1. Chapter 2: External Environment Chapter 2 External Environment

2.  2005 Kaplan Financial 2 Chapter 2: External Environment External Environment Economic Environment Legal Environment Social Environment Technological Environment Political Environment Taxation Environment

3.  2005 Kaplan Financial 3 Chapter 2: External Environment External Environment

4.  2005 Kaplan Financial 4 Chapter 2: External Environment The General Economy Demand Supply Substitutes & Complements Diminishing Marginal Utility Price Elasticity Equilibrium

5.  2005 Kaplan Financial 5 Chapter 2: External Environment Demand Curve

6.  2005 Kaplan Financial 6 Chapter 2: External Environment Supply Curve

7.  2005 Kaplan Financial 7 Chapter 2: External Environment Substitutes & Complements Substitutes products that serve similar purposes chicken and turkey Complements products consumed jointly peanut butter and jelly

8.  2005 Kaplan Financial 8 Chapter 2: External Environment Diminishing Marginal Utility As Rate of Consumption increases, enjoyment or use of additional units decreases.

9.  2005 Kaplan Financial 9 Chapter 2: External Environment Price Elasticity For some goods (elastic), demand will change greatly with a small price change. cars, boats, vacations For other goods (inelastic), demand will change little with a large price change. electricity, water

10.  2005 Kaplan Financial 10 Chapter 2: External Environment Price Elasticity % Δ in Quantity Demanded % Δ in Price = Price Elasticity (PE) PE > 1 Elastic PE < 1 Inelastic PE = 1 Unit elastic

11.  2005 Kaplan Financial 11 Chapter 2: External Environment Equilibrium

12.  2005 Kaplan Financial 12 Chapter 2: External Environment Hypothetical Business Cycle

13.  2005 Kaplan Financial 13 Chapter 2: External Environment Business Cycle Components Expansion Phase Contraction Phase Peak Point Trough Point

14.  2005 Kaplan Financial 14 Chapter 2: External Environment Business Cycle and GDP

15.  2005 Kaplan Financial 15 Chapter 2: External Environment Actual Business Cycle

16.  2005 Kaplan Financial 16 Chapter 2: External Environment The Economy and Inflation Inflation Deflation Disinflation Moderate Inflation Galloping Inflation

17.  2005 Kaplan Financial 17 Chapter 2: External Environment Measures of Inflation Consumer Price Index Gross Domestic Product Gross National Product Producer Price Index

18.  2005 Kaplan Financial 18 Chapter 2: External Environment Monetary and Fiscal Policy Monetary Policy Easy vs. Tight Monetary Policy Methods of Controlling Money Supply Discount rate Reserve requirements Open market operations Fiscal Policy Taxation, expenditures, and debt management of the federal government

19.  2005 Kaplan Financial 19 Chapter 2: External Environment Nature of Interest Rates Interest rate = price of money Nominal interest rate = stated rate Real interest rate = nominal rate adjusted for inflation

20.  2005 Kaplan Financial 20 Chapter 2: External Environment Expansion & Recession Expansion High Employment High resource demand Output > GDP average Recession High unemployment Low resource demand Falling real wages Decreasing real interest rates

21.  2005 Kaplan Financial 21 Chapter 2: External Environment Legal Environment Torts Liability & Negligence Consumer Protection Federal Consumer Protection Laws Bankruptcy Laws Worker Protection OSHA Workers’ Compensation Unemployment Compensation Social Security ERISA COBRA

22.  2005 Kaplan Financial 22 Chapter 2: External Environment Legal Environment (cont.) Financial Institutions FDIC Insurance Negotiable Instruments Investor Protection Securities Acts of 1933 and 1934

23.  2005 Kaplan Financial 23 Chapter 2: External Environment Torts Standards of Care Damages Vicarious Liability Defenses to Negligence

24.  2005 Kaplan Financial 24 Chapter 2: External Environment Federal Consumer Protection Laws Fair Packaging and Labeling Act Equal Credit Opportunity Act Fair Credit Reporting Act Fair Credit Billing Act Truth in Lending Act Magnuson-Moss Warranty Act

25.  2005 Kaplan Financial 25 Chapter 2: External Environment Federal Consumer Protection Laws (con’t) Fair Debt Collection Act Federal Bankruptcy Laws Consumer Protection at State Level Antitrust Legislation Monopoly Oligopoly Federal Trade Commission Act

26.  2005 Kaplan Financial 26 Chapter 2: External Environment FDIC Insurance Single Ownership Accounts Joint Accounts Business Accounts Retirement Accounts

27.  2005 Kaplan Financial 27 Chapter 2: External Environment Other External Factors Social Environment Technological Environment Political Environment Taxation Environment