1. 1 1 & 3. Business and the Economy Understanding Business and the Context in Which it Operates

2. 2 Why Study Business? To become a better-informed consumer and investor For help in choosing a career To be a successful employee To start your own business

3. 3 Business: A Definition Business consists of: –The profit-seeking activities of those engaged in purchasing or selling goods and services to satisfy society’s needs and wants. Satisfying needs wants –Ultimate objective of every firm Business profit –What remains after business expenses are deducted from sales revenue

4. 4 Economic Systems Economics : The study of how wealth is created & distributed –Macroeconomics: national economic issues –Microeconomics: consumers, individual businesses Factors of production: Four inputs to economic systems –Natural resources –Human resources –Capital –Entrepreneurship

5. 5 Measuring Economic Performance Economic indicators –Productivity measures Gross domestic product (GDP) Gross national product (GNP) –Price indexes Consumer price index (CPI) Producer price index (PPI) –Employment statistics Labor force, employment, unemployment

6. 6 More on Economic Systems Can be capitalistic, command/planned, or “mixed” Address four basic economic questions: –Which & how many goods & services will be produced? –How will they be produced? –For whom will they be produced? –Who owns & controls the factors of production?

7. 7 Capitalism: The Private Enterprise System Theories of Adam Smith (Wealth of Nations, 1776) –Society’s interests are best served when the individuals within society are allowed to pursue their own self- interest Based on four principles: –Creation of wealth is the concern of private individuals, not government –Owners of resources should be free to determine how they are used –Economic freedom ensures existence of competitive markets (market economy) –Government should act only as rule-maker/umpire

8. 8 Capitalism: The Private Enterprise System (Cont.) Basic rights of capitalist system: –Right to private property –Right of business owners to the profits (after taxes) generated by their activities –Freedom of choice (employment, purchases, investments) –Public (i.e, government) sets rules to protect competition

9. 9 Market Forces at Work in the Capitalist System Supply & demand –Prices influenced by competition –Prices usually respond to forces of supply & demand

10. 10 Supply Quantities of good/service that producers will provide on particular date at various prices Law of supply: –Sellers supply more at higher price, less at lower

11. 11 Demand Amount of good/service that consumers will buy on that date at various prices Law of demand: –Buyers buy more at lower price, less at higher

12. 12 Theory Of Supply & Demand Quantity supplied & quantity demanded interact continuously Balance between them is reflected by current price

13. 13 Supply, Demand, & Profit Motive Interact to regulate –What is produced –Amounts produced Consumers get what they want & producers earn a profit

14. 14 Relationship Between Supply And Demand Demand curve: relationship between price and quantity demanded Supply curve: relationship between price and quantity provided Equilibrium point: intersection of supply & demand curves

15. 15 Demand Curve Changes in quantity demanded –Movement along curve Changes in demand –Curve shifts to right (demand increased) or left (demand decreased) –Influences: preferences, incomes, substitute prices, no. buyers

16. 16 Supply Curve Changes in quantity supplied –Movement along curve –Independent of demand Changes in supply –Curve shifts to left (lowered supply) or right (increased supply) –Influence: factors of production

17. 17 Equilibrium Point Point at which demand and supply curves intersect Identifies prevailing market price Discrepancies between market & equilibrium price are self- correcting

18. 18 Types of Competition in the Capitalist System Pure competition Monopolistic competition Oligopoly Monopoly

19. 19 Pure Competition Products identical Perfect information No entity large enough to influence prices E.g., markets for agricultural commodities

20. 20 Monopolistic Competition Products not identical –Product differentiation possible –Use of branding, etc. Many buyers & sellers Imperfect information Some government regulation E.g., consumer goods markets

21. 21 Oligopoly Products: similar or different Few, large sellers; many small buyers Sellers match rivals’ prices Market entry expensive Government watches closely E.g., steel, automobile markets

22. 22 Monopoly One seller; many small buyers Seller controls products & prices--no competition Seller keeps other firms from competing True monopolies illegal E.g., utilities (legal; regulated)

23. 23 Other Economic Systems: Command/Planned & Mixed Socialism Communism “Mixed” economies

24. 24 Socialism High degree government planning Government owns some of land & capital Government involvement limited Private ownership permitted

25. 25 Communism Allows least degree economic freedom Public ownership of factors of production Planned resource allocation

26. 26 Mixed Economies Many communist & socialist economies have capitalist elements –Some relaxing of central control –Increased privatization Capitalist economies often have socialist elements

27. 27 Business Cycle Pattern of expansion and contraction through which our economy flows Characterized by: –Prosperity –Inflation: Recession –Depression –Recovery

28. 28 Employment Act of 1946 First formal statement of economic goals & federal government’s responsibility for economic progress Brought about by concerns following depression and WWII Effort to “flatten” the effects of the business cycle

29. 29 Federal Economic Responsibilities Promote maximum employment Promote maximum production Promote maximum purchasing power

30. 30 Maximum Employment Goal:full employment of able, willing, & seeking Full employment does not equal 0% unemployment –Worker mobility –Worker layoffs & retraining –Unrealistic worker hopes

31. 31 Four Categories Of Unemployment Frictional Seasonal Cyclical Structural

32. 32 Maximum Production (Economic Growth) Generally understood to be 4% production growth per year Increased efficiency –Increased production –Conservation of input resources

33. 33 Maximum Purchasing Power (Stable Prices) Control of inflation –Demand-pull –Cost-push –Hyperinflation Goal historically considered attained when prices rise at 2-3% per year

34. 34 Monetary Policy Increase/decrease money supply –Expansionary –Restrictive Controlled by “The Fed” –Adjusts % deposits of member banks –Adjusts interest rates

35. 35 Fiscal Policy Government influences economic activity through –Taxation –Spending Policy manifested in federal budget