1. McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-1 NickelsMcHughMcHugh With help from Philip

2. McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-2 Chapter 22 How Economics Affects Business: The Creation and Distribution of Wealth 2-2

3. McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-3 Learning Goals 1.Economics of Despair versus economics of Growth 2.Free Market Capitalism 3.Socialism and Communism 4.Mixed Economies 5.The US Economy 6.Government Fiscal and Monetary Policy

4. McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-4 1) Economics: Create Wealth Use Scarce Resources to Produce Goods & Services To Distribute Among Competing Groups/IndividualsUse Scarce Resources to Produce Goods & Services To Distribute Among Competing Groups/Individuals Micro v. MacroMicro v. Macro Resource DevelopmentResource Development

5. McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 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. McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-6 Three Economic Systems Communism Socialism Capitalism (Highly Controlled ) (Little Control ) Mixed

7. McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-7 2)Free-Market Capitalism Private Property Private Property Profit/Ownership Profit/Ownership Freedom of Competition Freedom of Competition Freedom of Choice Freedom of Choice

8. McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-8 Supply Curve Quantity(S) High High Low Price(P) S

9. McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-9 Demand Curve Price(P) Quantity(D) High Low D

10. McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-10 Quantity High Low Price Equilibrium Point Market Equilibrium SD Surplus Shortage

11. McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-11 Free-Market Competition Sellers OneMany Monopoly Oligopoly MonopolisticCompetition Perfect Competition

12. McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-12 Perfect Competition Buyer Sellers

13. McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-13 Monopolistic Competition: Many Sellers With Perceived Differences Fast Food Fast Food Colleges Colleges

14. McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-14 Oligopoly: Few Sellers Automobiles Automobiles Tobacco Tobacco

15. McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-15 Monopoly: One Seller Diamonds Diamonds Utilities Utilities Microsoft? Microsoft?

16. McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-16 Limits of Free-Markets Inequality of Wealth- Causes National & World Tension Inequality of Wealth- Causes National & World Tension Greed Compromises Ethics Greed Compromises Ethics Potential Environmental Damage Potential Environmental Damage Limitations Push Country towards Socialism = Government Regulation Limitations Push Country towards Socialism = Government Regulation

17. McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-17 3) Socialism and Communism a)Socialism Social EqualitySocial Equality Protection of poor and weakProtection of poor and weak Free educationFree education Free health careFree health care Brain drainBrain drain

18. McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-18 Number of Workers per Social Security Recipient Source: Investors.com

19. McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 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- Brain Drain Reduces Individual Incentive- Brain Drain

20. McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-20 Industrialized Nations’ Tax Rate Source: Parade Magazine, Apr. 12, 1998.

21. McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-21 b) Communism Ideal that is not achievable because of human natureIdeal that is not achievable because of human nature Government has total controlGovernment has total control Abuse: corruptionAbuse: corruption Theoretically no material reward for harder workTheoretically no material reward for harder work

22. McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-22 Communism Public Ownership Public Ownership Productive CapacityProductive Capacity CapitalCapital Central Planning/Controlled Economy Central Planning/Controlled Economy Managers = Mandatory Party Membership Managers = Mandatory Party Membership

23. McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-23 4) 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

24. McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-24 Why is the U.S. an Economic Success? Major ReasonPercent* Major ReasonPercent* Constitution85 Free Elections84 Free Enterprise System81 Abundant Resources78 Cultural Diversity71 * Respondents could choose more than one. Source: Investors Business Daily Survey

25. McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-25 5) U.S. Economy Key Economic IndicatorsKey Economic Indicators ProductivityProductivity Business CyclesBusiness Cycles RecessionRecession DepressionDepression RecoveryRecovery StabilizationStabilization Fiscal PolicyFiscal Policy Monetary PolicyMonetary Policy National DebtNational Debt

26. McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-26 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)

27. McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-27 U.S. Gross Domestic Product In Billions of U.S. $ Source: U.S. Dept. of Commerce, Bureau of Economic Analysis

28. McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-28 1970 2001 1970 2001 North America37 38North America37 38 Asia 21 28Asia 21 28 Europe33 28Europe33 28 South America 7 4South America 7 4 Africa/Australia 2 2Africa/Australia 2 2 Share of World GDP(%) Source: Investor’s Business Daily, Apr. 29, 2003.

29. McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-29 U.S. Unemployment (%) Source: U.S. Bureau of Labor Statistics

30. McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-30 What Makes Up The Consumer Price Index? SOURCE: SOURCE: U.S. Bureau of Labor Statistics

31. McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-31 Consumer Price Index 1982-84 = 100 Source: U.S. Dept. of Labor, Bureau of Labor Statistics

32. McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-32 % Change in Labor Productivity- U.S. Source: U.S. Dept. of Commerce, Bureau of Labor Statistics

33. McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-33 6) Government Fiscal and Monetary Policy Fiscal Policy: government influencing economy by varying taxes and spendingFiscal Policy: government influencing economy by varying taxes and spending National Debt: sum of government deficits over timeNational Debt: sum of government deficits over time Monetary Policy: management of money supply (reserve requirements) and interest ratesMonetary Policy: management of money supply (reserve requirements) and interest rates

34. McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-34 Where Does the Government Get Its Money? Source: Office of Management & Budget, 2002

35. McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-35 What Federal Dollars Buy (2002) Human Resources. – 63% Other 5.7% Defense - 17.5% Interest 7.9% Physical Resources 5.9% Source: Office of Management & Budget

36. McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-36 The debt has reached $6.7 trillion+ If $1,000 bills were stacked: $1 Million = 4.29 Inches $1 Billion = 357.5Feet $1 Trillion = 67Miles The debt is equal to 442.2 miles in $1,000 bills National Debt Clock- http://www.brillig.com/debt_clock/ http://www.brillig.com/debt_clock/ What is the National Debt?

37. McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-37 Billions California$ 35.0 California$ 35.0 New York 12.0 New York 12.0 New Jersey 5.7 New Jersey 5.7 Connecticut 2.5 Connecticut 2.5 Missouri 1.3 Missouri 1.3 Ohio 0.72 Ohio 0.72 Nevada 0.64 Nevada 0.64 State Budget Deficits (’03 & ’04) Source: BusinessWeek March 17, 2003