Copyright © 2004 South-Western. All rights reserved.4–1 Learning Goals Identify macroeconomic factors that affect business performance. Explain how market prices are determined. Explain how the government influences economic conditions.

Copyright © 2004 South-Western. All rights reserved.4–2 Economic Conditions –Macroeconomic conditions  Overall economic state of a country –Microeconomic conditions  Focus on conditions in a particular business or industry

Copyright © 2004 South-Western. All rights reserved.4–3 Macroeconomic Effects The performance of most firms depends on three macroeconomic factors: –Economic growth (employment rate) –Inflation –Interest rates

Copyright © 2004 South-Western. All rights reserved.4–4 Economic Growth general level of economic activity is higher than normal: –Total income level is relatively high. –higher volume of spending –higher revenues –Recession: Occurs when economic growth is negative for two consecutive quarters

Copyright © 2004 South-Western. All rights reserved.4–5 Indicators of Economic Growth Gross Domestic Product (GDP) Aggregate Expenditures

Copyright © 2004 South-Western. All rights reserved.4–6 Trend of Gross Domestic Product (GDP) Exhibit 4.1

Copyright © 2004 South-Western. All rights reserved.4–7 Indicators of Economic Growth In the U.S., these indicators are closely related: –consumer spending –production level Alternative Indicators of Economic Growth –Unemployment level –Industrial production level –New housing starts –Personal income level

Copyright © 2004 South-Western. All rights reserved.4–8 Unemployment Levels Frictional unemployment Seasonal unemployment Cyclical unemployment Structural unemployment Which is BEST?? How does Oregon Rank???

Copyright © 2004 South-Western. All rights reserved.4–9 Trend of U.S. Unemployment Exhibit 4.2

Copyright © 2004 South-Western. All rights reserved.4–10 Inflation An increase in the general level of prices of products and services over a specified period of time. –Estimated by the consumer price index (CPI). –CPI is a market basket of prices

Copyright © 2004 South-Western. All rights reserved.4–11 U.S. Inflation Rates over Time Exhibit 4.3

Copyright © 2004 South-Western. All rights reserved.4–12 Impact of Inflation Can affect a company’s operating expenses. Can affect a company’s revenues Cost-Push Inflation Demand-Pull Inflation

Copyright © 2004 South-Western. All rights reserved.4–13 Interest Rates Cost of borrowing money Firms may postpone expansion

Copyright © 2004 South-Western. All rights reserved.4–14 Market Price Determination Market price of a product is influenced by: –The total demand for that product by all customers –Supply of that product produced by firms The interaction between demand and supply determines the market price The “Invisible Hand” – Adam Smith

Copyright © 2004 South-Western. All rights reserved.4–15 How the Equilibrium Price is Determined by Supply and Demand Exhibit 4.6a

Copyright © 2004 South-Western. All rights reserved.4–16 Factors Influencing Market Prices Consumer income Changes in consumer tastes and preferences: Change in production expenses

Copyright © 2004 South-Western. All rights reserved.4–17 Monetary Policy Impacts Economic Conditions Monetary policy –Made by the Federal Reserve System  “Fed” is the central bank of the U.S. (Greenspan) –Decisions by Fed about the money supply:  Impact interest rates (expense and product demand)

Copyright © 2004 South-Western. All rights reserved.4–18 Fed’s Impact on Interest Rates Discount rate (loans to member banks) Purchases bonds on the open market Reserve Requirements

Copyright © 2004 South-Western. All rights reserved.4–19 Fiscal Policy How the federal government sets tax rates and spends money: –Personal income tax rates –Corporate taxes –Excise taxes

Copyright © 2004 South-Western. All rights reserved.4–20 Chapter Summary Firm performance depends on three macroeconomic factors: economic growth, inflation, and interest rates. Demand and supply conditions determine market prices. Federal government uses monetary and fiscal policies to influence macroeconomic conditions.

Copyright © 2004 South-Western. All rights reserved.4–21 Extra Credit Go to /selectatest.jsp /selectatest.jsp You can get there from my web site Take the age and one other test - do them quickly! Write a one page report on whether you found a bias and how you may be able to over come this bias when hiring - 25 potential points – writing must be

Copyright © 2004 South-Western. All rights reserved.4–22 NEXT TIME Meet with your group Chapter 5 – Microeconomics In text study guide Library visit (take notes)