Our Global Economy

2-1 Economics and Decision Making

2-2 Basics of Economics

2-3 Economic Systems

2-4 Achieving Economic Development

2-5 Resources Satisfy Needs

CHAPTER 2

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LESSON 2-1

Economics and Decision Making

GOALS Describe the basic economic problem.

List the steps of the decision-making process.

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If Money Were No Object…

Where would you live?What would you drive?Where would you go to school?What would you wear?

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Reality…

There is a limited supply of moneyThere are limited resourcesThere is limited amount of time to get

everything done you want to accomplish

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The Basic Economic Problem

Scarcity refers to the limited resources available to satisfy the unlimited needs and wants of people.

Economics is the study of how people choose to use limited resources to satisfy their unlimited needs and wants.

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Making Economic Decisions

Coping with scarcityMaking choices

TimeMoneyEnergy

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The Decision-Making Process

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The Decision-Making Process

1. Define the problemWhat do I want or need?

Business Example: Declining domestic sales

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The Decision-Making Process

2. Identify the alternativesWhat are the different ways my problem

can be solved?Business Example:

Increase PricesReduce ExpensesNew Product DevelopmentExpansion

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The Decision-Making Process

3. Evaluate the alternativesWhat are the advantages and

disadvantages of each of the choices available?Business Example:

Lose or gain customersDownsizingR&DNew products

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The Decision-Making Process

4. Make a choiceBased on the advantages and

disadvantages, which would be my best choice? Can I live with the consequences of that choice?Opportunity Cost – the most attractive

alternative given up when a choice is made

If by expanding globally, Kellogg’s has to use a manufacturing plant that currently has less than ethical business practices

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The Decision-Making Process

5. Take action on the choiceWhat needs to be done to put the

decision into action?Business Example: Expand Globally

Select CountriesHire Sales ForceDetermine Logistics/Distribution

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The Decision-Making Process

6. Review the decisionDid your decision solve the problem? As

time goes by, what different actions might be necessary? Were there consequences you did not predict when you evaluated the alternatives?Did increase in sales offset cost of global

expansion?Can Kellogg’s upgrade manufacturing plant

with more current ethical standards?

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The Decision-Making Process

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LESSON 2-2

Basics of Economics

GOALS Describe how the market sets prices.

Explain the causes of inflation.

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Price-Setting Activities

Supply is the relationship between the amount of a good or service that businesses are willing and able to make available and the price.

Demand is the relationship between the amount of a good or service that consumers are willing and able to purchase and the price.Law of Demand – as price declines, demand

increases

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Market Price Is Set by Supply and Demand

Market price is the point at which supply and demand cross.Also called Equilibrium Price

Example: Air line tickets

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Market Price Is Set by Supply and Demand

0 100 200 300 400 500 600$0

$500

$1,000

$1,500

$2,000

$2,500

Airfare to Paris

Qs

Qd

Seats Sold

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et

Market Price

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Changing Prices

Inflation – an increase in the average prices of goods and services in a country Demand-pull inflation

When demand exceeds supplyCan occur when a government prints too much money

Cost-push inflationWhen the expenses of a business increase

Can occur when cost of salaries or raw materials go up

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LESSON 2-3

Economic Systems

GOALS Name the three main factors of production.

Understand how different countries make economic decisions.

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Economic Resources Satisfy Needs

Factors of Production – the 3 types of resources used to produce goods and servicesNatural resourcesHuman resourcesCapital resources

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Natural Resources

Raw materials that come from the earth, from the water, and from the airIron ore, gold, silver, agricultural products

Also known as landUsed in the production of goods and

services consumed by individuals, businesses, and governments.

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Human Resources

The people who work to create goods and services

Also known as laborWhile technology has changed or

eliminated certain tasks previously performed by people, new types of work are continually being created.

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Capital Resources

Includes buildings, money, equipment, and factories used in the production process

Also called capitalThese items are expensive and are used

over several years by business organizations.

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Economic System

The economic choices of a country relate to three basic questions:1.What goods and services are to be

produced?

2.How should the goods and services be produced?

3.For whom should the goods and services be produced?

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Economic Systems

Economic SystemsThe method a country uses to answer the

basic economic questionsOften based on customs, political factors, and

religious beliefs3 common types

Command EconomiesMarket EconomiesMixed Economies

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Types of Economic Systems

Command EconomiesGovernment regulates the amount,

distribution, and price of everything producedGovernment owns the productive resourcesAny income from these resources is used to

help fund government activitiesAlso known as Communism

China, Cuba, Vietnam, Laos, North Korea

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Types of Economic Systems

Market EconomiesIndividual companies and consumers make

the decisions about what, how, and for whom items will be produced

Also known as Capitalism of Free Enterprise SystemUnited States, Japan, Australia, Canada

Is there such a thing as a Perfect Market Economy?

