Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Criticism of capitalism wikipedia , lookup
Schools of economic thought wikipedia , lookup
History of macroeconomic thought wikipedia , lookup
Steady-state economy wikipedia , lookup
Socialist economics wikipedia , lookup
Production for use wikipedia , lookup
History of economic thought wikipedia , lookup
Other Teaching Tools 2.3 Video Notes 2.4 Brief Chapter Outline and Learning Goals 2.5 Lecture Outline and Lecture Notes 2.7 Career and Study Skills Notes 2.23 CAREER DEVELOPMENT: Career Exploration and Professional Help 2.23 STUDY SKILLS: Keys to Good Study Habits 2.24 Lecture Links 2.25 LECTURE LINK 2-1 Europe is Shrinking 2.25 LECTURE LINK 2-2 When Disaster Changes the Economic Rules 2.25 LECTURE LINK 2-3 Capitalism in Crisis 2.26 LECTURE LINK 2-4 Other Economic Indicators 2.28 LECTURE LINK 2-5 Controlling Your Personal Money Supply 2.29 Bonus Internet Exercises 2.30 BONUS INTERNET EXERCISE 2-1 Know Your History of Economics BONUS INTERNET EXERCISE 2-2 Exploring the Gross Domestic Product 2.31 BONUS INTERNET EXERCISE 2-3 The Power of the Fed Critical Thinking Exercises 2.30 2.32 2.33 CRITICAL THINKING EXERCISE 2-1 Applying Economic Principles to Education 2.33 CRITICAL THINKING EXERCISE 2-2 Standard of Living Comparison: Better/Same/Worse? 2. 34 CRITICAL THINKING EXERCISE 2-3 How Businesses Help Nonprofits 2.36 CRITICAL THINKING EXERCISE 2-4 Balancing the Federal Budget 2.37 2.1 CHAPTER HOW ECONOMICS AFFECTS BUSINESS 2 Bonus Cases 2.2 2.40 BONUS CASE 2-1 Foundations of the Capitalist System 2.40 BONUS CASE 2-2 Katrina’s Aftermath (Video Case) 2.42 BONUS CASE 2-3 The Rule of 72 2.45 INTRODUCTION TO BUSINESS: Instructor’s Resource Manual OTHER TEACHING TOOLS For a description of each of these valuable teaching tools, please see the Preface in this manual. Student Learning Tools Student Online Learning Center (OLC) www.mhhe.com/diasbusiness Student Study Guide Spanish Translation Glossary (OLC) Spanish Translation Quizzes (OLC) Instructor Teaching Tools Annotated Instructor’s Resource Manual IRCD (Instructor’s Resource Manual, Test Bank, PowerPoints, EZtest) Asset Map Online Learning Center (OLC) www.mhhe.com/diasbusiness PageOut PowerPoint Presentations (on IRCD and OLC) Test Bank Business Videos on DVD Enhanced Cartridge option Spanish Translation Glossary (OLC) CHAPTER 2: How Economics Affects Business 2.3 VIDEO NOTES Twenty videos are available, geared to individual chapter topics. The teaching notes for these videos is included in the Video Notes section of this Instructor’s Resource Manual, beginning on page V.01. VIDEO 2: “Katrina’s Aftermath” Hurricane Katrina’s winds and water topped New Orleans’ levees and flooded the city. This video features an economist discussing the economic issues that must be confronted in rebuilding the city. (BONUS CASE 2-2, “Katrina’s Aftermath,” on page 2.42 of this manual relates to this video.) 2.4 INTRODUCTION TO BUSINESS: Instructor’s Resource Manual BRIEF CHAPTER OUTLINE AND LEARNING GOALS CHAPTER 2 How Economics Affects Business I. UNDERSTANDING ECONOMICS ► LEARNING OBJECTIVE 1 Understand the basics of economics. A. Basics of Economics B. Microeconomics and Macroeconomics C. Economic Theorists D. Supply and Demand ► LEARNING OBJECTIVE 2 Explain supply and demand. II. FREE MARKET CAPITALISM ► A. LEARNING OBJECTIVE 3 Describe free market capitalism and degrees of competition. Capitalism in Free Markets III. SOCIALISM AND COMMUNISM ► A. LEARNING OBJECTIVE 4 Understand the differences between socialism and capitalism. Socialism 1. The Benefits of Socialism 2. The Negative Consequences of Socialism B. Communism C. The Trend toward Mixed Economies IV. ECONOMIC INDICATORS ► LEARNING OBJECTIVE 5 Discuss the three major indicators of economic conditions. A. Gross Domestic Product B. Unemployment CHAPTER 2: How Economics Affects Business 2.5 C. Price Indexes D. Fiscal and Monetary Policy V. SUMMARY 2.6 INTRODUCTION TO BUSINESS: Instructor’s Resource Manual LECTURE OUTLINE AND LECTURE NOTES CHAPTER OPENING PROFILE WTRG Consulting (Text pages 38-39) The opening profile of this chapter focuses on Jim Williams, owner of WTRG Consulting, a business that provides macroeconomic and industry information to companies. Jim uses macroeconomic theory to help clients, such as stock traders and oil companies, forecast trends and prices into the future. This profile illustrates how basic economic principles are used daily by businesses of all types. LECTURE OUTLINE LECTURE NOTES I. UNDERSTANDING ECONOMICS ► LEARNING OBJECTIVE 1 Understand the basics of economics. (Text page 40) A. Economics impacts every business, small or large. B. Basics of Economics 1. ECONOMICS is the study of how society chooses to employ resources to produce goods and services and distribute them for consumption among various competing groups and individuals. 2. These resources (“factors of production” from Chapter 1) are land, labor, capital, entrepreneurship, and knowledge. C. Microeconomics and Macroeconomics 1. POWERPOINT 2-1 Chapter Title (Refers to text page 38) POWERPOINT 2-2 Learning Objectives (Refers to text page 39) TEXT REFERENCE Real World Business Apps (Box in text on page 41) Ashon, owner of a new Internet consulting business, has read a news article about economic forecasts. At first, he does not understand the terminology and assumes the information is irrelevant to his firm. There are two basic types of economic study: macro and micro. a. b. MACROECONOMICS is the study that looks at the operation of a nation’s economy as a whole. MICROECONOMICS is the study that looks at the behavior of peo- CHAPTER 2: How Economics Affects Business POWERPOINT 2-3 Understanding Economics (Refers to text pages 40-41) 2.7 LECTURE OUTLINE 2. LECTURE NOTES ple and organizations in particular markets. Some economists define economics as the allocation of “scarce” resources. a. 3. 4. Resources are scarce and need to be divided among people. b. However, there aren’t enough known resources to do that. RESOURCE DEVELOPMENT is the study of how to increase resources and to create the conditions that will make better use of those resources. Businesses can contribute to an economic system by inventing products that increase available resources (example: genetically modified foods). BONUS INTERNET EXERCISE 2-1 Know Your History of Economics This Internet exercise is designed to help students gather information about economics from a historic perspective. (See complete exercise on page 2.30 of this manual.) D. Economic Theorists 1. The English economist Thomas Malthus believed that population growth would outstrip resources. POWERPOINT 2-4 Understanding Economics (Refers to text pages 42-43) a. 2. 2.8 In response, Thomas Carlyle called economics “the dismal science.” b. Many still believe, like Malthus, that the solution to poverty is birth control. c. World population is currently growing more slowly than expected. d. But population in the developing world will continue to climb quickly. The challenge is to determine what INTRODUCTION TO BUSINESS: Instructor’s Resource Manual LECTURE OUTLINE 3. 4. 5. makes some countries relatively rich and other countries relatively poor, then to implement policies that lead to increased prosperity for everyone. Scottish economist Adam Smith advocated creating wealth through entrepreneurship. a. Rather than divide fixed resources, Smith envisioned creating more resources so that everyone could be wealthier. b. In 1776, Smith wrote a book called The Wealth of Nations in which he outlined steps for creating prosperity. c. Smith believed that freedom was vital to the survival of any economy. d. Also, he believed that people will work hard if they have incentives for doing so. Smith believed that businesspeople work primarily for their own prosperity. a. The INVISIBLE HAND is a phrase coined by Adam Smith to describe the process that turns selfdirected gain into social and economic benefits for all. b. Basically, this meant that a person working hard to make money for his or her own personal interest would (like an invisible hand) also benefit others. Some people end up with so much wealth; they would not be able to CHAPTER 2: How Economics Affects Business LECTURE NOTES LECTURE LINK 2-1 Europe Is Shrinking According to the United Nations, Europe’s population will shrink by more than 90 million people in the next 50 years. (See complete lecture link on page 2.25 of this manual.) 2.9 LECTURE OUTLINE ► LECTURE NOTES spend it all within a lifetime. a. One such entrepreneur, Bill Gates, has set up the largest charitable foundation in history. b. Warren Buffet has pledged to contribute part of his wealth to the Gates Foundation each year. LEARNING OBJECTIVE 2 Explain supply and demand. (Text pages 44-47) E. Supply and Demand 1. SUPPLY refers to the quantity of products that manufacturers or owners are willing to sell at different prices at a specific time. a. The amount supplied will increase as the price increases (direct relationship). b. The quantity producers are willing to supply at certain prices is illustrated on a supply curve. 2. DEMAND refers to the quantity of products that people are willing to buy at different prices at a specific time. a. The quantity demanded will decrease as the price increases (inverse relationship). b. The quantities consumers are willing to buy at certain prices are illustrated on a demand curve. 