Chapter 2: External Environment Chapter 2 External Environment.

Chapter 2: External Environment

Chapter 2

External Environment


2005 Kaplan Financial

2


Economic Environment Legal Environment Social Environment Technological Environment Political Environment Taxation Environment



3


Goals

FinancialStatements

RiskTolerance

Legal

Social

Technological

Political

Taxation

EXTERNALENVIRONMENT

INTERNALENVIRONMENT

(CLIENT)

Economic



4

The General Economy

Demand Supply Substitutes & Complements Diminishing Marginal Utility Price Elasticity Equilibrium



5

Demand Curve



6

Supply Curve



7

Substitutes & Complements

Substitutes products that serve similar purposes chicken and turkey

Complements products consumed jointly peanut butter and jelly



8

Diminishing Marginal Utility

As Rate of Consumption increases, enjoyment or use of additional units decreases.



9

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

Price Elasticity

% Δ in Quantity Demanded % Δ in Price

= Price Elasticity (PE)

PE > 1 ElasticPE < 1 InelasticPE = 1 Unit elastic



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Equilibrium

SupplyDemand

Pri

ce

Quantity

Equilibrium



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Hypothetical Business Cycle



13

Business Cycle Components

Expansion Phase Contraction Phase Peak Point Trough Point



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Business Cycle and GDP



15

Actual Business Cycle

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001

Per

cen

t C

han

ge

Change in GDP 47-yr Average Change in GDP10-yr Average Change in GDP



16

The Economy and Inflation

Inflation Deflation Disinflation Moderate Inflation Galloping Inflation



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Measures of Inflation

Consumer Price Index Gross Domestic Product Gross National Product Producer Price Index



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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



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Nature of Interest Rates

Interest rate = price of money Nominal interest rate = stated rate Real interest rate = nominal rate

adjusted for inflation



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Expansion & Recession Expansion

High Employment High resource demand Output > GDP average

Recession High unemployment Low resource demand Falling real wages Decreasing real interest rates



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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

Legal Environment (cont.)

Financial Institutions FDIC Insurance Negotiable Instruments Investor Protection

Securities Acts of 1933 and 1934



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Torts

Standards of Care Damages Vicarious Liability Defenses to Negligence



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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



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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



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FDIC Insurance

Single Ownership Accounts Joint Accounts Business Accounts Retirement Accounts



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Other External Factors

Social Environment Technological Environment Political Environment Taxation Environment

Chapter 2: External Environment Chapter 2 External Environment.

Documents

external environment

kaplan financial

external environment

external environment

gdp slide

jelly slide

water slide

unit elastic slide