bus 101 Chap002

*

*Chapter Two

Understanding How

Economics Affects

Business

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

1.Why some countries are relatively poor than other countries?

2. Why is South Korea relatively wealthy and North Korea suffering economically?

3. Why is China’s annual income per person ($944) much less than Taiwan’s ($13010)

*What Is Economics?

• Economics -- The study of how society employs resources to produce goods and services for consumption among various groups and individuals.

• Macroeconomics -- Concentrates on the operation of a nation’s economy as a whole. Ex: GDP, Unemployment rate, Price Index.

• Microeconomics -- Concentrates on the behavior of people and organizations in markets for particular products or services. Ex: Pricing, supply and demand.

The MAJOR BRANCHES of ECONOMICS

LG1 *

2-3

*

• Some economists define economics as the study of scarce resources. Resources need to be carefully divided among people by the government

• Resource Development -- The study of how to increase resources and create conditions that will make better use of them.•Recycling•New ways of growing food•Discover new energy sources•New way of creating needed goods and services.

What Is Economics?RESOURCE DEVELOPMENT

LG1 *

2-4

*The Secret to Creating a Wealthy Economy

• Malthus believed that if the rich had most of the wealth and the poor had most of the population, resources would run out.

• 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. (education)

THOMAS MALTHUS and the DISMAL SCIENCE

LG1 *

2-5

*The Secret to Creating a Wealthy Economy

“Give a man a fish and you feed him for a day, but teach a man to fish and you feed him for a life time”

“Teach a person to start a fish farm, and he or she will be able to feed a village for a life time” (Business)

THOMAS MALTHUS and the DISMAL SCIENCE

LG1 *

2-6

*Adam Smith & the Creation of Wealth

• Book titled ‘An inquiry into the nature and causes of the wealth of nations’ in 1776.

• The main theme of the book: creating more resources so that everyone could become wealthier. And when people see economic reward for their efforts, they would work for long hours and work hard.

• Result: economy would prosper with plenty of food and all kinds of products available to everyone.

ADAM SMITH the FATHER of ECONOMICS

LG1 *

2-7

*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.

• One way to be really wealthy was to start a successful business of your own.

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

ADAM SMITH the FATHER of ECONOMICS

LG1 *

2-8

ADAM SMITH the FATHER of ECONOMICS

• Smith said that as people try to improve their life, their efforts serve as an Invisible Hand that helps the economy to grow and prosper .

• Invisible hand – the process that turns self directed gain into social and economic benefits for all.

• Example: British American Tobacco, Bangladesh (BATB) is engaged in tree plantation

*

*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

LG2

2-10

Foundations of Capitalism

• The right to own private property

• The right to own a business and keep all the business’s profits.

• The right to freedom of competition

• The right to freedom of choice-People are free to choose what they want to do

Free-Market Capitalism

• How Free markets work?A free market is one in which decisions about what to produce

and in what quantities are made in the market by buyers and sellers negotiating prices for goods and services.

Price tells producers how much to produce • How Prices are determined? In a free market, prices are determined through

negotiations between buyers and sellers in the market.

Free-Market Capitalism

• The Economic concept of Supply- Seller supply refers to the quantity of product that manufacturers or

owners are willing to sell at different prices at a specific time; the amount supplied will increase as price increases

• The Economic concept of Demand- Buyer demand refers to the quantity of products that people

are willing to buy at a different prices at a specific time; the quantity demanded will increase as the price decreases

Free-Market Capitalism

Free-Market Capitalism

• The Equilibrium Point

intersecting point of the supply curve and demand curve is known as the equilibrium point where the quantity supplied and demanded are equal; this equilibrium point will become the market price in the long run.

If quantity supplied exceeds quantity

demanded, the resulting Surplus

signals the sellers to lower the prices

If quantity supplied is less than

quantity demanded the resulting,

Shortage signals sellers to

Increase the price

Competition within free market economy• Perfect competition- many sellers and no seller

dominates, products identical (example- agricultural products)

• Monopolistic competition- large number of sellers but product differentiation by buyers (example- creams, chicken broast)

• Oligopoly- few sellers dominates the market (telecom, automobiles)

• Monopoly- only one seller (TITAS Gas, Desco)

Free-Market Capitalism

Benefits and Limitations of Free Market

Benefits• Allows open competition among companies• Major factor in creating wealth• Economic Miracle- poverty reduction• Encourages business to be efficientLimitations• Inequality• Criminal Activity

*

*Understanding Socialism

• Socialism -- An economic system based on the premise that some basic businesses, like utilities, steel mills, coal mines should be owned by the government in order to more evenly distribute profits among the people. (Sweden)

• Entrepreneurs run smaller businesses • Citizens are highly taxed • Government is more involved in protecting the

environment and the poor• Takes away some of the business peoples incentives to

start work early and leave work late

SOCIALISM

LG3

2-18

*

*Understanding Communism

• Communism -- An economic and political system in which the government makes almost all economic decisions and owns almost all the major factors of production. (North Korea, Cuba)

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

• Dose not inspire people to work hard.

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

COMMUNISM

LG3

2-19

*

*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

LG4

2-20

*

*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).

• Unemployment Rate– The number of civilians at least 16 years old who are unemployed and tried to find a job within the prior four weeks.

• Price Index - Price indexes help gauge the health of the economy by measuring the levels of inflation, disinflation, deflation and stagflation.

GROSS DOMESTIC PRODUCT

LG5

2-21

*

*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

LG5

2-22

*

*Stabilizing the Economy Through Fiscal Policy

• Fiscal Policy -- The federal government’s efforts to keep the economy stable by increasing or decreasing taxes or government spending.

• Tools of Fiscal Policy:- Taxation- Government Spending

FISCAL POLICY

LG6

2-23

*

*Using Monetary Policy to Keep the Economy Growing

• Monetary Policy -- The management of the money supply and interest rates by the Federal Reserve Bank (the Central Bank).

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

tends to increase interest rates.- When the economy is in a recession, the central

bank tends to decrease the interest rates.

MONETARY POLICY

LG6

2-24