3. Supply and demand interact to determine price. a. At the equilibrium price, the supply and demand curves cross, and the quantity demanded equals the quantity supplied. 2.10 CRITICAL THINKING EXERCISE 2-1 Applying Economic Principles to Education Principles such as competition and productivity apply to nonprofit organizations, such as schools, as well as businesses. (See complete exercise on page 2.33 of this manual.) TEXT FIGURE 2.1 The Supply Curve at Various Prices (Box in text on page 44) POWERPOINT 2-5 Understanding Economics (Refers to text pages 44-47) TEXT FIGURE 2.2 The Demand Curve at Various Prices (Box in text on page 45) INTRODUCTION TO BUSINESS: Instructor’s Resource Manual LECTURE OUTLINE b. 4. The equilibrium point is the point at which the amount of goods sought by buyers is equal to the amount of goods produced by suppliers. BUSINESS CYCLES are the periodic rises and falls that occur in economies over time. a. The business cycle involves a common pattern of rapid growth (recovery and prosperity) alternating with a period of decline (contraction or recession). b. The business cycle is also known as the economic cycle. SELF CHECK QUESTIONS (Text pages 47) 1. How are macroeconomics and microeconomics different? 2. What theory did Adam Smith develop? Describe it in your own words. How are supply and demand interconnected? 3. LECTURE NOTES LECTURE LINK 2-2 When Disaster Changes the Economic Rules Hurricane Katrina changed the Gulf states’ economies in many ways. Demand for certain products increased and shortages developed. (See complete lecture link on page 2.25 of this manual.) TEXT FIGURE 2.3 The Equilibrium Point (Box in text on page 46) TEXT FIGURE 2.4 The Business/Economic Cycle (Box in text on page 46) POWERPOINT 2-6 Understanding Economics (Refers to text pages 46-47) II. FREE-MARKET CAPITALISM ► LEARNING OBJECTIVE 3 Describe free market capitalism and degrees of competition. (Text pages 47-49) A. In a FREE-MARKET, decisions about what to produce and in what quantities are made by the market. 1. Consumers send signals to producers about what to make, how many, and so on through the mechanism of price. (Indianapolis Colts t-shirts are the example in the text.) 2. In the U.S. the price tells producers how much to produce, reducing the CHAPTER 2: How Economics Affects Business BONUS CASE 2-1 Foundations of the Capitalist System What are the moral, ethical, and spiritual foundations of capitalism? (See complete case, discussion questions, and suggested answers on page 2.40 of this manual.) 2.11 LECTURE OUTLINE LECTURE NOTES chances of a long-term shortage of goods. 3. Prices in a free market are not determined by sellers; buyers and sellers negotiating in the marketplace determine them. B. Competition within Free Markets 1. Competition exists in different degrees, ranging from perfect to nonexistent. 2. PERFECT COMPETITION exists when there are many sellers in the market, no seller is large enough to dictate the price of a product, and the products are similar. a. Sellers produce products that appear to be identical. b. There are no true examples of perfect competition, but agricultural products are often used as an example. 3. MONOPOLISTIC COMPETITION exists when a large number of sellers produce products that are very similar but are perceived by buyers as different. a. Product differentiation, making buyers think similar products are different, is a key to success. b. The fast food industry is an example. 4. An OLIGOPOLY is a form of competition in which just a few sellers dominate a market. a. The initial investment required to 2.12 BONUS CASE 2-2 Katrina’s Aftermath (Video Case) Despite numerous efforts by businesses, government agencies, and nonprofit organizations to end poverty, poverty still persists. That point was illustrated vividly when hurricane Katrina hit the Gulf Coast region of the United States, and was especially apparent in New Orleans, Louisiana. (See complete case, discussion questions, and suggested answers on page 2.42 of this manual.) POWERPOINT 2-7 Free Market Capitalism (Refers to text pages 48-49) INTRODUCTION TO BUSINESS: Instructor’s Resource Manual LECTURE OUTLINE 5. enter the market is usually high. b. Prices among competing firms tend to be close to the same. c. Like monopolistic competition, product differentiation is key to market success. d. Examples include breakfast cereal and soft drinks. A MONOPOLY occurs when there is only one seller for a product or service. a. U.S. laws prohibit the creation of monopolies, but do permit approved monopolies in markets for public utilities. b. New laws have ended the monopoly status of utilities in some areas, creating intense competition among utility companies. c. Deregulation is meant to increase competition and lower prices for consumers. d. Example: cable companies LECTURE NOTES TEXT REFERENCE Career Development, Career Exploration and Professional Help (Box in text on page 49) One of the challenges students face is the career learning process. An additional exercise and discussion is available in this chapter on page 2.23 in this manual. SELF CHECK QUESTIONS (Text pages 50) 1. What is a free market system? 2. What are the four types of competition? 3. Do you think one type of competition would be better than another in developing countries? Why or why not? III. SOCIALISM AND COMMUNISM ► LEARNING OBJECTIVE 4 Understand the differences between socialism and capitalism. (Text pages 50-55) A. Socialism 1. SOCIALISM is an economic system based on the premise that some, if not CHAPTER 2: How Economics Affects Business 2.13 LECTURE OUTLINE 2. 3. 2.14 LECTURE NOTES most, basic businesses should be owned by the government so that profits can be distributed among the people. a. Entrepreneurs can own small businesses, but their profits are steeply taxed to pay for social programs. b. Advocates of socialism acknowledge the major benefits of capitalism, but believe that wealth should be more evenly distributed. c. Socialism is the guiding economic principle for many countries in Europe. The benefits of socialism a. The major benefit of socialism is social equality. b. Income is taken from the wealthier people and redistributed to the poorer members of the population. c. Workers in socialist countries are given free education, free health care, free child care, and more employee benefits. The negative consequences of socialism a. Socialism may create equality, but it takes away some work incentives. b. Tax rates in some nations once reached 85%. c. Because wealthy professionals have very high tax rates, many of them leave socialist countries for POWERPOINT 2-8 Socialism and Communism (Refers to text pages 50-52) INTRODUCTION TO BUSINESS: Instructor’s Resource Manual LECTURE OUTLINE countries with lower taxes. d. The loss of the best and brightest people to other countries is called BRAIN DRAIN. e. Socialist systems can result in fewer inventions and less innovation. 4. Consequences a. Capitalism creates freedom of opportunity, which in turn creates incentives to work hard. b. However, it also creates an unequal distribution of outcomes. c. Socialist systems tend to discourage workers from working harder and discourage innovation. d. Most socialist systems have not kept pace with the U.S. economically. B. Communism 1. German political philosopher Karl Marx felt that workers should take over ownership of businesses and share the wealth. a. His 1848 work, The Communist Manifesto, established his reputation as the founder of communism. b. COMMUNISM is an economic and political system in which the state (the government) makes almost all economic decisions and owns almost all the major factors of production. 2. Problems with communism CHAPTER 2: How Economics Affects Business LECTURE NOTES CRITICAL THINKING EXERCISE 2-2 Standard of Living Comparison: Better/Same/ Worse? This exercise asks students to research key economic indicators for a capitalist country, a socialist country, and a communist country. (See complete exercise on page 2.34 of this manual.) POWERPOINT 2-9 Socialism and Communism (Refers to text pages 52-54) 2.15 LECTURE OUTLINE LECTURE NOTES a. The government has no way of knowing what to produce because prices don’t reflect supply and demand. b. Shortages of many items may develop. c. Communism doesn’t inspire businesspeople to work hard, and is slowly disappearing as an alternative economic form. 3. Most communism countries today are suffering severe economic depression, including North Korea and Cuba. a. The former Soviet Union is moving toward free markets. b. Russia now has a flat tax of 13%, a much lower tax rate than the U.S. has. C. The Trend Toward Mixed Economies 1. There are dominant two economic systems: a. Free market economies i. FREE MARKET ECONOMIES exist when the market largely determines what goods and services get produced, who gets them, and how the economy grows. ii. This system is commonly known as capitalism. b. Command economies i. COMMAND ECONOMIES are economic systems in which the government largely decides what goods and ser2.16 LECTURE LINK 2-3 Capitalism in Crisis The worldwide business slump of the 1930s ranked as the worst and longest period of high unemployment and low business activity in modern times. The U.S. economic system seemed inadequate to deal with massive economic disruptions. John Maynard Keynes suggested changing the role of central government to ease the crisis. (See complete lecture link on page 2.26 of this manual.) INTRODUCTION TO BUSINESS: Instructor’s Resource Manual LECTURE OUTLINE vices will be produced, who will get them, and how the economy will grow. ii. These economies are known as socialism and communism. 