1. ****** 2-1 1-1 McGraw-Hill/Irwin Understanding Business, 8e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Nickels McHugh McHugh ** How Economics Affects Business: The Creation and Distribution of Wealth 2 CHAPTER * **

2. ****** 2-2 Learning goals Compare and contrast the economics of despair with the economics of growth.Compare and contrast the economics of despair with the economics of growth. Explain what capitalism is and how free markets work.Explain what capitalism is and how free markets work. Discuss the major differences between socialism and communism.Discuss the major differences between socialism and communism. Explain the trend toward mixed economies.Explain the trend toward mixed economies. Discuss the economic system of the united states, including the significance of key economic indicators (GDP), productivity, and the business cycle.Discuss the economic system of the united states, including the significance of key economic indicators (GDP), productivity, and the business cycle. Define fiscal policy and monetary policy, and explain how each affect the economy.Define fiscal policy and monetary policy, and explain how each affect the economy.

3. ****** 2-3 Economics: Create Wealth 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 Micro v. MacroMicro v. Macro Resource DevelopmentResource Development

4. ****** 2-4 Four “What’s” of an Economic System $What is produced? $What amount is produced? $What is the method of output distribution? $What is the rate of economic growth? Adapted from: Adapted from: Edwin Mansfield Economics (New York: W.W. Norton, 1976), p.8

5. ****** 2-5 Economic Theories Thomas Malthus (Early 1800s) Thomas Malthus (Early 1800s) “Dismal Science” “Dismal Science” Too many peopleToo many people Adam Smith (1776) Adam Smith (1776) Freedom is vitalFreedom is vital “Invisible Hand”“Invisible Hand”

6. ****** 2-6 Circular Flow Model

7. ****** 2-7 Three Economic Systems Communism Socialism Capitalism (Highly Controlled ) (Little Control ) Mixed

8. ****** 2-8 Free-Market Capitalism Private Property Private Property Business Ownership/ Profits Business Ownership/ Profits Freedom of Competition Freedom of Competition Freedom of Choice Freedom of Choice

9. ****** 2-9 Supply Curve Quantity(S) High High Low Price(P) S

10. ****** 2-10 Demand Curve Price(P) Quantity(D) High Low D

11. ****** 2-11 Quantity High Low Price Equilibrium Point Market Equilibrium SD Surplus Shortage

12. ****** 2-12 Free-Market Competition Sellers OneMany Monopoly Oligopoly MonopolisticCompetition Perfect Competition

13. ****** 2-13 Perfect Competition Buyer Sellers

14. ****** 2-14 Monopolistic Competition: Many Sellers With Perceived Differences Fast Food Fast Food Colleges Colleges

15. ****** 2-15 Oligopoly: Few Sellers Automobiles Automobiles Tobacco Tobacco

16. ****** 2-16 Monopoly: One Seller Utilities Utilities Microsoft? Microsoft?

17. ****** 2-17 Limits of Free-Markets Inequality of Wealth- Causes National & World Tension Inequality of Wealth- Causes National & World Tension Greed Compromises Ethics Greed Compromises Ethics Limitations Push Country towards Socialism = Government Regulation Limitations Push Country towards Socialism = Government Regulation

18. ****** 2-18 Industrialized Nations’ Top Individual Tax Rate Source: www.worldwide-tax.com, May 9, 2006

19. ****** 2-19 Socialism Private & Public Ownership Private & Public Ownership Some Choices are Limited Some Choices are Limited Creates Social Equality Creates Social Equality Reduces Individual Incentive Reduces Individual Incentive - Brain Drain

20. ****** 2-20 Communism Public Ownership Public Ownership Almost all major factors of production Almost all major factors of production Central Planning/Controlled Economy Central Planning/Controlled Economy Shortages of food and other products Shortages of food and other products may develop may develop Lack of motivation to work hard for Lack of motivation to work hard for business people business people

