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Transcript
1 & 3. Business and the Economy Understanding Business and the Context in Which it Operates 1 Why Study Business? • To become a better-informed consumer and investor • For help in choosing a career • To be a successful employee • To start your own business 2 Business: A Definition • Business consists of: – The profit-seeking activities of those engaged in purchasing or selling goods and services to satisfy society’s needs and wants. • Satisfying needs wants – Ultimate objective of every firm • Business profit – What remains after business expenses are deducted from sales revenue 3 Economic Systems • Economics: The study of how wealth is created & distributed – Macroeconomics: national economic issues – Microeconomics: consumers, individual businesses • Factors of production: Four inputs to economic systems – – – – Natural resources Human resources Capital Entrepreneurship 4 Measuring Economic Performance • Economic indicators – Productivity measures • Gross domestic product (GDP) • Gross national product (GNP) – Price indexes • Consumer price index (CPI) • Producer price index (PPI) – Employment statistics • Labor force, employment, unemployment 5 More on Economic Systems • Can be capitalistic, command/planned, or “mixed” • Address four basic economic questions: – Which & how many goods & services will be produced? – How will they be produced? – For whom will they be produced? – Who owns & controls the factors of production? 6 Capitalism: The Private Enterprise System • Theories of Adam Smith (Wealth of Nations, 1776) – Society’s interests are best served when the individuals within society are allowed to pursue their own selfinterest • Based on four principles: – Creation of wealth is the concern of private individuals, not government – Owners of resources should be free to determine how they are used – Economic freedom ensures existence of competitive markets (market economy) 7 – Government should act only as rule-maker/umpire Capitalism: The Private Enterprise System (Cont.) • Basic rights of capitalist system: – Right to private property – Right of business owners to the profits (after taxes) generated by their activities – Freedom of choice (employment, purchases, investments) – Public (i.e, government) sets rules to protect competition 8 Market Forces at Work in the Capitalist System • Supply & demand – Prices influenced by competition – Prices usually respond to forces of supply & demand 9 Supply • Quantities of good/service that producers will provide on particular date at various prices • Law of supply: – Sellers supply more at higher price, less at lower 10 Demand • Amount of good/service that consumers will buy on that date at various prices • Law of demand: – Buyers buy more at lower price, less at higher 11 Theory Of Supply & Demand • Quantity supplied & quantity demanded interact continuously • Balance between them is reflected by current price 12 Supply, Demand, & Profit Motive • Interact to regulate – What is produced – Amounts produced • Consumers get what they want & producers earn a profit 13 Relationship Between Supply And Demand • Demand curve: relationship between price and quantity demanded • Supply curve: relationship between price and quantity provided • Equilibrium point: intersection of supply & demand curves 14 Demand Curve • Changes in quantity demanded – Movement along curve • Changes in demand – Curve shifts to right (demand increased) or left (demand decreased) – Influences: preferences, incomes, substitute prices, no. buyers 15 Supply Curve • Changes in quantity supplied – Movement along curve – Independent of demand • Changes in supply – Curve shifts to left (lowered supply) or right (increased supply) – Influence: factors of production 16 Equilibrium Point • Point at which demand and supply curves intersect • Identifies prevailing market price • Discrepancies between market & equilibrium price are self- correcting 17 Types of Competition in the Capitalist System • • • • Pure competition Monopolistic competition Oligopoly Monopoly 18 Pure Competition • • • • Products identical Perfect information No entity large enough to influence prices E.g., markets for agricultural commodities 19 Monopolistic Competition • Products not identical – Product differentiation possible – Use of branding, etc. • • • • Many buyers & sellers Imperfect information Some government regulation E.g., consumer goods markets 20 Oligopoly • • • • • • Products: similar or different Few, large sellers; many small buyers Sellers match rivals’ prices Market entry expensive Government watches closely E.g., steel, automobile markets 21 Monopoly • One seller; many small buyers • Seller controls products & prices--no competition • Seller keeps other firms from competing • True monopolies illegal • E.g., utilities (legal; regulated) 22 Other Economic Systems: Command/Planned & Mixed • Socialism • Communism • “Mixed” economies 23 Socialism • • • • High degree government planning Government owns some of land & capital Government involvement limited Private ownership permitted 24 Communism • Allows least degree economic freedom • Public ownership of factors of production • Planned resource allocation 25 Mixed Economies • Many communist & socialist economies have capitalist elements – Some relaxing of central control – Increased privatization • Capitalist economies often have socialist elements 26 Business Cycle • Pattern of expansion and contraction through which our economy flows • Characterized by: – – – – Prosperity Inflation: Recession Depression Recovery 27 Employment Act of 1946 • First formal statement of economic goals & federal government’s responsibility for economic progress • Brought about by concerns following depression and WWII • Effort to “flatten” the effects of the business cycle 28 Federal Economic Responsibilities • Promote maximum employment • Promote maximum production • Promote maximum purchasing power 29 Maximum Employment • Goal:full employment of able, willing, & seeking • Full employment does not equal 0% unemployment – Worker mobility – Worker layoffs & retraining – Unrealistic worker hopes 30 Four Categories Of Unemployment • Frictional • Seasonal • Cyclical • Structural 31 Maximum Production (Economic Growth) • Generally understood to be 4% production growth per year • Increased efficiency – Increased production – Conservation of input resources 32 Maximum Purchasing Power (Stable Prices) • Control of inflation – Demand-pull – Cost-push – Hyperinflation • Goal historically considered attained when prices rise at 2-3% per year 33 Monetary Policy • Increase/decrease money supply – Expansionary – Restrictive • Controlled by “The Fed” – Adjusts % deposits of member banks – Adjusts interest rates 34 Fiscal Policy • Government influences economic activity through – Taxation – Spending • Policy manifested in federal budget 35