growing
Monetary policy — The management of the money supply and interest rates by the Federal Reserve Bank.
The Fed’s most visible role is raising and lowering of interest rates.
When the economy is booming, the Fed tends to raise interest rates.
When the economy is in a recession, the Fed tends to decrease the interest rates.
©McGraw-Hill Education.
37
Appendix of Long Image Descriptions
©McGraw-Hill Education.
38
Appendix 1 Figure 2.1 The Supply Curve at Various Prices
The graph shows the relationship between the price of T-shirts and the quantity supplied. An upward curving line, labeled supply curve, indicates that as the price of T-shirts rises, the quantity also rises.
©McGraw-Hill Education.
©McGraw-Hill Education.
39
Appendix 2 Figure 2.2 The Demand Curve at Various Prices
The graph shows the relationship between the price of T-shirts and the quantity demanded. A downward curving line on the chart, labeled demand curve, indicates that as the price of T-shirts decreases, the quantity demanded increases.
©McGraw-Hill Education.
©McGraw-Hill Education.
40
Appendix 3 Figure 2.3 The Equilibrium Point
The graph shows the relationship between the price of T-shirts and the quantity of T-shirts. A downward-sloping demand curve and an upward-sloping supply curve are shown. The point at which these two curves intersect is labeled as the equilibrium point. Here, it shown at a price of 15 dollars and a quantity of 25.
©McGraw-Hill Education.
©McGraw-Hill Education.
41
Appendix 4 Figure 2.5 U.S. Unemployment Rate 1989–2017
In 1989, unemployment was at approximately 5.5 percent. It rose to a peak of nearly 8 percent around 1992. It then dropped to a low of just below 4 percent in 2000. It then rose again to just over 6 percent in 2003, before dropping to just below 5 percent in 2006 and 2007. Unemployment then spiked to a high of about 10 percent in 2009. Since then, it has dropped to about 4.75 percent in 2017.
©McGraw-Hill Education.
©McGraw-Hill Education.
42
