*

*Chapter Two

Understanding How

Economics Affects

Business

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

*What Is Economics?

• Economics – • how society employs resources to produce

goods and services for consumption among various groups and individuals.

• Macroeconomics – “Big”• Concentrates on the operation of a nation’s

economy as a whole.

• Microeconomics – “Small”• Concentrates on behavior of people and

organizations in markets for particular products or services.

The MAJOR BRANCHES of ECONOMICS

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• Resource Development – • how to increase resources and create conditions

that will make better use of them.

What Is Economics?RESOURCE DEVELOPMENT

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*The Secret to Creating a Wealthy Economy

• Resources would run out if the rich had most of the wealth and the poor had most of the population,

• This belief led the writer Thomas Carlyle to call economics “The Dismal Science.”

• Neo-Malthusians believe there are too many people in the world and believe the answer is radical birth control.

THOMAS MALTHUS and the DISMAL SCIENCE

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World Population Growth

*Adam Smith & the Creation of Wealth

Smith believed that:

• Freedom was vital to any economy’s survival.

• Freedom to own land or property and the right to keep the profits of a business is essential.

• People will work hard if they believe they will be rewarded.

ADAM SMITH the FATHER of ECONOMICS

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ADAM SMITH the FATHER of ECONOMICS

• Invisible Hand

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Three Economic Systems

CommunismCommunism

SocialismSocialism

CapitalismCapitalism

MixedMixed

High ControlHigh Control Little ControlLittle ControlGovernment

*

*Understanding Free-Market Capitalism

• Capitalism -- All or most of the land, factories and stores are owned by individuals, not the government, and operated for profit.

• Countries with capitalist foundations:- United States- England- Australia- Canada

CAPITALISM

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Free-Market Capitalism Rights

• Private Property

• Business Ownership/ Profits

• Freedom of Competition

• Freedom of Choice

*

*Understanding Socialism

• Socialism – • based on premise that some basic businesses,

like utilities, should be owned by the government in order to more evenly distribute profits among the people.

• Entrepreneurs run smaller businesses

• Citizens are highly taxed

• Government is more involved in protecting the environment and the poor

SOCIALISM

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*

*Understanding Communism

• Communism – • government makes almost all economic

decisions and owns almost all the major factors of production.

• Prices don’t reflect demand which may lead to shortages of items, including food and clothing.

• Most communist countries today suffer severe economic depression and citizens fear the government.

COMMUNISM

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Where is This?• http://images.google.com/imgres?imgurl=http://

strangemaps.files.wordpress.com/2007/12/1207koreaelectricitygrikf0.jpg&imgrefurl=http://strangemaps.wordpress.com/2007/12/16/218-koreas-dark-half/&usg=__YKejMC75cgXfP689w826Re5jRig=&h=700&w=548&sz=63&hl=en&start=21&sig2=wqr7GrODDT9BLQCikNy2jA&um=1&tbnid=vAaKo6KGi2keSM:&tbnh=140&tbnw=110&prev=/images%3Fq%3DKorea%26ndsp%3D18%26hl%3Den%26rls%3Dcom.microsoft:*:IE-Address%26rlz%3D1I7WZPA_en%26sa%3DN%26start%3D18%26um%3D1&ei=QXieSom9F8LilAeU06jHDQ

• http://www.youtube.com/watch?v=ImAthUIqEfU

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*

*The Trend Toward Mixed Economies

• Mixed Economies –

• Some allocation of resources is made by the market and some by the government.

• Neither free-market nor command economies have created sound economic conditions so countries use a mix of the two economic systems.

MIXED ECONOMIES

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*Gross Domestic Product

• Gross Domestic Product (GDP) – • Total value of final goods and services produced

in a country in a given year. • As long as a company is within a country’s

border, their numbers go into the country’s GDP (even if they are foreign-owned).

• When the GDP changes, businesses feel the effect.

• The high U.S. GDP (about $14 trillion) is what enables us to enjoy a high standard of living.

GROSS DOMESTIC PRODUCT

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US GROSS DOMESTIC PRODUCT

Recession

*

*Productivity inthe United States

• Productivity in the service sector grows slowly because of less new technology.

• Productivity in the U.S. has risen due to the technological advances that have made production faster and easier.

PRODUCTIVITY

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*

*The Business Cycle

• Business Cycles –

• Periodic rises and falls that occur in economies over time.

• Four Phases of Long-Term Business Cycles:1. Economic Boom

2. Recession – Two or more consecutive quarters of decline in the GDP.

3. Depression – A severe recession.

4. Recovery – When the economy stabilizes and starts to grow. This leads to an Economic Boom.

BUSINESS CYCLES

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*

*Stabilizing the Economy Through Fiscal Policy

• Fiscal Policy –

• federal government’s efforts to keep economy stable

• increasing or decreasing taxes or government spending.

• Tools of Fiscal Policy:- Taxation- Government Spending

FISCAL POLICY

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*

*Using Monetary Policy to Keep the Economy Growing

• Monetary Policy – • management of money supply and interest rates

by Federal Reserve Bank (the Fed).

• The Fed’s most visible role is increasing and lowering interest rates.- When the economy is booming, the Fed tends to

increase interest rates.- When the economy is in a recession, the Fed

tends to decrease the interest rates.

MONETARY POLICY

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