2. No one economic system is perfect by itself. a. Free-market mechanisms haven’t been responsive enough to a nation’s social and economic needs and haven’t adequately protected the environment. b. Socialism and communism haven’t always created enough jobs or wealth to keep economies growing fast enough. c. Socialist and communist countries have moved toward capitalism. d. The trend for so-called capitalist countries to move toward socialism. e. No country is purely capitalist or purely communist; rather some mix of the two systems. f. The result has been a blend of capitalism and communism, called a mixed economy. 3. MIXED ECONOMIES are economies where the market and some by government. 4. The U.S. has a mixed economy. a. The role of government in many parts of the economy is a matter of some debate. b. For instance, the government has CHAPTER 2: How Economics Affects Business LECTURE NOTES CRITICAL THINKING EXERCISE 2-3 How Businesses Help Nonprofits Choosing a career at a nonprofit organization is not the only way for students to help society. The for-profit sector creates the wealth that nonprofits use to do good. (See complete exercise on page 2.36 of this manual.) TEXT FIGURE 2.5 Comparisons of Key Economic Systems (Box in text on page 55) TEXT REFERENCE Study Skills: Keys to Good Study Habits. (Box in text on page 53) Gives students suggestions for improving their study skills. An additional exercise and discussion is available in this chapter on page 2.24 of this manual. 2.17 LECTURE OUTLINE LECTURE NOTES become the largest employer in the U.S. SELF CHECK QUESTIONS (Text page 54) 1. What is the difference between socialism and communism? How are they the same? Which system, in your opinion, is the best and why? 2. Compare free market economies with socialism. What are the advantages and disadvantages of each? 3. What is a mixed economy? 4. Why is the trend going toward mixed economies? Do you think at some point the balance will likely change to one of the pure types? Why or why not? TEXT REFERENCE Thinking Critically: The Threat of Global Poverty (Box in text on page 56) When Americans see televised images of malnourished children in other countries, they often don’t see a threat to their way of life. This box discusses how global poverty can breed civil conflict, infectious diseases, crime and drug enterprises, and environmental degradation. IV. ECONOMIC INDICATORS ► LEARNING OBJECTIVE 5 Discuss the three major indicators of economic conditions. (Text pages 56-60) A. Understanding economic indicators helps you assess the nation’s economy. B. Gross Domestic Product 1. GROSS DOMESTIC PRODUCT (GDP) is the total value of goods and services produced in a country in a given year. 2. GDP includes the output of both domestic and foreign-owned companies as long as the companies are located within the U.S. 3. GROSS NATIONAL PRODUCT (GNP) is similar to GDP, but only counts Americans producing products in the country, not other foreign nationals. 4. A major influence on the growth of GDP is how productive the work force is. 2.18 POWERPOINT 2-10 Economic Indicators (Refers to text pages 56-60) BONUS INTERNET EXERCISE 2-2 Exploring the Gross Domestic Product This Internet exercise asks students to gather data regarding the gross domestic product (GDP) of the United States from the Census Bureau’s Website. (See complete exercise on page 2.31 of this manual.) INTRODUCTION TO BUSINESS: Instructor’s Resource Manual LECTURE OUTLINE The total U.S. GDP in 2006 was over $13 trillion. C. Unemployment 1. The UNEMPLOYMENT RATE is the number of civilians at least 16 years old who are unemployed and tried to find a job within the prior four weeks. 2. In recent years, the unemployment rate has been as low as 3.9%. 3. There are four types of unemployment: frictional, structural, cyclical, and seasonal (as seen in Text Figure 2.6.). 4. The U.S. tries to protect those who are unemployed because of recessions, industry shifts, and other cyclical factors. D. PRICE INDEXES are indexes of the changes in goods and prices of goods and services based on the prices of the same goods and services from a previous period. 1. The price indexes help measure the health of the economy. 2. The Consumer Price Index measures the prices of products from month to month so economists can measure inflation. a. INFLATION refers to a general rise in the prices of goods and services over time. b. HYPERINFLATION occurs when inflation increases beyond 50% in a given time period. c. STAGFLATION occurs when unemployment rates and inflation LECTURE NOTES 5. CHAPTER 2: How Economics Affects Business TEXT FIGURE 2.6 Types of Unemployment and U.S. Unemployment Rates from 1989 to 2007 (Box in text on page 58) TEXT FIGURE 2.7 Economic Indicators for the U.S. Economy (Box in text on page 59) BONUS CASE 2-3 The Rule of 72 No formula is more useful for understanding inflation than the rule of 72. Basically, the rule allows you to quickly compute how long it takes the cost of goods and services to double at various compounded rates of growth. (See complete case, discussion questions, and suggested answers on page 2.45 of this manual.) 2.19 LECTURE OUTLINE LECTURE NOTES rates are high. d. DEFLATION is a situation in which prices are actually declining, occurring when countries produce so many goods that people cannot afford to buy them all. 3. Consumer Price Index (CPI) a. The CONSUMER PRICE INDEX (CPI) consists of the monthly statistics that measure the pace of inflation or deflation. b. It tracks the price of 400 goods. c. Some wages, rents, government benefits, and interest rates are based on the CPI. 4. The PRODUCER PRICE INDEX (PPI) is similar to the consumer price index, but measures prices at the wholesale level. E. Fiscal and Monetary Policy 1. FISCAL POLICY refers to the federal government’s efforts to keep the economy stable by increasing or decreasing taxes or government spending. a. The first half of fiscal policy involves taxation. i. High tax rates may discourage small business ownership. ii. Low tax rates would tend to give the economy a boost. b. The second half of fiscal policy involves government spending. 2.20 LECTURE LINK 2-4 Other Economic Indicators In addition to the GDP, CPI, and unemployment indicators, there are other economic indicators that can forecast changes in the economy. (See complete lecture link on page 2.28 of this manual.) TEXT FIGURE 2.8 Government Revenues and Expenditures (Box in text on page 61) POWERPOINT 2-12 Fiscal and Monetary Policy (Refers to text pages 62-64) CRITICAL THINKING EXERCISE 2-4 Balancing the Federal Budget Can your students balance the federal budget? This exercise presents actual 2006 figures and asks them to make adjustments in spending and income to do just that. (See complete exercise on page 2.37 of this manual.) BONUS INTERNET INTRODUCTION TO BUSINESS: Instructor’s Resource Manual LECTURE OUTLINE i. 2. 3. The national deficit is the amount of money that the federal government spends over and above the amount it gathers in taxes. ii. The NATIONAL DEBT is the sum of government deficits over time. c. One way to lessen the annual deficits is to cut government spending, but there is a continuing need for social programs and for military spending. In an economic boom, businesses do well. a. A RECESSION occurs when the GDP falls for two consecutive quarters. b. A DEPRESSION is a severe recession, when the GDP falls for several quarters, and recovery is a long time off. c. The Great Depression in the late 1920s and 1930s in the U.S. lasted almost an entire decade. d. RECOVERY is an improvement in the economy, marking the end of a recession or decline. MONETARY POLICY is the management of the monetary supply and interest rates. a. The Federal Reserve System (the Fed) is a semiprivate organization that decides how much money to put into circulation. CHAPTER 2: How Economics Affects Business LECTURE NOTES EXERCISE 2-3 The Power of the Fed The Federal Reserve is one of the most powerful institutions in our economy. This Internet exercise directs students to explore the Fed website. (See complete exercise on page 2.32 of this manual.) POWERPOINT 2-11 Fiscal and Monetary Policy (Refers to text pages 60-62) TEXT FIGURE 2.9 The National Debt (Box in text on page 62) TEXT REFERENCE Ethical Challenge: Recon Still Cleaning Up After Katrina (Box in text on page 63) Hurricane Katrina is the worst natural disaster in U.S. history. This text box presents some of the failures and unethical practices that resulted from the government’s inadequate response to the storm’s destruction. It is a good overview of the role of government in disaster situations. LECTURE LINK 2-5 Controlling Your Personal Money Supply Controlling your personal money supply is harder than you may think. (See complete lecture link on page 2.29 of this manual.) 2.21 LECTURE OUTLINE b. c. d. LECTURE NOTES Using interest rates i. When the economy is booming, the Fed tends to raise interest rates. ii. Lowering interest rates encourages more business borrowing. iii. Raising and lowering interest rates helps control the rapid ups and downs of the economy. The Federal Reserve also controls the money supply. i. The more money the Fed makes available to businesspeople, the faster the economy grows. ii. To slow the economy, the Fed lowers the money supply. The economic goal is to keep the economy growing. SELF CHECK QUESTIONS (Text page 64) 1. 