1. Chapter 8
The Impact of Economic Forces

2. Macroeconomic Forces Macroeconomics: Key Macroeconomic Variables:
The study of the entire economy of a nation.
Key Macroeconomic Variables:
Economic Growth
Inflation
Unemployment
Interest Rates
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3. Gross Domestic Product (GDP)
The market value of all final goods and services produced in a country in a given year.
The 4 Components of GDP:
Personal Expenditures
Gross Private Domestic Investment
Government Consumption Expenditures and Gross Investment
Net Exports of Goods and Services (the value of exports minus the value of imports)
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4. Key Economic Factors Economic Growth: Per Capita Economic Growth:
An increase in total spending in the economy.
Per Capita Economic Growth:
Calculated by dividing the GDP in each year by the population in that year.
Per capita growth rate is then determined by comparing the GDP per person in the preceding year with the GDP per person in the current year.
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5. Key Economic Factors Inflation: Deflation:
A general increase in prices or an increase in the prices of most goods and services.
Deflation:
A general decrease in prices or the prices of most goods and services.
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6. Unemployment Unemployment Rate: Types of Unemployment:
The ratio of the number of people classified as unemployed to the total labor force.
Types of Unemployment:
Frictional Unemployment
Structural Unemployment
Seasonal Unemployment
Cyclical Unemployment
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7. Interest Rates Interest: Effects of Interest Rates on Business:
The price that individuals or businesses pay to borrow money.
Effects of Interest Rates on Business:
Rising interest rates increase the total price customers pay who use credit for products and services.
Higher interest rates mean higher costs of doing business.
Interest rates impact on the rate of expansion of a business.
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8. Monetary and Fiscal Policy
Raising or lowering taxes of government spending in order to influence growth.
Monetary Policy:
Changing the money supply to change interest rates directly, thus influencing inflation, growth, and unemployment.
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9. The Business Cycle The Business Cycle
A somewhat regular pattern of ups and downs in aggregate production, as measured by the fluctuations in real GDP.
Peak
GDP
Peak
Expansion
Expansion
Recession
Trough
Year
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10. Industry Cycles Industry Cycles:
Some industries are subject to their own cyclical fluctuations in sales and profits.
Most likely to occur in industries where a high percentage of the cost of production is incurred at the time production capacity is created.
Telephone industry
Airline industry
Electricity generation industry
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11. Microeconomic Forces Microeconomics: Market:
The study of the behavior of individuals and firms.
Market:
The place where buyers and sellers meet and bargain over goods and services.
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12. Supply, Demand, and Market Price
Revenue is determined by 2 factors:
The prices customers pay.
The total amount of goods and services customers purchase.
P x Q = TR
P = price, Q = quantity sold, and TR = total revenue
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13. Supply, Demand, and Market Price
Demand Curve:
A line on a graph that shows how much of a good or service buyers will purchase at each possible price.
Supply Curve:
A line on a graph that shows the amount of a good or service a business will offer at each possible price.
Equilibrium Point:
The point on a graph where the demand curve intersects the supply curve.
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14. The Basic Supply and Demand Model
Price
Supply Curve
Equilibrium
Point
Demand Curve
Quantity
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15. Direct Competition Market Models
Pure Competition:
A market situation where many firms sell nearly identical products and no one firm can raise its price without losing most of its customers.
Monopolistic Competition:
A market situation where there are many firms but each firm has a slightly different product.
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16. Direct Competition Market Models
Oligopoly:
A situation where a few firms, with or without differentiated products, dominate the market.
Pure Monopoly:
A market situation where only one firm sells a product of service.
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17. Indirect Competition
Different products or services that are perceived by customers as acceptable alternatives or substitute products or services.
Southwest Airlines as a substitute for the car between Dallas, Houston, and San Antonio
The Internet as a substitute for the U. S. Postal Service
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18. The Role of Economics in Management Decision Making
Managers must observe and predict what will happen in the overall economy to ensure that their decisions match their best guesses of the future.
Large publicly held companies in particular must look at the economy because they know their performance and stock price will be affected by forces beyond their control.
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19. The Role of Economics in Management Decision Making
Stockholders will want to see continually rising stock prices or at least valid reasoning if stock prices do not meet expectations.
Top managers in these large companies may make acquisitions, sell divisions, or even sell the company itself depending on their assessment of the economy and how their firm can compete.
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