BADM1103F07Ch02

1/34How Economics Affects Business: The Creation and Distributionof Wealth2/34Economics and Business•Economic and Legal System•Influences the business structure•Developed Countries•Influenced not only by their own economic system, but also by the international ambience3/34Economics (cont.)•Economics•Study of how society chooses to employ resources to produce goods & services and distribute them among competing groups/individuals•The allocation of scarce resources4/34Economics: Create Wealth•Economics•Microlooks at the behavior of people and organizations in particular markets•Macrolooks at the operation of a nation’s economy as a whole5/34Economics (cont.)•Resource Development•How to increase resources and to create the conditions that will make better use of those resources6/34Economic Theories•Thomas Malthus (Early 1800s)•“Dismal Science”•Too many people •Adam Smith –“The Wealth of Nations” (1776)•Freedom is vital•“Invisible Hand”7/34Free-Market Capitalism•Capitalism•An economic system in which all or most of the factors of production and distribution are privately owned and operated for profit•No country is purely capitalist•Markets vs Government 8/34Free-Market Capitalism•Four Basic Rights:•Private Property•Business Ownership/Profits•Freedom of Competition•Freedom of Choice9/34Capitalism (cont.)•Market•Sets prices•ProducersDecide what and how much to produce•ConsumersVote for products with dollar votes10/34Capitalism (cont.)•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 time11/34Capitalism (cont.)•Market Equilibrium12/34Capitalism (cont.)•Market price (equilibrium price)The price determined by supply and demandSurplusesShortages13/34Capitalism (cont.)•Competition•Perfectmany sellers in the market and no seller is large enough to dictate the price of a product (salt)•Monopolisticlarge number of sellers produce products that are very similar but are perceived by buyers as different (computers, T-shirts)14/34Capitalism (cont.)•Competition (cont.)•Oligopolya few sellers dominate a market(soft drinks, aircrafts)•Monopolyonly one seller for a product or service (power suppliers)Deregulation (long distance calls)15/34Socialism•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 distributed among the people16/34Socialism (cont)•Socialism•Private & public ownership •Creates social equality (not quite)•Free social services (healthcare, education) –but quality?•Reduces individual incentive -Brain Drain17/34Communism•Communism•An economic and political system in which the state (the government) makes almost all economic decisions and owns almost all the major factors of production18/34Communism (cont)•Public Ownership of almost all major factors of production•Central Planning/Controlled Economyshortages of food and other productslack of motivation to work hard19/34Mixed Economies•Free-Market Economy•Capitalism•Command Economy•Socialism•Communism•Mixed Economies (U.S.)20/3421/34U.S. Economy•Key Economic Indicators•Productivity in the U.S.•Productivity in the Service Sector•Business Cycles•Stabilization –Fiscal Policy •Economic Growth through Monetary Policy22/34Key Economic Indicators•Gross Domestic Product (GDP)•The total value of goods and services produced in a country in a given year•Unemployment Rate•The number of civilians at least 16 years old who are unemployed and tried to find a job within the prior four weeks23/34Unemployment Rate (cont.)U.S. unemployment rate24/34Unemployment Rate (cont.)25/34Key Economic Indicators (cont.)•Price Indexesmeasure the health of the economy•Inflationa general rise in the prices of goods and services over time•Disinflationprice increases are slowing (the inflation rate is declining)26/34Key Economic Indicators (cont.)•Deflationprices are actually declining -countries produce many goods that people cannot afford to buy•Stagflationthe economy is slowing, but prices keep going up 27/34Key Economic Indicators (cont.)•Consumer Price Index (CPI)Monthly statistics that measure the pace of inflation or deflation•Producer Price Index (PPI)Index that measures prices at the wholesale level28/34Productivity in the U.S.•U.S. Productivity•Has gone up in recent years•The U.S. economy is a service economyvery labor intensive –productivity issueswhich productivity went up faster: general business or manufacturing29/34Productivity in the U.S. (cont.)•Productivity In The Service Sector•Computers, word processors, and other technology increase productivity•Sometimes they increase only quality30/34Business Cycles•Business Cycles•The periodic rises and falls that occur in economies over time•Economic boom•Recession•Depression (deflation)•Recovery31/34Business Cycles (cont.)© Wikipedia32/34The Business Cycle (cont.)•Stabilization•Fiscal policyfederal government’s efforts to keep the economy stable by increasing or decreasing taxes or government spending–does it work?•May lead to National Deficit (it usually does )33/34National Debt© Microsoft Corporation -Encarta34/34The Business Cycle (cont.)•Monetary Policy•The management of the monetary supply and interest rates•Federal Reserve System•Independent form the government•Controls the money supply