2. Name and discuss the three economic indicators. What are price indexes? What do they have to do with the economy? 3. What is the difference between monetary policy and fiscal policy? TEXT REFERENCE Career Spotlight: Economics and You (Box in text on page 64) Although most of your students will not become economists, they will use economic concepts in their chosen career fields. This text box discusses how businesspersons use economic indicators and principles on a daily basis. TEXT REFERENCE Real World Business Apps This text box continues the story of Ashon presented earlier in the text. Throughout the day Ashon recalled the news article and has done some basic research. He now understands how economic forecasts can help his Internet business. (Box in text on page 65) V. SUMMARY 2.22 INTRODUCTION TO BUSINESS: Instructor’s Resource Manual CAREER AND STUDY SKILLS NOTES CAREER DEVELOPMENT BOX: Career Exploration and Professional Help (Text page 49) Instructor’s Notes for Text Box Two:(Objectives to increase students’ knowledge, usage, and understanding of the concepts). Getting your first job was probably accomplished with relative ease. You knew somebody already working at the local fast food restaurant or shopping mall and they helped you get the interview that lead to your first time job. As age increases, job opportunities become more complex and decisions more critical to your consideration of employment. Why are you more selective? What is required of you for the new, more important job compared to the job you had in the past? Let’s explore these questions: As you become older, your needs are expanding and lower level jobs cannot meet these newly increased needs. As you look ahead to increasing your family size through marriage and children, job compensation becomes more critical; not only in pay but for the job benefits as well. As you increase your skills and knowledge, you will demand better pay and higher job status (You will have a chance to evaluate your skills and see just how they do stack up in the next section of this program.). To keep this entire decision making process working in your best interest, the ability to understand the career planning process becomes very important. If you have a sound level of understanding regarding the importance of learning career planning skills, these skills can help guide you as you go forward; and if done early in your career, can pay great dividends for the short and long term during the working years of your life! STUDENT EXERCISE: Have students visit the Career Center at their school and ask them to make a list of the five items they found that were available to help them learn more about their careers; self assessment information; job searches; and the other tools to help assist in developing their careers. Discuss the lists and make a comprehensive list of items that all students can now use to help them in the career exploration and development process. CHAPTER 2: How Economics Affects Business 2.23 STUDY SKILLS BOX: Keys to Good Study Habits (Text page 53) Instructor’s Notes for Text Box Two:(Objectives: to increase students’ knowledge, usage, and understanding of the concepts). Knowledge is key to performance. We need to understand what methods can be taken to learn and improve study skills. Most study skill improvement guides list the following ways to improve your study skill effectiveness: Find a quiet place to study, a routine that maximizes your study alertness. Learn how to .prioritize, take better notes, use time management, become a better reader, a better writer, or a better listener. Maximize your memory, test taking. Reduce procrastination, test taking anxiety. Go back and review this list to begin your own assessment regarding effective study skills. How does this list help to identify what you already know about good study skills and what might be areas that need improvement? STUDENT EXERCISES: Now is the time to engage in discussions about the many resources available for helping students become better at studying and test-taking. Some websites that will be helpful to spend time with are listed below. Require the students to view these specific websites and be prepared to discuss at a later class: STUDY SKILLS at www.shsu.edu/~counsel/hs/study skills.html Writing Center STUDY SKILLS: www.ccis.edu/departments/writingcenter/studyskills.html 2.24 INTRODUCTION TO BUSINESS: Instructor’s Resource Manual LECTURE LINKS LECTURE LINK 2-1 Europe is Shrinking At the end of the 20th century, massive changes took place in Europe—the Berlin Wall came down and communism disappeared as the Soviet Union collapsed. While the public’s attention was focused on these historic events, another significant change was quietly taking place. According to the United Nations, Europe’s population will shrink by more than 90 million people in the next 50 years, roughly twice the number killed worldwide during World War II. For more than two decades the total fertility rate—the average number of children each woman will bear in her lifetime—has remained below the 2.1 level required to replace the population. In the late 1990s Europe’s population began to fall. Demographers doubt that the fertility rate will return to replacement level in the near future. Some speculate that the decline may not be limited to Europe. The world’s population could actually decline by the end of the 21st century—a trend unseen since the 14th century Black Death. Among the first nations to experience the population implosion will be historically fertile Italy. With births below replacement level since 1977, Italy is projected to lose nearly a quarter of its current population by 2050. Contraceptive use is at record levels, and women are earning more college degrees than men, leading many to seek careers first and families second. Couples who do start families are waiting longer to have their first child. Germany has one of the world’s lowest birthrates: fewer babies were born in 2005 than in the last year of World War II. A United Nations report estimated that by 2050 Germany will need 3.5 million working-age immigrants each year to maintain its population ratio and fund pension, health care, and other programs. Without babies to replenish the labor force and pay taxes, Europeans will find it hard to fund the pensions of longer-living retirees. To stay in the black, governments will need to take unpopular steps, such as raising the retirement age, cutting benefits, hiking taxes, and increasing legal immigration. Or do what France has done. Since World War I, France has been awarding medals for childbearing to women of “good character” to restore its war-devastated population. Today, with France again in need of more children, France has relaxed its medal rules: the mothers don’t have to be married; and they don’t even have to be French.i LECTURE LINK 2-2 When Disaster Changes the Economic Rules On Monday, August 29, 2005 Hurricane Katrina roared over the northern Gulf Coast as a category 3 hurricane. Television viewers have all seen the catastrophic damage done to New Orleans when the levees failed. Other parts of the Gulf Coast—Louisiana, Mississippi, and Alabama—were also severely affected. The damage carved across the Gulf South covered an area larger than all of Great Britain. After the winds died down and the flooding subsided, residents in three states woke up to a radically changed world. In the coastal cities, condominiums and casinos were replaced with acre after acre of rubble and mud. Houses and trees were toppled for hundreds of miles inland. CHAPTER 2: How Economics Affects Business 2.25 Across the disaster zone, millions of electricity and telephone transmission poles were flattened, cutting power and communications. Failing power disabled water treatment plans, making water undrinkable. The power failure also knocked out gas station pumps, leaving the Mid-South in a severe gasoline shortage. Widespread use of electric generators to power homes added to the demand for gasoline. The inevitable result—long lines at the few gas stations that were able to pump gas. Fights broke out at stations when people tried to break ahead in three-hour long lines. Banks were severely limited in the services they could offer. ATM machines were useless. With no telecommunication and no power to run electronic credit machines, credit cards were useless. The economy rapidly reverted to an old-time barter system. Neighbors traded C and D cell batteries for a ride across town. The lucky few whose power was restored opened their homes so the less fortunate could take hot showers and do the laundry. Bottled water became the currency of convenience. A full five-gallon can of gasoline could buy almost anything. Store shelves were stripped of bottle water, powdered milk, bleach, dry milk, plastic storage boxes, beer, and—strangely—tomato soup. (Wal-Mart’s own database research showed that during hurricanes people eat more strawberry Pop-Tarts, so the company makes sure coastal stores are stocked appropriately.) Most businesses adopted a community-minded approach and kept prices stable. Even the retail giant Wal-Mart immediately sent 1,900 truckloads of water and other emergency supplies to the area. The company also contributed $17 million to the hurricane relief effort. But some unscrupulous local businesspeople doubled and tripled