McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-1 Chapter 22 How Economics Affects Business: The Creation and Distribution of Wealth 2-1

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-2 Economics: Create Wealth Use Scarce Resources to Produce Goods & Services To Distribute Among Competing Groups/IndividualsUse Scarce Resources to Produce Goods & Services To Distribute Among Competing Groups/Individuals Micro v. MacroMicro v. Macro Resource DevelopmentResource Development

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-3 Four “What’s” of an Economic System $What is produced? $What amount is produced? $What is the method of output distribution? $What is the rate of economic growth? Adapted from: Adapted from: Edwin Mansfield Economics (New York: W.W. Norton, 1976), p.8

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-4 Economic Theories Thomas Malthus (Early 1800s) Thomas Malthus (Early 1800s) “Dismal Science” “Dismal Science” Too many peopleToo many people Adam Smith (1776) Adam Smith (1776) Freedom is vitalFreedom is vital “Invisible Hand”“Invisible Hand”

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-5 Three Economic Systems Communism Socialism Capitalism (Highly Controlled ) (Little Control ) Mixed

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-6 Free-Market Capitalism Private Property Private Property Profit/Ownership Profit/Ownership Freedom of Competition Freedom of Competition Freedom of Choice Freedom of Choice

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-7 Supply Curve Quantity(S) High High Low Price(P) S

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-8 Demand Curve Price(P) Quantity(D) High Low D

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-9 Quantity High Low Price Equilibrium Point Market Equilibrium SD Surplus Shortage

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Free-Market Competition Sellers OneMany Monopoly Oligopoly MonopolisticCompetition Perfect Competition

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Perfect Competition Buyer Sellers

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Monopolistic Competition: Many Sellers With Perceived Differences Fast Food Fast Food Colleges Colleges

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Oligopoly: Few Sellers Automobiles Automobiles Tobacco Tobacco

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Monopoly: One Seller Diamonds Diamonds Utilities Utilities Microsoft? Microsoft?

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Limits of Free-Markets Inequality of Wealth- Causes National & World Tension Inequality of Wealth- Causes National & World Tension Greed Compromises Ethics Greed Compromises Ethics Potential Environmental Damage Potential Environmental Damage Limitations Push Country towards Socialism = Government Regulation Limitations Push Country towards Socialism = Government Regulation

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Socialism Private & Public Ownership Private & Public Ownership Some Choices are Limited Some Choices are Limited Creates Social Equality Creates Social Equality Reduces Individual Incentive- Brain Drain Reduces Individual Incentive- Brain Drain

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Communism Public Ownership Public Ownership Productive CapacityProductive Capacity CapitalCapital Central Planning/Controlled Economy Central Planning/Controlled Economy Managers = Mandatory Party Membership Managers = Mandatory Party Membership

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Mixed Economies Free-Market Economy = Capitalism Free-Market Economy = Capitalism Command Economy Command Economy SocialismSocialism CommunismCommunism Trend Results in Blend/Mix Trend Results in Blend/Mix Capitalism > SocialismCapitalism > Socialism Socialism > CapitalismSocialism > Capitalism

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved U.S. Economy Key Economic IndicatorsKey Economic Indicators ProductivityProductivity Business CyclesBusiness Cycles RecessionRecession DepressionDepression RecoveryRecovery StabilizationStabilization Fiscal PolicyFiscal Policy Monetary PolicyMonetary Policy National DebtNational Debt

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Key Economic Indicators Gross Domestic Product (GDP) Gross Domestic Product (GDP) Unemployment Rate Unemployment Rate Price Indexes Price Indexes Consumer Price Index(CPI)Consumer Price Index(CPI) Producer Price Index(PPI)Producer Price Index(PPI)

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Where Does the Government Get Its Money? Source: Office of Management & Budget, 2002

McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved The debt has reached $6.7 trillion+ If $1,000 bills were stacked: $1 Million = 4.29 Inches $1 Billion = 357.5Feet $1 Trillion = 67Miles The debt is equal to miles in $1,000 bills National Debt Clock- What is the National Debt?