2. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2 Economics: The Framework for Business Define economics and discuss the evolving global economic crisis Analyze the impact of fiscal and monetary policy on the economy Explain and evaluate the free market system and supply and demand 2 2-1 2-2 2-3

3. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2 Economics: The Framework for Business Explain and evaluate planned market systems Describe the trend toward mixed market systems Discuss key terms and tools to evaluate economic performance 3 2-4 2-5 2-6

4. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Economics ￭ Study of the choices that people, companies, and governments make in allocating society’s resources  Guide decision-making  Help understand broad forces that affect business and personal life ￭ Economy: Financial and social system of how resources flow through society 4

5. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Macro and Micro Economics 5 ￭ Macroeconomics: Study of a country’s overall economic dynamics  Employment rate, gross domestic product, and taxation policies ￭ Microeconomics: Study of smaller economic units  Individual consumers, families, and individual businesses

6. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Global Economic Crisis ￭ Started with slump in dot-com business followed by the 9/11 terrorist attacks Stock market dropped  Unemployment rose  Economic experts feared that the U.S. was on the edge of a full-blown recession 6

7. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Global Economic Crisis ￭ Subprime mortgage loans - Loans to borrowers with:  Low credit scores  High debt-to-income ratios  Other signs of a reduced ability to repay the money they borrow ￭ Financial institutions suffered when mortgage-backed funds lost value 7

8. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Steps Taken by the Federal Government and the Federal Reserve ￭ Troubled Assets Relief Program (TARP) - $700 billion economic bailout plan ￭ American Recovery and Reinvestment Act  Designed to turn the economy around over the next two years 8

9. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Managing the Economy: Fiscal & Monetary Policy ￭ Help achieve the goal of controlled sustained economic growth ￭ Fiscal policy: Government efforts to influence the economy through taxation and spending ￭ Monetary policy: Federal reserve decisions that shape the economy by influencing interest rates and supply of money 9

10. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Debt Ceiling and Fiscal Cliff ￭ Debt Ceiling - Maximum amount Congress lets the government borrow  Limits amount that government can borrow ￭ Fiscal cliff - Package of across-the-board spending cuts and sharp tax hikes  Aimed to decrease the U.S. budget deficit  Not beneficial if the U.S. economy goes over the fiscal cliff 10

11. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Budget Outlines expected revenue from taxes and fees, and expected spending Revenue is higher than expenses over a given period Budget surplus Expenses are higher than revenue over a given period Budget deficit Sum of all the money borrowed and not yet repaid by they federal government Federal debt 11

12. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Federal Reserve Banks ￭ Execute Fed policies ￭ Perform banking services for commercial banks in their districts  Commercial banks: Privately owned financial institutions Accept demand deposits Make loans Provide other services for the public 12

13. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Money Supply ￭ Total amount of money within the overall economy ￭ Money: Medium of exchange, a measure of value, or a means of payment ￭ Commonly used definitions  M1: All currency plus checking accounts and traveler’s checks 13

14. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Money Supply  M2: M1 money supply plus most savings accounts, money market accounts, and certificates of deposit ￭ When economy contracts, Fed increases the money supply ￭ When prices rise, Fed reduces the money supply 14

15. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Open Market Operations ￭ Federal Reserve function of buying and selling government securities  Includes treasury bonds, notes, and bills ￭ Federal Deposit Insurance Corporation (FDIC): Federal agency that insures deposits in banks and thrift institutions for up to $250,000 per customer, per bank 15

16. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Discount Rate and Reserve Requirement ￭ Discount rate: Rate of interest that the Federal Reserve charges when it loans funds to banks ￭ Reserve requirement: Rule set by the Fed which specifies minimum amount of reserves a bank must hold  Expressed as a percentage of the bank’s deposits 16

17. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Capitalism: Free Market System ￭ Economic system based on private ownership, economic freedom, and fair competition  Known as the private enterprise or free market system  Economic system: Structure for allocating limited resources 17

18. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Fundamental Rights of Capitalism Right to own a business and keep after-tax profits Right to private propertyRight to free choiceRight to fair competition 18

19. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Degrees of Competition Market structure with many competitors selling virtually identical products Barriers to entry are quite low Pure competition Market structure with many competitors selling differentiated products Barriers to entry are low Monopolistic competition Market structure with only a handful of competitors selling products that can be similar or different Barriers to entry are typically high Oligopoly 19

20. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Monopoly 20 One producer completely dominates the industry, leaving no room for any significant competitors Barriers to entry tend to be virtually insurmountable Natural monopoly: Market structure with one company as the supplier of a product Reason - Nature of that product makes a single supplier more efficient Government sanctioned and regulated

21. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Capitalism: Supply & Demand Explains the dynamic interaction between buyers and sellers that directly affects: Range of products Prices Supply Quantity of products that producers are willing to offer for sale at different market price Demand Quantity of products that consumers are willing to buy at different market prices 21

22. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Supply ￭ To make profits, businesses produce:  More of a product that commands a higher market price  Less of a product that commands a lower price ￭ Supply curve: Graphed relationship between price and quantity from a supplier standpoint 22

23. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit 2.3 - Supply Curve 23

24. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Demand ￭ To get the products at the lowest possible prices consumers buy:  More products with lower prices  Fewer products with higher prices ￭ Demand curve: Graphed relationship between price and quantity from a demand standpoint 24

25. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit 2.4 - Demand Curve 25

26. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Equilibrium Price ￭ Associated with the point at which the quantity demanded equals the quantity supplied ￭ Constant interaction between supply and demand determines the market price 26

27. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit 2.5 - Equilibrium 27

28. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Socialism ￭ Economic system based on the principle that the government owns and operates key enterprises that directly affect public welfare ￭ Has higher taxes, designed to distribute wealth more evenly through society ￭ Cause of slump in socialist economies  High taxes and lavish social programs 28

29. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Communism 29 ￭ System that calls for public ownership of all enterprises, under a strong central government ￭ Did not thrive due to following reasons  Authoritarian governments suspended individual rights and choices  Developed crippling shortages and surpluses  Corruption at every level of government

30. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Mixed Economies ￭ Embody elements of both planned and market-based economic systems ￭ Federal government partly owns number of financial institutions ￭ Government intervenes in the free market by creating regulations ￭ Privatization: Converting government- owned businesses to private ownership 30

31. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Evaluating Economic Performance Gross domestic productEmployment levelBusiness cycleInflation rateProductivity 31

32. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Gross Domestic Product (GDP) ￭ Total value of all final goods and services produced within a nation’s physical boundaries over a given period of time ￭ Used to:  Measure the economic performance of individual nations  Compare the growth among nations 32

33. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Employment Level ￭ Tracked through unemployment rate  Unemployment rate: Percentage of people in the labor force over age 16 who do not have jobs and are actively seeking ￭ Categories of unemployment  Frictional - Temporary unemployment  Structural - Long term unemployment  Cyclical - Layoffs during recessions  Seasonal - Job loss related to the time of year 33

34. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Business Cycle Periodic contraction and expansion that occur over time in every economy Recession: Decrease in the GDP for two consecutive quarters Depression: Long and deep recession Contraction: Period of brief economic downturn Recovery: Period of rising economic growth and employment Expansion: Period of robust economic growth and high employment 34

35. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Price Levels ￭ Inflation: Period of rising average prices across the economy ￭ Hyperinflation: Average monthly inflation rate of more than 50 percent 35

36. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Price Levels ￭ Disinflation: Period of slowing average price increases across the economy ￭ Deflation: Period of falling average prices across the economy 36

37. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Price Indexes to Evaluate Inflation ￭ Consumer price index (CPI): Evaluates the change in the weighted-average price of goods and services that the average consumer buys each month ￭ Producer price index (PPI): Evaluates the change over time in the weighted- average wholesale prices 37

38. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Productivity ￭ Relationship between:  Output - Production of goods or services  Input - Resources required to produce goods or services 38 Productivity = Output/Input

39. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Define economics and discuss the evolving global economic crisis Analyze the impact of fiscal and monetary policy on the economy Explain and evaluate the free market system and supply and demand 39 2-1 2-2 2-3

40. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Explain and evaluate planned market systems Describe the trend toward mixed market systems Discuss key terms and tools to evaluate economic performance 40 2-4 2-5 2-6