the price of ice, gasoline, and propane tanks. For a horrible week the demand curves for critical supplies shifted dramatically to the right while supply remained constant or declined. Gradually over the next month, power and telephone service were restored to most households and life began to get back to normal. Because of the disruption to petroleum refineries in the Gulf, gasoline prices remained high. However, this was the more normal interaction of high demand and short supply that predictably occurs. ii LECTURE LINK 2-3 Capitalism in Crisis The worldwide business slump of the 1930s ranked as the worst and longest period of high unemployment and low business activity in modern times. Many causes contributed to making the Great Depression as severe as it was. During the 1920s many bank failures, together with low incomes among farmers and factory workers, helped set the stage. Uneven distribution of income among workers also contributed. The Great Depression differed in both length and harshness from previous depressions in the United States. In earlier depressions, business activity started to pick up after one or two years. But from October 1929 until Franklin D. Roosevelt became president in March 1933, the economy slumped almost every month. From 1930 to 1933 stock market prices of industrial companies fell about 80%. Banks and individuals with investments in the stock market lost fortunes. Banks had also loaned money to many people who could not repay it. The deepening depression forced large numbers of people to withdraw their savings. Banks had difficulty meeting the withdrawals, which came at a time when the banks were unable to collect on many loans. Between January 1930 and March 1933, about 9,000 banks failed. The bank failures wiped out the savings of millions of people. Bank failures meant less money available for loans to industry. The decline in available money caused a drop in production and a further rise in unemployment. From 1929 to 1933, the total value of goods and services produced annually in the United States fell from about $104 billion to about $56 billion. In 1932, the number of business closings was almost a third higher than the 1929 level. 2.26 INTRODUCTION TO BUSINESS: Instructor’s Resource Manual In 1925, about 3% of the nation’s workers were unemployed. The unemployment rate reached about 25%—or about 13 million persons—in 1933. Many people who kept or found jobs had to take salary cuts. In 1932, wage cuts averaged about 18%. In 1932, the New York City Police Department estimated that 7,000 persons over the age of 17 shined shoes for a living. Human suffering became a reality for millions of Americans as the depression continued. Many died of disease resulting from malnutrition. Thousands lost their homes because they could not pay the mortgage. Severe droughts and dust storms hit parts of the Midwest and Southwest during the 1930s. The afflicted region became known as the Dust Bowl, and thousands of farm families were wiped out. President Herbert Hoover held office as the Depression began. America had operated for 150 years under Adam Smith’s philosophy of laissez faire, or free competition. Hoover believed that business, if left alone to operate without government supervision, would correct the economic conditions. He vetoed several bills aimed at relieving the depression because he felt they gave the federal government too much power. Most Americans felt that Hoover did not do enough to fight the depression and elected Franklin D. Roosevelt president in 1932. America was at a crossroads. The existing economic system had proved inadequate to deal with massive economic disruption. Capitalism seemed to be discredited, as business failures and unemployment escalated. For many Americans without a job the teachings of Karl Marx and Frederick Engles held tremendous appeal—“from each according to his ability, to each according to his need.” Many questioned whether capitalism would survive. It is this environment that influenced the ideas of John Maynard Keynes, a British economist at Cambridge University. His General Theory of Employment, Interest, and Money (1936) ranks among the most important books on economics. The book changed economic theory and policy and became the basis of economic policies of most nations today. The basis of Keynesian economics is simple. The level of economic activity depends on the total spending of consumers, business, and government. If business expectations are poor, investment spending will be cut, causing a series of reductions in total spending. If this should happen, the economy can move into a depression and stay there. To avoid a depression, Keynes urged increased government spending and easy money. These actions, he argued, would encourage investment, increase employment, and enable consumers to spend more. Keynes sought not to destroy capitalism, but to save it. President Roosevelt also believed the federal government had the chief responsibility of fighting the Great Depression. After his inauguration, he called Congress into a special session to pass laws to relieve the suffering, which became known as the New Deal. New Deal programs not only helped relieve the depression, but also renewed the confidence of Americans in the government. But about 15% of the nation’s working force still did not have a job in 1940. The Great Depression did not end in the United States until 1942, after the country had entered World War II. New government policies increased federal control over banks and the stock market. Laws of the New Deal also gave the government more power to provide money for the needy. Since the depression, the powers of the federal government have been broadened. This shift can be dramatically seen in the pattern of government spending. In 1929, government spending made up less than 5% of the gross domestic product—by the early 2000s this percent had grown to about one fifth. The Great Depression also changed the attitudes of many Americans toward business and the federal government. Before the depression, most people regarded bankers and business executives as the nation’s leaders. After the stock market crashed and these leaders could not relieve the depression, Americans lost faith in them. The government finally succeeded in improving conditions. As a result, many Americans decided that the government—not business—had the responsibility to maintain the national economy. CHAPTER 2: How Economics Affects Business 2.27 LECTURE LINK 2-4 Other Economic Indicators In addition to the key economic indicators mentioned in the text—CPI, GDP, unemployment rate—there are other indicators measure different segments of the economy. Below are some of the more important ones. KEY ECONOMIC INDICATORS Producer Price Index Monthly index that measures changes in wholesale prices. Prime Interest Rate Lowest interest rate that banks charge preferred borrowers on short-term loans. Housing Starts Tracks how many new single-family homes or buildings were constructed during the month and can detect trends in the economy looking forward. Durable-Goods Orders New orders for goods that last more than three years. Balance of Trade Total value of a country’s exports minus the total value of its imports, over a specific period of time. Inflation Rate Percentage increase in prices of goods or services over a period of time. Consumer Confidence Index Measures the degree of consumer confidence in the economy, and can indicate an upcoming increase or decrease in economic activity. THE “BEIGE BOOK” Many economists use the Federal Reserve Board “Beige Book” to detect trends in the economy. The correct name for the report is “Summary of Commentary on Current Economic Conditions by Federal Reserve District.” Each Federal Reserve Bank gathers information on current economic conditions in its district. The Beige Book summarizes this information by district and sector and is a gauge on the strength of the economy. TIMING OF THE INDICATORS Economic indicators can further be classified by the timing of the indicator. Some indicators are lagging, meaning that they don’t change direction until a few quarters after the economy does. An example is the unemployment rate. Unemployment tends to increase for two or three quarters after the economy starts to improve. Coincident indicators move at the same time as the economy does. The Gross Domestic Product measures the economy’s output as it occurs. Leading economic indicators are indicators which change before the economy changes. Stock market returns are a leading indicator, as the stock market usually begins to fall before the economy declines and they improve before the economy begins to pull out of a recession. Housing starts and the consumer confidence index are other leading economic indicators.iii 2.28 INTRODUCTION TO BUSINESS: Instructor’s Resource Manual LECTURE LINK 2-5 Controlling Your Personal Money Supply Controlling your personal money supply is harder than you may think. In a recent study, nearly half of those asked said they lose track of how they spend their pocket cash, on average more than $2,000 a year. The study was commissioned by the Visa credit card group, part of their campaign to get Americans to use debit cards to manage money. A dollar here, a dollar there, everyone loses track of some cash. What surprised the survey’s authors was how much cash goes unaccounted for at the end of a week. The survey asked over 2,000 respondents to estimate their “mystery spending or money they couldn’t keep track of. Of those, 48% said they couldn’t account for an average of $2,340 a year. At the extreme end of the spectrum were 7% who said they lost track of more than $100 per week, or $5,000 per year. People 34 and under are the biggest offenders. Men lost track of an average of $50 a week, or $3,078 a year. Over half of them said they blew the cash during a night out. Young women spent $42 in mystery cash a week, or $2,709 a year. Two-thirds of the women blamed shopping trips.iv CHAPTER 2: How Economics Affects Business 2.29 BONUS INTERNET EXERCISESv BONUS INTERNET EXERCISE 2-1 Know Your History of Economics PURPOSE: To gather information regarding the foundation of economics from a historic perspective. The concepts of economics that are discussed in the classroom today can be traced from the founders of economics. Concepts of rational self interest, population growth, free trade, diminishing returns and utility maximization come from such famous economist as Ricardo, Smith, Malthus, and Bentham. EXERCISE: Go to the internet and look up the following economist: Adam Smith, Jeremy Bentham, David Ricardo, and T.R. Malthus. Choose one of these economists and answer the following questions that describe their contributions to the field of economics. 