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Types of Economic Systems

3 Characteristics of Market EconomiesPrivate property – individuals have right to buy and

sell productive resources and to own business enterprises

Profit motive – individuals are inspired by the opportunity to be rewarded for taking business risks and for working hard

Free, competitive marketplace – consumers have the power to use their choices to determine what is to be produced and to influence the prices to be charged

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Types of Economic SystemsMixed Economies

Blend between government involvement in business and private ownership

Government owns transportation, communications, and major industries

Individuals free to engage in other business opportunities and free to make buying choices

Also known as SocialismSweden, France

Privatization – process of changing an industry from public to private ownership

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LESSON 2-4

Achieving Economic Development

GOALS Describe the factors that affect economic development.

Identify the different levels of economic development.

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Economic Development

Traveling on a high-speed bullet train to manage a computer network in a high-rise building

Going by ox cart to a grass hut to operate a hand loom to make cloth for family members and other people in their village

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What Influences a Country’s Economic Development?

Literacy levelTechnology Agricultural dependency

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What Influences a Country’s Economic Development?

True or false?countries with better education systems usually

provide more goods and services that are of higher quality for their citizens

automated production, distribution, and communication systems allow companies to create and deliver goods, services, and ideas quickly

an economy that is largely involved in agriculture does not have the manufacturing base to provide citizens with a large number of high quality products

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Level of Economic Development

Industrialized or Developed CountriesLess-Developed CountriesDeveloping Countries

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Levels of Economic Development

Low literacyLimited

technologyAgricultural or

mining economy

Improving literacy

Improving technology

Decreasing dependence on agriculture or mining

High literacyModern

technologyIndustrial

economy

Less-Developed Country

Developing Country

Industrialized Country

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2Industrialized or Developed CountriesStrong Infrastructure

a nation’s transportation, communication, and utility systems

Actively involved in international business and foreign trade

Average annual income per person of more than $30,000US, Canada, UK, France, Germany, Italy,

Japan

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Less-Developed Countries (LDCs)Little economic wealth

May have resources, but no technology to make use of them

Weak Infrastructure, poor health care, low literacy rates, low levels of employment skills, uncertain political environments

Little to no foreign tradeAverage annual income per person of less than

$1,000Bangladesh, Cambodia, Chad, Haiti, Nepal, Niger,

and Sudan SLIDE 38

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Developing CountriesEvolving from less developed to

industrialized Improving educational systems, increasing

technology, and expanding industriesAlso known as Emerging Markets

Argentina, Brazil, Ecuador, India, Kenya, Hungary, Poland, South Africa, Turkey, Thailand, and Vietnam

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LESSON 2-5

Resources Satisfy Needs

GOALS Discuss economic principles that explain the need for international trade.

Identify various measures of economic progress and development.

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The Economics of Foreign Trade

Absolute advantage exists when a country can produce a good or service at a lower cost than other countriesUsually occurs as a result of the natural

resources or raw materials of a countryExamples:

South America – coffeeSaudi Arabia – oilCanada - lumber

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The Economics of Foreign Trade

Comparative advantage exists when a country can produce a good or service with more efficiency than other countriesMaximizing economic wealthIf advantage exists in more than one area,

produce goods with greatest return and buy other goods elsewhere

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Measuring Economic Progress

Measures of ProductionGross domestic product (GDP)

Measures the output of goods that a country produces within its borders

Includes items produced with foreign resourcesGross national product (GNP)

Measures the total value of all goods and services produced by the resources of a country

GDP plus production on other countries using our resourcesPer Capita

Refers to an amount per personTakes total GDP divided by country population

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2Per Capita GDP for Selected Countries

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Rank Country US$ Rank Country US$

1 Qatar 143,427 8 San Marino 60,664

2 Luxembourg 92,049 9 Switzerland 58,087

3 Singapore 82,762 10 Hong Kong 54,722

4 Brunei 73,233 11 US 54,597

5 Kuwait 71,020 12 Saudi Arabia 52,183

6 Norway 66,937 13 Bahrain 51,714

7 UAE 64,479 14 Ireland 49,195

Source: International Monetary Fund (2014)

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Measuring Economic Progress

International Trade ActivityBalance of trade – the difference between a

country’s exports and importsTrade Surplus – when a country exports (sells)

more than it imports (buys)Trade Deficit – when a country imports (buys)

more than it exports (sells)

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Balance of Trade

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Measuring Economic Progress

International Trade ActivityForeign exchange rate – the value of one country’s

money in relation to the value of the money of another country

How strong is the US dollar today?Foreign debt – the amount a country owes to other

countries How much external debt does the US have?

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Measuring Economic Progress

Other Economic MeasurementsConsumer price index (CPI)

How inflation is measured in USMonthly report that provides price levels for various products

and services in different regions of the countryUnemployment rate

Number of people not workingWhen people are not earning an income, they cannot

purchase needed goods and services