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Nickels
McHugh
McHugh
With help
from
Philip
2-1
McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Chapter
How
Economics
Affects
Business:
The Creation
and
Distribution of
Wealth
2-2
McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Learning Goals
1. Economics of Despair versus
economics of Growth
2. Free Market Capitalism
3. Socialism and Communism
4. Mixed Economies
5. The US Economy
6. Government Fiscal and Monetary
Policy
2-3
McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
1) Economics: Create Wealth
• Use Scarce Resources
to Produce Goods &
Services To Distribute
Among Competing
Groups/Individuals
• Micro v. Macro
• Resource Development
2-4
McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Economic Theories
•
Thomas Malthus (Early 1800s)
• “Dismal Science”
• Too many people
•
Adam Smith (1776)
• Freedom is vital
• “Invisible Hand”
2-5
McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Three Economic Systems
Mixed
Socialism
(Highly Controlled)
(Little Control)
Communism
Capitalism
2-6
McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
2)Free-Market Capitalism
•
Private Property
•
Profit/Ownership
•
Freedom of Competition
•
Freedom of Choice
2-7
McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Supply Curve
High
Price(P)
S
Low
Quantity(S)
High
2-8
McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Demand Curve
High
Price(P)
D
Low
Quantity(D)
High
2-9
McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Equilibrium Point
Surplus
High
Market Equilibrium
Price
S
Low
Shortage
Quantity
D
High
2-10
McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Free-Market Competition
Monopolistic
Oligopoly
Competition
One
Many
Perfect
Competition
Monopoly
Sellers
2-11
McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Perfect Competition
Sellers
Buyer
2-12
McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Monopolistic Competition:
Many Sellers With Perceived Differences
•
Fast Food
•
Colleges
2-13
McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Oligopoly: Few Sellers
•
Automobiles
•
Tobacco
2-14
McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Monopoly: One Seller
•
Diamonds
•
Utilities
•
Microsoft?
2-15
McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Limits of Free-Markets
•
•
•
•
Inequality of Wealth- Causes
National & World Tension
Greed Compromises Ethics
Potential Environmental
Damage
Limitations Push Country
towards Socialism =
Government Regulation
2-16
McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
3) Socialism and Communism
a) Socialism
•
•
•
•
•
Social Equality
Protection of poor and weak
Free education
Free health care
Brain drain
2-17
McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Number of Workers per
Social Security Recipient
6
5
4
3
2
1
0
1960
2000
2075(Est.)
Source: Investors.com
2-18
McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Socialism
•
•
•
•
Private & Public
Ownership
Some Choices are Limited
Creates Social Equality
Reduces Individual
Incentive- Brain Drain
2-19
McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Industrialized
Nations’ Tax Rate
U.S.
Austria/Japan
Italy
Canada
Germany
Spain/Sweden
France
Finland
Denmark
0%
10%
20%
30%
40%
50%
60%
70%
Source: Parade Magazine, Apr. 12, 1998.
McGraw-Hill/Irwin
Understanding Business, 7/e
2-20
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
b) Communism
• Ideal that is not achievable because of
human nature
• Government has total control
• Abuse: corruption
• Theoretically no material reward for
harder work
2-21
McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Communism
•
Public Ownership
• Productive Capacity
• Capital
•
•
Central Planning/Controlled
Economy
Managers = Mandatory Party
Membership
2-22
McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
4) Mixed Economies
•
•
Free-Market Economy = Capitalism
Command Economy
• Socialism
• Communism
•
Trend Results in Blend/Mix
• Capitalism > Socialism
• Socialism > Capitalism
2-23
McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Why is the U.S.
an Economic Success?
Major Reason
Percent*
Constitution
85
Free Elections
84
Free Enterprise System
81
Abundant Resources
78
Cultural Diversity
71
* Respondents could choose more than one.
2-24
Source: Investors Business Daily Survey
McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
5) U.S. Economy
• Key Economic Indicators
• Productivity
• Business Cycles
• Recession
• Depression
• Recovery
• Stabilization
• Fiscal Policy
• Monetary Policy
• National Debt
2-25
McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Key Economic Indicators
•
Gross Domestic Product (GDP)
•
Unemployment Rate
•
Price Indexes
• Consumer Price Index(CPI)
• Producer Price Index(PPI)
2-26
McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
U.S. Gross
Domestic Product
12,000
10,000
8,000
In Billions of U.S. $
6,000
4,000
2,000
0
1940
1950
1960
1970
1980
1990
2000
2002
Source: U.S. Dept. of Commerce, Bureau of Economic Analysis
2-27
McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Share of World GDP(%)
1970
•North America
37
•Asia
21
•Europe
33
•South America
7
•Africa /Australia 2
2001
38
28
28
4
2
Source: Investor’s Business Daily, Apr. 29, 2003.
2-28
McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
U.S. Unemployment (%)
16
14
12
10
8
6
4
2
0
1940
1950
1960
1970
1980
1990
2000
2002
Source: U.S. Bureau of Labor Statistics
2-29
McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
What Makes Up The
Consumer Price Index?
Recreation Apparel
5%
6%
Medical Care/
Insurance
7%
Medical Care
6%
Other
5%
Housing & Util.
39%
Food &
Beverage
16%
SOURCE: U.S. Bureau of Labor Statistics
McGraw-Hill/Irwin
Understanding Business, 7/e
Transportation
18%
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
2-30
Consumer Price Index
200
180
160
140
120
100
80
60
40
20
0
1982-84 = 100
1940
1950
1960
1970
1980
1990
2000
2002
Source: U.S. Dept. of Labor, Bureau of Labor Statistics
2-31
McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
% Change in Labor
Productivity- U.S.
9
8
7
6
5
4
3
2
1
0
-1
1950
1960
1970
1980
1990
2000
2002
Source: U.S. Dept. of Commerce, Bureau of Labor Statistics
2-32
McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
6) Government Fiscal and
Monetary Policy
• Fiscal Policy: government influencing
economy by varying taxes and
spending
• National Debt: sum of government
deficits over time
• Monetary Policy: management of
money supply (reserve requirements)
and interest rates
2-33
McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Where Does the
Government Get Its Money?
4%
4%
9%
43%
Individual Income
Taxes
Social Security &
Payroll Taxes
Corporate Taxes
Excise Taxes
40%
Other
2-34
Source: Office of Management & Budget, 2002
McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
What Federal Dollars Buy
(2002)
Human Resources. – 63%
Source: Office of
Management & Budget
McGraw-Hill/Irwin
Understanding Business, 7/e
Interest 7.9%
Defense - 17.5%
Other 5.7%
Physical Resources 5.9%
2-35
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
What is the National Debt?
The debt has reached $6.7
trillion+
If $1,000 bills were stacked:
$1 Million = 4.29 Inches
$1 Billion = 357.5 Feet
$1 Trillion =
67 Miles
The debt is equal to 442.2 miles
in $1,000 bills
National Debt Clockhttp://www.brillig.com/debt_clock/
2-36
McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
State Budget Deficits
(’03 & ’04)
 California
 New York
 New Jersey
 Connecticut
 Missouri
 Ohio
 Nevada
Billions
$ 35.0
12.0
5.7
2.5
1.3
0.72
0.64
Source: BusinessWeek March 17, 2003
McGraw-Hill/Irwin
Understanding Business, 7/e
2-37
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.