part Chapter © 2009 The McGraw-Hill Companies, Inc. All rights reserved. 1 McGraw-Hill How Economics Affects Business Chapter 2

© 2009 The McGraw-Hill Companies, Inc. All rights reserved. 2 McGraw-Hill 1.Understand the basics of economics. 2.Explain supply and demand. 3.Describe free market capitalism and degrees of competition. 4.Understand the differences between socialism and communism. 5.Discuss the three major indicators of economic conditions. Learning Objectives

© 2009 The McGraw-Hill Companies, Inc. All rights reserved. 3 McGraw-Hill Economics impacts every business Basics of Economics Definition Economic systems of the world Microeconomics and Macroeconomics Two basic types of economic study: –Macro –Micro Resource Development Understanding Economics

© 2009 The McGraw-Hill Companies, Inc. All rights reserved. 4 McGraw-Hill Economic Theorists Neo-Malthusians –Solution to poverty is birth control Adam Smith –People will work for rewards –The “invisible hand” Understanding Economics

© 2009 The McGraw-Hill Companies, Inc. All rights reserved. 5 McGraw-Hill Supply and Demand Supply increases as price increases Quantity demanded increases as the price decreases Equilibrium point Understanding Economics

© 2009 The McGraw-Hill Companies, Inc. All rights reserved. 6 McGraw-Hill Supply and Demand Business Cycle Understanding Economics

© 2009 The McGraw-Hill Companies, Inc. All rights reserved. 7 McGraw-Hill Consumers control the market Competition in Free Markets Four common types: –Perfect ( Agriculture) –Monopolistic ( Fast food burger companies) –Oligopoly ( Tobacco, automobiles) –Monopoly ( Cable companies) Free Market Capitalism

© 2009 The McGraw-Hill Companies, Inc. All rights reserved. 8 McGraw-Hill Socialism and Communism Socialism Definition The Benefits of Socialism Social equality Free education Longer vacations The Negative Consequences of Socialism Takes away incentives for businesses Brain drain

© 2009 The McGraw-Hill Companies, Inc. All rights reserved. 9 McGraw-Hill Socialism and Communism Communism Definition Karl Marx Lack of incentive for workers to produce Countries – severe economic depression The Trend toward Mixed Economies Free market Command Neither are best Mixed economies

© 2009 The McGraw-Hill Companies, Inc. All rights reserved. 10 McGraw-Hill Gross Domestic Product GDP and GNP Unemployment Unemployment rate Price Indexes Inflation and hyperinflation Stagflation and deflation CPI PPI Economic Indicators

© 2009 The McGraw-Hill Companies, Inc. All rights reserved. 11 McGraw-Hill Two halves of fiscal policy: –Taxation and Government spending National debt Economic boom and recession –Depression –Recovery Fiscal and Monetary Policy

© 2009 The McGraw-Hill Companies, Inc. All rights reserved. 12 McGraw-Hill Monetary policy –Controlled by Federal Reserve Raising and lowering of interest rates Controlling the money supply Fiscal and Monetary Policy