21. ****** 2-21 Mixed Economies Free-Market Economy = Capitalism Free-Market Economy = Capitalism Command Economy Command Economy SocialismSocialism CommunismCommunism Trend Results in Blend/Mix Trend Results in Blend/Mix Capitalism > SocialismCapitalism > Socialism Socialism > CapitalismSocialism > Capitalism

22. ****** 2-22 Why is the U.S. an Economic Success? Major Reason Percent* Major Reason Percent* Constitution85 Free Elections84 Free Enterprise System81 Abundant Resources78 Cultural Diversity71 * Respondents could choose more than one. Source: Investors Business Daily Survey

23. ****** 2-23 U.S. Economy Key Economic IndicatorsKey Economic Indicators Productivity in the U.S.Productivity in the U.S. Productivity in the Service SectorProductivity in the Service Sector Business CyclesBusiness Cycles RecessionRecession DepressionDepression RecoveryRecovery StabilizationStabilization Fiscal PolicyFiscal Policy National DebtNational Debt Economic Growth through Monetary PolicyEconomic Growth through Monetary Policy

24. ****** 2-24 Key Economic Indicators Gross Domestic Product (GDP) Gross Domestic Product (GDP) Unemployment Rate Unemployment Rate Price Indexes Price Indexes Consumer Price Index (CPI)Consumer Price Index (CPI) Producer Price Index (PPI)Producer Price Index (PPI)

25. ****** 2-25 U.S. Gross Domestic Product In Billions of U.S. $ Source: U.S. Dept. of Commerce, Bureau of Economic Analysis

26. ****** 1975 2004 1975 2004 G-8 Countries55 44G-8 Countries55 44 U.S. only22 21U.S. only22 21 China 5 13China 5 13 India 3 6India 3 6 Latin America 7 6Latin America 7 6 Africa 33Africa 33 Share of World GDP(%) Source: www.dlc.org/ppi, July 6, 2005 2-26

27. ****** 2-27 U.S. Unemployment (%) Source: U.S. Bureau of Labor Statistics Source: Source: U.S. Bureau of Labor Statistics

28. ****** 2-28 What Makes Up The Consumer Price Index? Source: Source: U.S. Bureau of Labor Statistics

29. ****** 2-29 Consumer Price Index 1982-84 = 100 Source: U.S. Dept. of Labor, Bureau of Labor Statistics

30. ****** 2-30 Percent Change in Labor Productivity- U.S. Source: U.S. Dept. of Commerce, Bureau of Labor Statistics

31. ****** 2-31 Where Does the Government Get Its Money? Source: Office of Management & Budget, 2002

32. ****** 2-32 Federal Spending Source: Congressional Budget Office

33. ****** 2-33 Biggest Economic Challenges Over the Next 3-5 years the U.S. can be expected to face these challenges:Over the Next 3-5 years the U.S. can be expected to face these challenges: Pension & Health care costsPension & Health care costs The Federal DeficitThe Federal Deficit High Energy and Commodity CostsHigh Energy and Commodity Costs Balance of paymentsBalance of payments TerrorismTerrorism Source: Investors Business Daily January 9, 2006

34. ****** 2-34 Healthcare Expenditure Projections (Percent of National GDP) Source: FORTUNE May 3, 2004

35. ****** 2-35 Rising U.S. Trade Deficit Source: US Dept of Commerce, Bureau of Economic Analysis

36. ****** 2-36 Where are the Homeland Security Dollars Spent? Source: Business Week June 14, 2004

37. ****** 2-37 The debt has reached $8.36 trillion+ (May 2006)The debt has reached $8.36 trillion+ (May 2006) If $1,000 bills were stacked:If $1,000 bills were stacked: $1 Million = 4.29 Inches$1 Million = 4.29 Inches $1 Billion = 357.5Feet$1 Billion = 357.5Feet $1 Trillion = 67Miles$1 Trillion = 67Miles The debt is equal to 560.1 miles in $1,000 billsThe debt is equal to 560.1 miles in $1,000 bills National Debt Clock- http://www.brillig.com/debt_clock/National Debt Clock- http://www.brillig.com/debt_clock/ http://www.brillig.com/debt_clock/ What is the National Debt?