1. Describe the personality of your chosen economist. 2. What major contributions did this chosen economist contribute to the filed of economics regarding: a. Microeconomics b. Macroeconomics c. The field of economics 3. How does the works of your chosen economist have any relevance to our economy today? 4. How did your chosen economist further the field of economic study? 2.30 INTRODUCTION TO BUSINESS: Instructor’s Resource Manual BONUS INTERNET EXERCISE 2-2 Exploring the Gross Domestic Product PURPOSE: To gather data regarding U.S. Gross Domestic Product, analyze spending trends, and discover historical patterns. To answer the following questions, explore the Census Bureau’s homepage on the Internet at www.bea.gov. EXERCISE: The U.S. Bureau of Economic Analysis (a part of the U.S. Department of Commerce) publishes extensive data about the national, state, regional, and local GNP. Go to the Bureau’s Website (www.bea.gov) to answer the following questions (Sometimes the web address for a location changes. You might need to search to find the exact location mentioned.). 1. What percentage of the GDP comes from private industries? From the federal government? From state and local governments? 2. The annual output of final goods and services for a state or region is called the GSP, gross state product. 3. 4. a. What is the latest GSP for the Southeast region of the U.S.? b. For the Far West? c. Is which of these regions is the GSP increasing more rapidly? Locate the historical data on current dollar GDP and “real” GDP. a. In which years did the current dollar GDP decline? b. In which years did the real GDP decline? Go to one of the news Websites (such as www.CNN.com, www.cbsnews.com, www.msnbc.com, or www.foxnews.com) and locate news stories from the years identified in Question 3. What events and trends occurred during those years? CHAPTER 2: How Economics Affects Business 2.31 BONUS INTERNET EXERCISE 2-3 The Power of the Fed! The Internet is a wonderful tool for exploring important functions of our powerful economy, and one specific way to better understand this is viewing the extremely well constructed websites of the Federal Reserve Banks (go to any of the Federal Reserve websites—there are websites based on the 12 Federal Reserve Banks located across the United States). For this exercise, assume you are going to start your own banking business and you have applied for your local business license approval and met local building and zoning codes, etc. However, before you get too caught up in local approval, the banking industry is heavily regulated and all new bank startups, mergers and other banking activities are governed by the Federal Reserve Bank that would be designated to regulate this new activity based on your geographic location. To better understand the Federal Reserve’s purpose, visit the Federal Reserve Bank of St. Louis website and answer the following questions: 1. Where are the 12 Federal Reserve Banks located (click on the icon “About The Fed”)? 2. Go to the section “Banking Information” and click on “Supervisory & Regulatory.” Go to the section of regulations, laws and other guidance and click the “Laws” icon and find the Federal Reserve Act and click. Once here, explain the Federal Reserve Act: 3. Go to the section “Applications and Notices.” Once there, explain what the Bank’s Supervision and Regulatory Department is responsible for processing: 4. Go to “Structure Information” icon and explain the function of the NIC (National Information Center). What type of information does this site provide? 2.32 INTRODUCTION TO BUSINESS: Instructor’s Resource Manual CRITICAL THINKING EXERCISES CRITICAL THINKING EXERCISE 2-1 Applying Economic Principles to Education Recently, the U.S. Supreme Court ruled that cities could have voucher programs that give money directly to parents, and the parents can then choose between competing schools: public and private. The idea for promoting such a ruling was to create competition among schools. As with businesses, schools were expected to improve their products (how effectively they teach) to win students from competitors. Supposedly, that would mean an improvement in all schools, private and public, and would benefit many students. 1. Do you believe that such economic principles apply in both private and public organizations? Be prepared to defend your answer. 2. Are there other public functions that might benefit from more competition, including competition from private firms? CHAPTER 2: How Economics Affects Business 2.33 CRITICAL THINKING EXERCISE 2-2 Standard of Living Comparison: Better/Same/Worse? Is the standard of living different in capitalist, socialist, and communist economies? Which economic system provides the highest standard of living? One way of answering these questions is by comparing economic data you might find in the library or on the Internet. (Hint: try the CIA Website.) Choose one capitalist country, one socialist country, and one communist country. Use the following chart to record your findings. CAPITALIST COUNTRY SOCIALIST COUNTRY COMMUNIST COUNTRY Country Chosen 1996 2006 1996 2006 1996 2006 Gross Domestic Product (total dollars & growth including growth trends) Consumer Price Index (CPI) Unemployment Rate Inflation Rate Average Household Income Government Stability (unstable/stable) 2.34 INTRODUCTION TO BUSINESS: Instructor’s Resource Manual NOTES ON CRITICAL THINKING EXERCISE 2-2 In searching for the answers to this exercise, students should go to the library or go online to find possible sources. The CIA publishes the “World Factbook” (https://www.cia.gov/library/publications/theworld-factbook/index.html), which gives a surprisingly complete collection of economic and demographic data. As students search these sources, they can record the latest information they find. Even if they cannot find the answers, encourage them to note what information is available in those sources so they can refer to them again in the future. Consumer prices are meaningless in an economy that the government controls most of the consumer goods. The official price and the price paid to unofficial sellers working underground are two radically different things. One lesson from an exercise like this is that information is often difficult to obtain from a controlled government and the information you do get may not be accurate. CHAPTER 2: How Economics Affects Business 2.35 CRITICAL THINKING EXERCISE 2-3 How Businesses Help Nonprofits Many people say that businesspeople do not do enough for society. Some students choose to go into the public sector instead of business because they “want to help others.” However, businesspeople say that they do more to help others than nonprofit groups do because they provide jobs for people rather than giving them charity, which often precludes them from searching for work. Furthermore, they believe that businesses create all the wealth that nonprofit groups distribute. 1. Can you find some middle ground in this debate that would show that both businesspeople and those who work for nonprofit organizations contribute to society and need to work together more closely to help people? 2. Could you use the concepts of Adam Smith to help illustrate your position? 