Download CHAPTER 5 Small Business and the Entrepreneur

Economics and
Banking
Chapter 2
Better Business
2nd Edition
Solomon (Contributing Editor) ·
Poatsy · Martin
© 2012 Pearson Education, Inc.
Publishing as Prentice Hall
2-1
Learning Objectives
1. What is economics, and what are the different types of economic
systems?
2. What are the principles of supply and demand and the factors that
affect each principle?
3. What are the four degrees of competition, and how does competition
affect supply?
4. How do economic indicators—particularly the gross domestic
product (GDP), price indexes, the unemployment rate, and
productivity—reflect economic health?
5. What are the four stages of the business cycle?
6. How does the government use both fiscal policy and monetary
policy to control swings in the business cycle?
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2-2
Economics Basics
• Economics
• Microeconomics is the study of how
individual businesses, households, and
consumers make decisions to allocate their
limited resources in the exchange of goods
and services
• Macroeconomics study of behavior of the
overall economy
Why do business managers need
to be concerned with economics?
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Types of Economic Systems
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Determining Price:
Supply and Demand
• Currency
• Market price
- price at which everyone who
is interested can get an item
with none left over
• Supply
- availability of the item
• Demand
- need or desire for the item
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Supply and Demand
• Law of supply- supply is derived from a
producer’s desire to maximize profits:
- The amount supplied will increase as the price increases
- The amount supplied will decrease as the price decreases
• Supply curve- the producers’ desire to supply
more, or sell, is affected by price
• Demand refers to how much of a good or service
people want to buy at any given time.
- As price increases, demand decreases
• Demand curve illustrates that demand increases
as prices decrease
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Supply and Demand Curves and
Eddie’s Coffee Kiosk
Important terms:
• Supply curve
• Demand curve
• Equilibrium
point
• Surplus
• Shortage
At $2.00, how much coffee do suppliers want to provide?
How much coffee do buyers want to buy?
What is the dollar value for the equilibrium price?
What does this point mean?
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Shifts in Supply and Demand
• Determinants of Supply
-
Technology changes
Change in resource prices
Price expectations
Number of suppliers
Price of substitute goods
• Determinants of Demand
-
Changes in income levels
Population changes
Consumer preferences
Complementary goods
Substitute goods
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Degrees of Competition
Monopoly
Oligopoly
Monopolistic
Competition
Perfect
Competition
Number of
Providers
One
Few
Many, but fewer
than perfect
Many
Similarity of
Goods and
Services
Only one
product is
available
Relatively
similar; product
differences
Very similar,
price and
perceived
differences
Virtually
identical
Ease of Entry
into Industry
Government
regulated
High
investment
Fairly easy
Relatively easy
Supplier
Control Over
Price
Considerable
Some
Some
None
Examples
Utility
companies
Airlines,
automobile
industry
Laundry
Agricultural
detergent, pizza,
products
colas
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Economic Indicators:
GDP and GNP
• Gross Domestic Product (GDP)
- the broadest measure the health of any country’s
economy
- Only those goods that are actually produced in the
country are counted in the country’s GDP
• Gross National Product (GNP)
- Former system of measurement the United States used
to measure the economic health
- Switched to GDP in 1991
- The GNP attributes earnings to the country where the
company was owned, not where the company was
manufactured
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Economic Indicators:
CPI and PPI
•
•
•
•
Inflation
Disinflation
Deflation
Consumer price
index (CPI)
• Purchase price
index (PPI)
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Economic Indicators:
Unemployment
• Unemployment rate
- A measurement of the number of workers who
are not working and who are actively looking
for work
- Frictional unemployment
- Structural unemployment
- Cyclical unemployment
- Seasonal unemployment
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Economic Indicators: Productivity
• Measurement of the quantity of goods and
services that human and physical
resources can produce in a given period of
time
Why is it important to measure
and track productivity?
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Business Cycle
• The state of the economy changes over
time
- Peak
- Recession
- Trough
- Expansion/
Recovery
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Fiscal Policy
• Fiscal policy relates to government
management of revenues (taxes) and
spending
Why does the government increase
taxes?
Why does the government decrease
taxes?
How does government spending help
stimulate the economy?
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The Federal Reserve System
• “Fed” is central banking system in
the U.S.
- Independent government agency
- 12 regional Federal Reserve Banks
- Board of Governors
- Based in Washington D.C.
• The Federal Open
Market Committee (FOMC)
sets policies of the Fed,
including monetary
policies
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Monetary Policy
• Monetary policy relates to managing the
supply of money
-
Money supply: is the combined amount of money available
within an economy, but there are different components to the
money supply
• M-1: Currency, traveler’s checks, and checking accounts
constitute the narrowest measure of our money supply
• M-2: M-1 along with the available money for banks to lend
out, such as savings deposits, money market accounts, and
certificates of deposit (CDs) less than $100,000
• M-3: M-2 plus less liquid funds
Why is measurement of the
money supply important?
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Managing the Money Supply:
Open Market Operations
• Open market operations
- The primary, and most influential, tool the Fed
uses to alter the money supply
- Consists of buying and selling U.S. Treasury
and federal agency bonds in the “open
market”
- To stimulate the economy, the Fed buys
securities
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Managing the Money Supply:
Reserve Requirement
• Determined by the Federal Reserve Bank,
is the minimum amount of money banks
must hold in reserve to cover deposits
• The Fed dictates what percent of deposits
the bank must keep on hand.
• The reserve requirement is the least used
monetary policy.
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Managing the Money Supply:
Discount Rate
• Discount Rate
- Interest rate charged to banks that borrow emergency
funds from the Federal Reserve Bank
• Fed Funds Rate
- The interest rate that banks charge other banks when
they borrow funds overnight from one another
• Lowering the discount rate encourages banks
to borrow more money, which they in turn
lend to businesses. This stimulates the
economy.
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Chapter Summary:
Learning Objectives
1. What is economics, and what are the different types of economic
systems?
2. What are the principles of supply and demand and the factors that
affect each principle?
3. What are the four degrees of competition, and how does competition
affect supply?
4. How do economic indicators, particularly the gross domestic
product (GDP), price indexes, the unemployment rate, and
productivity, reflect economic health?
5. What are the four stages of the business cycle?
6. How does the government use both fiscal policy and monetary
policy to control swings in the business cycle?
© 2012 Pearson Education, Inc.
Publishing as Prentice Hall
2-22
© 2012 Pearson Education, Inc.
Publishing as Prentice Hall
2-23