Economics and Business Chapter 2 Download this book for free at: ttp://hdl.handle.net/10919/70961

Review What is the purpose of a business? Are profits a bad thing? Who are the major participants in a business? Who are the stakeholders? What external factors affect business?

Learning Objectives Describe capitalism and socialism Discuss private property rights and economic development Discuss the concept of GDP (gross domestic product). Explain fiscal and monetary policy Discuss the concept of the unemployment rate Discuss the concepts of inflation and deflation. Explain other key terms including: supply; demand; equilibrium price; monopoly; recession; depression. Download this book for free at: ttp://hdl.handle.net/10919/70961

Economics Download this book for free at: ttp://hdl.handle.net/10919/70961

Economics Resources – inputs to the firm Land Raw material Labor Capital (money) Factors of production – resources used to produce outputs Equipment

Economic Systems Planned Systems Government controls production and allocation of goods and services Communism Government owns all or most enterprises Socialism Government owns “essential” businesses

Economic Systems Free Markets Capitalism Most businesses are privately owned Competition determines allocation of goods and services Adam Smith - “Invisible hand” Private property rights Shareholders own their land and resources Private enterprise Shareholders entitled to profits

Captialism Private enterprise Owned by individuals vs. public enterprise – owned by government “Invisible Hand” - from Adam Smith’s book The Wealth of Nations. Individuals, acting in their own self-interest, will collectively make the best decisions. We vote with our dollars!

Economic Systems Mixed Economies Both private enterprise and government ownership Discussion – What enterprises should the government own? Why?

Economics Supply & Demand Demand curve – shows how much consumers are willing to purchase at every price What factors affect the demand curve? Download this book for free at: ttp://hdl.handle.net/10919/70961

Factors Affecting Demand Curve Customer preferences Number of buyers Incomes Price of substitute goods Price of complementary goods Future expectations

Economics Supply & Demand Supply curve – shows how much businesses are willing to produce at every price What factors affect the supply curve? Download this book for free at: ttp://hdl.handle.net/10919/70961

Factors Affecting Supply Curve Costs of goods Costs of labor Costs of technology Availability of suppliers Taxes Weather (how?)

Economics Supply & Demand Equilibrium price – price at which consumers are willing to purchase everything a business is willing to make No surplus No shortage Download this book for free at: ttp://hdl.handle.net/10919/70961

Supply and Demand Curve Changes Shift right in the demand curve Results in higher prices and greater quantity S Price D’ D Quantity

Supply and Demand Curve Changes Shift left in the demand curve Results in lower prices and less quantity S Price D D’ Quantity

Supply and Demand Curve Changes Shift right in the supply curve Results in lower price and greater quantity S S’ Price D Quantity

Supply and Demand Curve Changes Shift left in the supply curve Results in higher price and less quantity S’ S Price D Quantity

Economics Supply & Demand Discuss affects of Increase in corporate taxes Change in consumer tastes Automation Promotion Download this book for free at: ttp://hdl.handle.net/10919/70961

Economics Supply & Demand Consider the market for lemonade. What happens when: There is a heat wave The price of sugar goes up The cost of a can of soda falls There is a baseball game on the street Download this book for free at: ttp://hdl.handle.net/10919/70961

Competition Perfect competition Monopolistic competition Many providers Standard product Many consumers Monopolistic competition Differentiated product

Competition Oligopoly Monopoly Natural monopolies Legal monopolies Few providers Many consumers Monopoly One provider Natural monopolies Legal monopolies

Measuring the Economy Gross Domestic Product, GDP Value of all goods and services produced for consumer Prosperity Prosperity Recovery/ Growth Recovery/ Growth Change In GDP Recession Time The Business Cycle

Recession Negative GDP change Lasts 6 months or longer (two quarters) Must be real GDP Lasts 6 months or longer (two quarters)

Measuring the Economy Unemployment Unemployment rate Percent unemployed and actively seeking work U3 Full employment Everyone who wants a job can get one ~4% unemployment considered “full” employment U6 unemployment Broader measure Includes part-time workers wanting full-time and those not actively seeking work

Types of Unemployment Frictional Seasonal Structural Cyclical

Historical Unemployment Download this book for free at: ttp://hdl.handle.net/10919/70961

Exercise Desert island thought experiment

Measuring the Economy Inflation Consumer Price Index, CPI Measure of inflation Download this book for free at: ttp://hdl.handle.net/10919/70961

Measuring Price Level Changes Consumer Price Index (CPI)—measures the monthly average change in prices of goods and services Market Basket—compilation of the goods and services most commonly purchased by urban consumers Producer Price Index (PPI) For Finished Goods For Intermediate Goods The Governmental Bureau of Labor Standards (BLS) tracks price levels with two indices: The Consumer Price Index (CPI) 1. measures monthly average changes in prices that consumers pay for certain goods and services 2. not a perfect measure of inflation - might actually overstate inflation by not fully accounting for changes in the goods and services that people buy The Producer Price Index (PPI) 1. tracks the differences in goods and services prices from the sellers perspective 2. Uses three measurements – finished goods, intermediate goods, and crude goods

Contents of the CPI Market Basket

Factoring out Inflation Need to compare costs over time “Nominal” is the quoted amount E.g. The nominal price of a gallon of gas in 1970 was $.36 “Real” is an adjective to describe a measure with inflation subtracted out Real = Nominal – Inflation E.g. Real gas prices, real home prices, real GDP

Historical Inflation Inflation is not a modern phenomenon 14th Century Post-plague 16th – 17th Century Spain Caused by gold and silver from America Hyperinflation Zimbabwe 2007 – 11,000% Greece 1944 – 13,800% Germany 1923 – 29,525% Hungary 1940 – 14 quintillion % Prices doubled every 15 hours Venezuela 2018 – 1 million % IMF prediction

Measuring the Economy Economic Forecasting Economic indicators Statistics about the economy Lagging economic indicators Look at past data E.g. average length of unemployment Leading economic indicators Try to predict the economy E.g. new home sales E.g. consumer confidence index

Government’s Role in Economy Monetary Policy Managed by a country’s central bank Federal Reserve Board, “The Fed” Responsible for money supply of the U.S. Primary tool is control of short-term interest rates

Government’s Role in Economy Fed Actions May increase money supply By lowering short-term interest rates “Easing” money supply Stimulates economy Stimulates inflation May decrease money supply By raising short-term interest rates “Tightens” money supply Slows economy Lowers inflation

Government’s Role in Economy Fiscal Policy Managed by Congress Primary tools Taxes Est. $3.3 Trillion in 2018* Spending Est. $4.1 Trillion in 2018* When economy is in a recession Want to stimulate growth When inflation is high May want to contract * www.cbo.gov/topics/budget

Government’s Role in Economy Fiscal Policy Actions Stimulate economy By lowering taxes By increased spending Effect is to increase money in economy Increases inflation Contract the economy By increasing taxes By reducing spending Reduces money in the economy Lowers inflation

National Debt Budget surplus Budget deficit National debt If take in more than spend Budget deficit If spend more than take in National debt Amount government owes >$21 Trillion as of 5/18 >$174,000 per tax payer www.usdebtclock.org

Legal Framework of Business Antitrust monopolies are illegal no price discrimination no collusion Regulation FTC – Federal Trade Commission FCC – Federal Communications Commission FDA – Food and Drug Administration SEC – Securities and Exchange Commission

Legal Framework of Business Liability Intellectual Property protection patent copyright trademark trade secret