1. Economics and Business
Chapter 2
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2. Review What is the purpose of a business? Are profits a bad thing?
Who are the major participants in a business?
Who are the stakeholders?
What external factors affect business?

3. Learning Objectives Describe capitalism and socialism
Discuss private property rights and economic development
Discuss the concept of GDP (gross domestic product).
Explain fiscal and monetary policy
Discuss the concept of the unemployment rate
Discuss the concepts of inflation and deflation.
Explain other key terms including: supply; demand; equilibrium price; monopoly; recession; depression.
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4. Economics
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5. Economics Resources – inputs to the firm
Land
Raw material
Labor
Capital (money)
Factors of production – resources used to produce outputs
Equipment

6. Economic Systems Planned Systems
Government controls production and allocation of goods and services
Communism
Government owns all or most enterprises
Socialism
Government owns “essential” businesses

7. Economic Systems Free Markets
Capitalism
Most businesses are privately owned
Competition determines allocation of goods and services
Adam Smith - “Invisible hand”
Private property rights
Shareholders own their land and resources
Private enterprise
Shareholders entitled to profits

8. Captialism Private enterprise
Owned by individuals
vs. public enterprise – owned by government
“Invisible Hand” - from Adam Smith’s book The Wealth of Nations.
Individuals, acting in their own self-interest, will collectively make the best decisions.
We vote with our dollars!

9. Economic Systems Mixed Economies
Both private enterprise and government ownership
Discussion – What enterprises should the government own? Why?

10. Economics Supply & Demand
Demand curve – shows how much consumers are willing to purchase at every price
What factors affect the demand curve?
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11. Factors Affecting Demand Curve
Customer preferences
Number of buyers
Incomes
Price of substitute goods
Price of complementary goods
Future expectations

12. Economics Supply & Demand
Supply curve – shows how much businesses are willing to produce at every price
What factors affect the supply curve?
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13. Factors Affecting Supply Curve
Costs of goods
Costs of labor
Costs of technology
Availability of suppliers
Taxes
Weather (how?)

14. Economics Supply & Demand
Equilibrium price – price at which consumers are willing to purchase everything a business is willing to make
No surplus
No shortage
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15. Supply and Demand Curve Changes
Shift right in the demand curve
Results in higher prices and greater quantity S
Price D’ D
Quantity

16. Supply and Demand Curve Changes
Shift left in the demand curve
Results in lower prices and less quantity S
Price D D’
Quantity

17. Supply and Demand Curve Changes
Shift right in the supply curve
Results in lower price and greater quantity S S’
Price D
Quantity

18. Supply and Demand Curve Changes
Shift left in the supply curve
Results in higher price and less quantity S’ S
Price D
Quantity

19. Economics Supply & Demand
Discuss affects of
Increase in corporate taxes
Change in consumer tastes
Automation
Promotion
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20. Economics Supply & Demand
Consider the market for lemonade.
What happens when:
There is a heat wave
The price of sugar goes up
The cost of a can of soda falls
There is a baseball game on the street
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21. Competition Perfect competition Monopolistic competition
Many providers
Standard product
Many consumers
Monopolistic competition
Differentiated product

22. Competition Oligopoly Monopoly Natural monopolies Legal monopolies
Few providers
Many consumers
Monopoly
One provider
Natural monopolies
Legal monopolies

23. Measuring the Economy Gross Domestic Product, GDP
Value of all goods and services produced for consumer
Prosperity
Prosperity
Recovery/ Growth
Recovery/ Growth
Change
In GDP
Recession
Time
The Business Cycle

24. Recession Negative GDP change Lasts 6 months or longer (two quarters)
Must be real GDP
Lasts 6 months or longer (two quarters)

25. Measuring the Economy Unemployment
Unemployment rate
Percent unemployed and actively seeking work U3
Full employment
Everyone who wants a job can get one
~4% unemployment considered “full” employment
U6 unemployment
Broader measure
Includes part-time workers wanting full-time and those not actively seeking work

26. Types of Unemployment
Frictional
Seasonal
Structural
Cyclical

27. Historical Unemployment
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28. Exercise
Desert island thought experiment

29. Measuring the Economy Inflation
Consumer Price Index, CPI
Measure of inflation
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30. Measuring Price Level Changes
Consumer Price Index (CPI)—measures the monthly average change in prices of goods and services
Market Basket—compilation of the goods and services most commonly purchased by urban consumers
Producer Price Index (PPI)
For Finished Goods
For Intermediate Goods
The Governmental Bureau of Labor Standards (BLS) tracks price levels with two indices:
The Consumer Price Index (CPI)
1. measures monthly average changes in prices that consumers pay for certain goods and services
2. not a perfect measure of inflation - might actually overstate inflation by not fully accounting for changes in the goods and services that people buy
The Producer Price Index (PPI)
1. tracks the differences in goods and services prices from the sellers perspective
2. Uses three measurements – finished goods, intermediate goods, and crude goods

31. Contents of the CPI Market Basket

32. Factoring out Inflation
Need to compare costs over time
“Nominal” is the quoted amount
E.g. The nominal price of a gallon of gas in 1970 was $.36
“Real” is an adjective to describe a measure with inflation subtracted out
Real = Nominal – Inflation
E.g. Real gas prices, real home prices, real GDP

33. Historical Inflation Inflation is not a modern phenomenon 14th Century
Post-plague
16th – 17th Century Spain
Caused by gold and silver from America
Hyperinflation
Zimbabwe 2007 – 11,000%
Greece 1944 – 13,800%
Germany 1923 – 29,525%
Hungary 1940 – 14 quintillion %
Prices doubled every 15 hours
Venezuela 2018 – 1 million % IMF prediction

34. Measuring the Economy Economic Forecasting
Economic indicators
Statistics about the economy
Lagging economic indicators
Look at past data
E.g. average length of unemployment
Leading economic indicators
Try to predict the economy
E.g. new home sales
E.g. consumer confidence index

35. Government’s Role in Economy Monetary Policy
Managed by a country’s central bank
Federal Reserve Board, “The Fed”
Responsible for money supply of the U.S.
Primary tool is control of short-term interest rates

36. Government’s Role in Economy Fed Actions
May increase money supply
By lowering short-term interest rates
“Easing” money supply
Stimulates economy
Stimulates inflation
May decrease money supply
By raising short-term interest rates
“Tightens” money supply
Slows economy
Lowers inflation

37. Government’s Role in Economy Fiscal Policy
Managed by Congress
Primary tools
Taxes
Est. $3.3 Trillion in 2018*
Spending
Est. $4.1 Trillion in 2018*
When economy is in a recession
Want to stimulate growth
When inflation is high
May want to contract *

38. Government’s Role in Economy Fiscal Policy Actions
Stimulate economy
By lowering taxes
By increased spending
Effect is to increase money in economy
Increases inflation
Contract the economy
By increasing taxes
By reducing spending
Reduces money in the economy
Lowers inflation

39. National Debt Budget surplus Budget deficit National debt
If take in more than spend
Budget deficit
If spend more than take in
National debt
Amount government owes
>$21 Trillion as of 5/18
>$174,000 per tax payer

40. Legal Framework of Business
Antitrust
monopolies are illegal
no price discrimination
no collusion
Regulation
FTC – Federal Trade Commission
FCC – Federal Communications Commission
FDA – Food and Drug Administration
SEC – Securities and Exchange Commission

41. Legal Framework of Business
Liability
Intellectual Property protection
patent
copyright
trademark
trade secret