Download CHAPTER 5 Small Business and the Entrepreneur

2
chapter
Economics and
Banking
Better Business
1st Edition
Poatsy · Martin
Slide presentation prepared by Pam Janson
Stark State College of Technology
© 2010 Pearson Education, Inc.
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means, electronic, mechanical, photocopying, recording, or otherwise,
without the prior written permission of the publisher. Printed in the
United States of America.
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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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Economics Basics
• Supply and demand
o Determine how goods and services are priced
• Microeconomics
o Study of individual purchase decisions
• Macroeconomics
o 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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Economic Systems:
Related Ideas
• Privatization
o Conversion of government production and
services to privately-owned, profit-seeking
enterprises
o Privatization possibilities: water, utilities,
transportation, other
Generally, privatization moves an economic
system from ___________ to ___________.
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Determining Price:
Supply and Demand
• Currency
• Market price
o Price at which everyone who
is interested can get an item
with none left over
• Supply
o Availability of the item
• Demand
o Need or desire for the item
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Supply and Demand
• Law of supply—Amount suppliers want to
provide:
o Increases as price increases.
o Decreases as price decreases.
• Supply curve—As price increases, quantity
supplied increases.
• Law of demand—Amount buyers want to
purchase:
o Increases as price decreases.
o Decreases as price increases.
• Demand curve—As price increases, quantity
demanded decreases.
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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
o
o
o
o
o
Technology changes
Number of suppliers
Change in resource prices
Price expectations
Price of substitute goods
• Determinants of Demand
o
o
o
o
o
Changes in income levels
Complementary goods
Population changes
Substitute goods
Consumer preferences
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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
• Gross domestic product
o The broadest measure of economic activity
o Annualized quarterly percent changes in GDP reflect
the growth rate of total economic output
o The broad components of GDP are
• Consumption
• Investment
• Net exports
• Government purchases
• Inventories
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Economic Indicators:
CPI and PPI
• Consumer price
index (CPI)
• Purchase price
index (PPI)
• Inflation
• Disinflation
• Deflation
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Economic Indicators:
Unemployment
• Unemployment rate
o A measurement of the number of workers
who are not working and who are actively
looking for work
o Frictional unemployment
o Structural unemployment
o Cyclical unemployment
o 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
o Peak
o Recession
o Trough
o 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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Monetary Policy
• Monetary policy relates to managing the
amount of money in the system
o Money supply: The total amount of money in
the economy. It is measured in categories
• M-1: Readily available money
• M-2: M-1 plus money available to banks to lend
out
• M-3: M-2 plus less available money
Why is measurement of the
money supply important?
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The Federal Reserve System
• “Fed” is central banking system in the U.S.
o Independent government agency
o 12 regional Federal Reserve Banks
o 7-member Board of Governors
• Chairman: Ben Bernanke
• The Federal Open
Market Committee
sets policies of the Fed,
including monetary
policies
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Managing the Money Supply:
Open Market Operations
• Open market operations
o The primary, and most influential, tool the
Fed uses to alter the money supply
o Consists of buying and selling U.S. Treasury
and federal agency bonds in the “open
market”
o To stimulate the economy, the Fed buys
securities
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Managing the Money Supply:
Discount Rate
• Discount Rate
o Rate the Fed charges member banks
• Fed Funds Rate
o Rate that banks charge other banks
• 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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Managing the Money Supply:
Reserve Requirement
• Banks keep a reserve of money on hand to
cover customer demands for funds.
• 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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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?
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Publishing as Prentice Hall
23
Beyond the Book
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24
U.S. GDP
Over the Last 50 Years
16000
8
14000
6
4
8000
2
Percent
10000
6000
0
4000
-2
2000
0
-4
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
Billions of Dollars
12000
Gross Domestic Product (in Billions of Dollars)
Percent Change from Preceding Year
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The Better Economy?
• Which economy has had better performance in
the past five years: The U.S. or Japan?
o The U.S. average annual real GDP growth of
2.9% was much faster than Japan’s 2.1%.
o Japan’s GDP per person increased at an
annual rate of 2.1% in the five years to 2007,
slightly faster than the U.S.’s 1.9%.
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Consumer Price Index
• The major categories of
goods and services
monitored for CPI
o
o
o
o
o
o
o
Food and beverages
Housing
Apparel
Transportation
Medical care
Recreation
Education and
communication
o Other goods and services
• Tobacco and smoking
products, haircuts, funeral
expenses
Average Cost of a 16-oz. Bag of
Potato Chips in U.S. Cities
Year
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
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January
Price
$3.15
$3.22
$3.39
$3.39
$3.44
$3.48
$3.43
$3.26
$3.43
$3.36
$3.53
Percent
Change
2.11
4.99
0.15
1.34
1.32
-1.60
-5.28
4.96
-1.99
4.84
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2008 Economic
Stimulus Package
• Signed by President George W. Bush on
February 13, 2008, to address short-term
economic uncertainties and stimulate
consumer spending
• Included provisions for
o Tax rebates of up to $600 for individuals and
$1,200 for couples (plus $300 per child)
o Tax code changes allowing American
businesses to deduct an additional 50% of
new equipment purchased this year
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