1/34 How Economics Affects Business: The Creation and Distribution of Wealth

2/34 Economics and Business Economic and Legal SystemEconomic and Legal System Influences the business structureInfluences the business structure Developed CountriesDeveloped Countries Influenced not only by their own economic system, but also by the international ambienceInfluenced not only by their own economic system, but also by the international ambience

3/34 Economics (cont.) EconomicsEconomics Study of how society chooses to employ resources to produce goods & services and distribute them among competing groups/individualsStudy of how society chooses to employ resources to produce goods & services and distribute them among competing groups/individuals The allocation of scarce resourcesThe allocation of scarce resources

4/34 Economics: Create Wealth EconomicsEconomics MicroMicro  looks at the behavior of people and organizations in particular markets MacroMacro  looks at the operation of a nation’s economy as a whole

5/34 Economics (cont.) Resource DevelopmentResource Development How to increase resources and to create the conditions that will make better use of those resourcesHow to increase resources and to create the conditions that will make better use of those resources

6/34 Economic Theories Thomas Malthus (Early 1800s) Thomas Malthus (Early 1800s) “Dismal Science” “Dismal Science” Too many peopleToo many people Adam Smith – “The Wealth of Nations” (1776) Adam Smith – “The Wealth of Nations” (1776) Freedom is vitalFreedom is vital “Invisible Hand”“Invisible Hand”

7/34 Free-Market Capitalism Capitalism Capitalism An economic system in which all or most of the factors of production and distribution are privately owned and operated for profit 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 No country is purely capitalist Markets vs Government Markets vs Government

8/34 Free-Market Capitalism Four Basic Rights: Four Basic Rights: Private Property Private Property Business Ownership/ Profits Business Ownership/ Profits Freedom of Competition Freedom of Competition Freedom of Choice Freedom of Choice

9/34 Capitalism (cont.) MarketMarket Sets pricesSets prices ProducersProducers  Decide what and how much to produce ConsumersConsumers  Vote for products with dollar votes

10/34 Capitalism (cont.) SupplySupply The quantity of products that manufacturers or owners are willing to sell at different prices at a specific timeThe quantity of products that manufacturers or owners are willing to sell at different prices at a specific time DemandDemand The quantity of products that people are willing to buy at different prices at a specific timeThe quantity of products that people are willing to buy at different prices at a specific time

11/34 Capitalism (cont.) Market EquilibriumMarket Equilibrium

12/34 Capitalism (cont.) Market price (equilibrium price)Market price (equilibrium price)  The price determined by supply and demand  Surpluses  Shortages

13/34 Capitalism (cont.) CompetitionCompetition PerfectPerfect  many sellers in the market and no seller is large enough to dictate the price of a product (salt) MonopolisticMonopolistic  large number of sellers produce products that are very similar but are perceived by buyers as different (computers, T-shirts)

14/34 Capitalism (cont.) Competition (cont.)Competition (cont.) OligopolyOligopoly  a few sellers dominate a market (soft drinks, aircrafts) MonopolyMonopoly  only one seller for a product or service (power suppliers)  Deregulation (long distance calls)

15/34Socialism Socialism 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 people 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 people

16/34 Socialism (cont) Socialism Socialism Private & public ownership Private & public ownership Creates social equality (not quite) Creates social equality (not quite) Free social services (healthcare, education) – but quality? Free social services (healthcare, education) – but quality? Reduces individual incentive - Brain Drain Reduces individual incentive - Brain Drain

17/34Communism CommunismCommunism An economic and political system in which the state (the government) makes almost all economic decisions and owns almost all the major factors of production An economic and political system in which the state (the government) makes almost all economic decisions and owns almost all the major factors of production

18/34 Communism (cont) Public Ownership of almost all major factors of production Public Ownership of almost all major factors of production Central Planning/Controlled Economy Central Planning/Controlled Economy  shortages of food and other products  lack of motivation to work hard

19/34 Mixed Economies Free-Market Economy Free-Market Economy Capitalism Capitalism Command Economy Command Economy Socialism Socialism Communism Communism Mixed Economies (U.S.) Mixed Economies (U.S.)

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21/34 U.S. Economy Key Economic Indicators Key Economic Indicators Productivity in the U.S. Productivity in the U.S. Productivity in the Service Sector Productivity in the Service Sector Business Cycles Business Cycles Stabilization – Fiscal Policy Stabilization – Fiscal Policy Economic Growth through Monetary Policy Economic Growth through Monetary Policy

22/34 Key Economic Indicators Gross Domestic Product (GDP) Gross Domestic Product (GDP) The total value of goods and services produced in a country in a given year The total value of goods and services produced in a country in a given year Unemployment Rate Unemployment Rate The number of civilians at least 16 years old who are unemployed and tried to find a job within the prior four weeks The number of civilians at least 16 years old who are unemployed and tried to find a job within the prior four weeks

23/34 Unemployment Rate (cont.) U.S. unemployment rate

24/34 Unemployment Rate (cont.)

25/34 Key Economic Indicators (cont.) Price Indexes Price Indexes  measure the health of the economy Inflation Inflation  a general rise in the prices of goods and services over time Disinflation Disinflation  price increases are slowing (the inflation rate is declining)

26/34 Key Economic Indicators (cont.) Deflation Deflation  prices are actually declining - countries produce many goods that people cannot afford to buy Stagflation Stagflation  the economy is slowing, but prices keep going up

27/34 Key Economic Indicators (cont.) Consumer Price Index (CPI) Consumer Price Index (CPI)  Monthly statistics that measure the pace of inflation or deflation Producer Price Index (PPI) Producer Price Index (PPI)  Index that measures prices at the wholesale level

28/34 Productivity in the U.S. U.S. ProductivityU.S. Productivity Has gone up in recent yearsHas gone up in recent years The U.S. economy is a service economyThe U.S. economy is a service economy  very labor intensive – productivity issues  which productivity went up faster: general business or manufacturing

29/34 Productivity in the U.S. (cont.) Productivity In The Service SectorProductivity In The Service Sector Computers, word processors, and other technology increase productivityComputers, word processors, and other technology increase productivity Sometimes they increase only qualitySometimes they increase only quality

30/34 Business Cycles Business CyclesBusiness Cycles The periodic rises and falls that occur in economies over timeThe periodic rises and falls that occur in economies over time Economic boomEconomic boom RecessionRecession Depression (deflation)Depression (deflation) RecoveryRecovery

31/34 Business Cycles (cont.) © Wikipedia

32/34 The Business Cycle (cont.) StabilizationStabilization Fiscal policyFiscal 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 )May lead to National Deficit (it usually does )

33/34 National Debt © Microsoft Corporation - Encarta

34/34 The Business Cycle (cont.) Monetary PolicyMonetary Policy The management of the monetary supply and interest ratesThe management of the monetary supply and interest rates Federal Reserve SystemFederal Reserve System Independent form the governmentIndependent form the government Controls the money supplyControls the money supply