2.36 INTRODUCTION TO BUSINESS: Instructor’s Resource Manual CRITICAL THINKING EXERCISE 2-4 Balancing the Federal Budget The Federal government’s historical budget deficit is discussed and debated endlessly. Everyone has an opinion on how to balance the budget. Below are actual figures (more or less) for fiscal year 2006. Rearrange the figures to eliminate the $248,181,000,000 deficit and balance the budget. You can either cut money going out or increase money coming in, but interest payments on the national debt cannot be adjusted. Good luck. CHAPTER 2: How Economics Affects Business 2.37 FEDERAL GOVERNMENT REVENUE AND SPENDING, 2006 MONEY COMING IN (RECEIPTS) (all figures in $billions) Individual income taxes 2006 Proposed Value 1,043,908 Corporation income taxes 353,915 Social Security 837,821 Excise taxes 73,961 Other 97,649 TOTAL, FEDERAL RECEIPTS 2,407,254 MONEY GOING OUT (OUTLAYS) (all figures in $billions) National defense 521,840 Human resources 1,672,076 Education, training, employment, and social services 118,560 Health 252,780 Medicare 329,868 Income security 352,477 Social security 548,549 Veterans benefits and services 69,842 Physical resources 164,800 Energy 782 Natural resources and environment 33,055 Commerce and housing credit 6,188 Transportation 70,244 Community and regional development 54,531 Other functions International affairs, space and technology, agriculture, justice, general government Interest on National Debt (CANNOT BE CHANGED) TOTAL, FEDERAL OUTLAYS SURPLUS (DEFICIT) 2.38 70,116 226,603 226,603 2,655,435 (248.2) 0.0 INTRODUCTION TO BUSINESS: Instructor’s Resource Manual NOTES ON CRITICAL THINKING EXERCISE 2-4 There is no “right” or “wrong” answer to this exercise. Each student will modify the budget figures based on their individual beliefs and attitudes. It is interesting to assign this exercise as a group project and have the groups negotiate an equitable balance. You can also update the figures with the current year’s data by visiting Websites such as www.federalbudget.com/, www.whitehouse.gov/omb/budget/, or www.gpoaccess.gov/usbudget. You may have a hard time finding reliable totals, as different sources use different categorization methods. CHAPTER 2: How Economics Affects Business 2.39 BONUS CASES BONUS CASE 2-1 Foundations of the Capitalist System Throughout history of capitalism, there has been one persistent criticism. The whole system seems to be based on selfishnessthe more one works, the more one prospers. If one is unable to work, the system seems to have no answer to his or her problems. Furthermore, there does not seem to be any moral or spiritual foundation to the system. Where do businesses get their values? What about concepts such as sharing, helping neighbors, and protecting the environment? It is important to make a distinction between plain capitalism and democratic capitalism. Democratic capitalism is a system based on three components: (1) free enterprise; that is, freedom to own your own businesses and farms and freedom to keep the profits, (2) a freely elected government that has internal checks and balances, and (3) moral, ethical, and spiritual values that are part of the very fabric of the country and the business system. Plain capitalism is a system where there is free enterprise, but no freely elected government and no foundation of moral, ethical, and spiritual values. There are several “capitalist” countries headed by right-wing dictators that do not have democratic capitalism and do not have the relative prosperity and social justice that we have in the United States. Let’s explore democratic capitalism in more detail so that you can understand how the system works. One of the most important elements of democratic capitalism is its moral and spiritual base. When the U.S. was being settled, there was so much religious debate and rivalry among religions that people were tortured and killed for their beliefs. When it came time to establish a free and separate U. S., however, the founding fathers were adamant about freedom of religion. They were very religious people themselves. Thomas Jefferson was proud of his religious heritage and his fight for religious freedom in the U.S. He asked that his epitaph should read: “Author of the Declaration of Independence, of the Statute of Virginia for Religious Freedom, and Father of the University of Virginia.” Jefferson felt that freedom of religion was one of his most important contributions. He felt it was as important as being President of the United States. Democratic capitalism cannot work effectively and fairly without all three components. With all three, the democratic capitalist system can become the most fair and equitable economic system in the world. Not everyone agrees on the role of government in the democratic system and on how much of the total gross national product the government should control. (Recent history indicates that somewhere between 20% and 25% of GDP gives the government the funds it needs to create more social justice and more equitable distribution of wealth.) A freely elected government is important to democratic capitalism because if the people feel that the system is not fair, they can elect new politicians to change the rules. DISCUSSION QUESTIONS FOR BONUS CASE 2-1 1. Why is it so necessary to have a freely elected government for democratic capitalism to create a prosperous and fair economy? 2. Go through the three components of democratic capitalism and picture an economy without each one. What happens to freedom, fairness, and moral and ethical behavior? Which part of the system seems weakest today? What can be done about it? 2.40 INTRODUCTION TO BUSINESS: Instructor’s Resource Manual ANSWERS TO DISCUSSION QUESTIONS FOR BONUS CASE 2-1 1. Why is it so necessary to have a freely elected government for democratic capitalism to create a prosperous and fair economy? Because any kind of dictatorship hinders the operation of free markets, or at least tends to do so. Free choice in the market is based on a value system that includes free choice in it, including free choice of leaders. 2. Go through the three components of democratic capitalism and picture an economy without each one. What happens to freedom, fairness, and moral and ethical behavior? Which part of the system seems weakest today? What can be done about it? Without free enterprise, shortages develop and the whole economy tends to slow. Poverty, hunger, and starvation often result. Without a freely-elected government, the arbitrary allocation of resources can lead to the same problems as an absence of free markets. But what is needed in any economy is a moral and ethical base. Without that base, the market mechanism falters. CHAPTER 2: How Economics Affects Business 2.41 BONUS CASE 2-2 Katrina’s Aftermath (Video Case) (NOTE: This case can be used with the Video on DVD for this chapter.) Free market capitalism has been credited with the marvelous growth and prosperity enjoyed by the United States and other developed countries. But no country really has a totally free market system. Always, the government acts to help assure those who are poor, elderly, or disabled that they will receive some minimum amount of assistance. Usually that assistance includes education or some kind of welfare assistance (e.g., food, housing, or tax relief). The resulting system is called a mixed economic system because it is a mixture of free market capitalism and government social programs. If the government programs are extensive, the system might be called socialism. In the United States, there are many very rich people and many very poor people. Despite numerous efforts by businesses, government agencies, and nonprofit organizations to end poverty, poverty still persists. That point was illustrated vividly when hurricane Katrina hit the Gulf Coast region of the United States, and was especially apparent in New Orleans, Louisiana. Who is to blame for persistent poverty? And why did the people in New Orleans suffer for so many days before assistance arrived? Is the government indifferent to the needs of some? Is the city government responsible, or the state government, or the federal government? There have been major natural disasters throughout the world in recent years, and the results have been much the same. Many people die; others lose their homes and jobs. Almost always, citizens try to help, but the task is simply too great. At times, even the state and federal government are overwhelmed by the need. In the case of New Orleans, businesses like Wal-Mart responded rather quickly, but they couldn’t get food and materials to people without help. Nonprofit groups of all kinds drove down to help, but government bureaucracy made it difficult, if not impossible, to get a coordinated effort going. Communications between and among various government, private, and nonprofit organizations was almost nonexistent. Much of the infrastructure (roads, rivers, water system, electricity, and so forth) were not operating. In short, capitalism is a great system for creating wealth in a macroeconomic environment where supply and demand dictate through prices what gets produced and in what quantity and quality. In the short run, however, shortages can exist for a while without the appropriate response. In the long run, the free market system will do its work. The demand for supplies will result in flows of goods. Homes will be rebuilt. Businesses will reopen. Jobs will be created. People will get on with their lives. That has happened again and again in Florida and other places where disaster has struck. Wars and natural disasters create a real challenge for any economic system. The fastest response usually comes when people are free to create their own businesses, free to own their own land, free to set their own prices, and free to keep the profits from what they earn. Acadian Ambulance is an example of what free markets can do. In the midst of the Katrina disaster, the company had a satellite communication system up and running. Acadian was thus able to coordinate hospitals, law enforcement, and rescue workers. Land lines, cell phones, and internet communications had all failed. But one creative company was able to rise above the chaos. Ultimately, you and I, as taxpayers, will have to pay for the damages in the Gulf region. The government uses fiscal policy, taxes and spending, to keep the economy growing and to respond to people in need. The government also uses monetary policy to keep the economy growing at the right pace. That means that the Federal Reserve will raise or lower interest rates and control the money supply so that businesses can prosper and grow—creating jobs and minimizing poverty. There have always been ups and downs in the economy. Though thick and thin, people have always responded by helping their neighbors and helping those throughout the world who have less. More 2.42 INTRODUCTION TO BUSINESS: Instructor’s Resource Manual and more countries are adopting the concepts of free markets and free trade. The results are obvious in places like China, India, South Korea, and around the world. A good understanding of economics is the basis for all such growth—and the reason for discussing economics early in this text. DISCUSSION QUESTIONS FOR BONUS CASE 2-2 1. No economic system has been able to respond quickly to the devastation caused by war or major natural disasters. Why is the free market system more likely to respond faster? What advantages might a socialist system have in responding to the needs of the poor? 2. What could the government do to better coordinate the efforts of churches, other nonprofit organizations, government agencies, businesses, and individual citizens when emergencies strike? What factors have hindered such coordination in the past? 3. When disasters hit an area, the cost of everything seems to go up immediately: food, water, housing, gas, etc. Explain why this phenomenon may be a good thing, using the laws of supply and demand to explain your answer. What would happen if prices did not go up? ANSWERS TO DISCUSSION QUESTIONS FOR BONUS CASE 2-2 1. No economic system has been able to respond quickly to the devastation caused by war or major natural disasters. Why is the free market system more likely to respond faster? What advantages might a socialist system have in responding to the needs of the poor? The single greatest impediment to quick response is cumbersome bureaucracy. The free market system has less. Companies and individuals can respond immediately with needed human essentials. For example, a company like Wal-Mart, with its formidable infrastructure and transportation systems, can efficiently move goods where they are most in demand and meet local needs. Simultaneously they can enhance their marketing through benevolent response to human suffering and make an already ubiquitous name more well thought of universally. The socialist system could respond quickly with essential goods and services already directly tied to national government agencies. There would be less incentive to the individual to profit through price gouging which is especially harmful to the economically disadvantaged. 2. What could the government do to better coordinate the efforts of churches, other nonprofit organizations, government agencies, businesses, and individual citizens when emergencies strike? What factors have hindered such coordination in the past? Hurricane Katrina exposed the lack of preparedness of all levels of government to huge-scale natural disasters. The national government should take the lead in coordinating with state and local governments for long-term relief and placing authorities immediately to ensure appropriate action. Local government, with the aid of state and national governments, should be free to meet first responder and emergency needs. Planning to meet immediate future needs while the larger scope of clean up, rebuilding, and disaster prevention such as improved levee systems needs to be a priority of the national government. 3. When disasters hit an area, the cost of everything seems to go up immediately: food, water, housing, gas, etc. Explain why this phenomenon may be a good thing, using the laws of supply and demand to explain your answer. What would happen if prices did not go up? CHAPTER 2: How Economics Affects Business 2.43 When disasters hit an area, supply and demand quickly come into play. In the aftermath of Katrina, dwindling supplies of gasoline led to a spike in prices and long lines at service stations. As demand increased, supply went to zero in some places. Gasoline prices immediately skyrocketed and price gouging was common. Certain items, such as batteries, ices, and water, quickly sold out. Companies like Wal-Mart and Home Depot responded by bringing in ice, building materials, chain saws, and other emergency-related items to meet demands of the public while keeping supplies from becoming critically low for long periods of time. This response led to higher sales, greater profits, and excellent public relations for the companies. Meanwhile, higher oil prices brought about by the declining supply of crude oil from the rigs in the Gulf of Mexico increased prices of most goods. This phenomenon produces profit incentives for oil companies to search for and produce more oil. Other factors such as limited oil reserves and global warming increase the potential profit in alternative energy sources that produce no greenhouse gases and other pollutants. 2.44 INTRODUCTION TO BUSINESS: Instructor’s Resource Manual BONUS CASE 2-3 The Rule of 72 No formula is more useful for understanding inflation than the Rule of 72. Basically, the rule allows you to quickly compute how long it takes the cost of goods and services to double at various compounded rates of growth. For example, if houses were increasing in cost at 9% a year, how long would it take for the price of a home to double? The answer is easy to calculate. Simply divide 72 by the annual increase (9%) and you get the approximate number of years it takes to double the price (eight years). Of course, the same calculation can be used to predict how high food prices or auto prices will be 10 years from now. Here’s an example of how you can use the Rule of 72. If the cost of going to college goes up by 6% a year, how much might you have to pay to send your child to college in 24 years (this assumes you will have a child 6 years from now) if college costs are now $10,000 a year? To find the answer, you divide 72 by 6, which shows that the cost of an education would double in 12 years. It would double twice in 24 years. Your son or daughter can expect to pay $40,000 per year to attend college. DISCUSSION QUESTIONS FOR BONUS CASE 2-3 1. If the cost of a private college education is about $20,000 per year now, what will it cost your children per year if costs go up 9% a year and your children go to college 16 years from now? 2. If the value of a home doubles in 12 years, what is the annual rate of return? (Hint: use the rule of 72 in reverse.) 3. If you put $1,000 into a savings account and earned 6% per year, how much money would you have in the account after 48 years? 4. If interest on the national debt is 6% a year, how long would it take for the debt to double? How long would it take if interest rates went up to 8%? ANSWERS TO DISCUSSION QUESTIONS FOR BONUS CASE 2-3 1. If the cost of a private college education is about $20,000 per year now, what will it cost your children per year if costs go up 9% a year and your children go to college 16 years from now? Using the Rrule of 72, costs would double in 8 years (72 divided by 9). There are two 8-year periods in 16 years, meaning that costs would double twice: $40,000 then $80,000 per year. So the cost would be $80,000 per year. 2. If the value of a home doubles in 12 years, what is the annual rate of return? (Hint: Use the Rule of 72 in reverse.) Using the Rule of 72, you divide 12 into 72 and get the rate of return, which is 6%. 3. If you put $1,000 into a savings account and earned 6% per year, how much money would you have in the account after 48 years? CHAPTER 2: How Economics Affects Business 2.45 Your original $1,000 would double in 12 years (72 divided by 6 equals 12). There are four 12year periods in 48 years, so the amount would double four times: $2,000, $4,000, $8,000, for an end amount of $16,000. 4. If interest on the national debt is 6% a year, how long would it take for the debt to double? How long would it take if interest rates went up to 8%? Again, using the Rule of 72, it would take about 12 years at 6% (72 divided by 6) and 9 years at 8% (72 divided by 8.) 2.46 INTRODUCTION TO BUSINESS: Instructor’s Resource Manual ENDNOTES Sources: Scott Elder, “Europe’s Baby Bust,” National Geographic, September 2003; “The Population Divide,” The Register-Guard, May 14, 2006; and “Europe Facing Culture Dilemma,” The Clarion-Ledger, March 29, 2006, p. 10A. i Sources: Liza Featherstone, “Wal-Mart to the Rescue!” The Nation, September 13, 2005; “Wal-Mart and Sam’s Club’s Response to Hurricane Disaster Continues,” Walmartfacts.com, August 31, 2005; and interviews with affected residents. ii Sources: Mike Moffatt, “A Beginner’s Guide to Economic Indicators,” About.com, May 16, 2006; “Economic Indicators,” Investopedia.com; “Leading Indicators Index Shows Economy Braking,” The Clarion-Ledger, May 19, 2006, p. 3C; and “Economic Indicators,” GPOAccess, Council of Economic Advisors, www.gpoaccess.gov. iii iv Source: “Half of Americans ‘Lose’ $2,000 in Cash a Year,” CNNMoney.com, September 13, 2007. v The Internet is a dynamic, changing information source. Web links noted in this manual were checked at the time of publication, but content may change over time. Please review the website before recommending it to your students. CHAPTER 2: How Economics Affects Business 2.47