How Economics Affects Business: The Creation and Distribution of Wealth
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Economics and Business
• Economic and Legal System
• Influences the business structure
• Developed Countries
• Influenced not only by their own economic system, but also by the international ambience
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Economics (cont.)
• Economics
• Study of how society chooses to employ resources to produce goods & services and distribute them among competing groups/individuals
• The allocation of scarce resources
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Economics: Create Wealth
• Economics
• Micro
looks at the behavior of people and organizations in particular markets
• Macro
looks at the operation of a nation’s economy as a whole
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Economics (cont.)
• Resource Development
• How to increase resources and to create the conditions that will make better use of those resources
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Economic Theories
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Thomas Malthus (Early 1800s)
• “Dismal Science” • Too many people
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Adam Smith – “The Wealth of Nations” (1776)
• Freedom is vital • “Invisible Hand”
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Free-Market Capitalism
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Capitalism
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An economic system in which all or most of the factors of production and distribution are privately owned and operated for profit No country is purely capitalist
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Markets vs Government
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Free-Market Capitalism
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Four Basic Rights:
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Private Property
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Business Ownership/ Profits
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Freedom of Competition
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Freedom of Choice
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Capitalism (cont.)
• Market
• Sets prices • Producers
Decide what and how much to produce
• Consumers
Vote for products with dollar votes
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Capitalism (cont.)
• Supply
• The quantity of products that manufacturers or owners are willing to sell at different prices at a specific time
• Demand
• The quantity of products that people are willing to buy at different prices at a specific time
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Capitalism (cont.)
• Market Equilibrium
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Capitalism (cont.)
• Market price (equilibrium price)
The price determined by supply and demand Surpluses
Shortages
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Capitalism (cont.)
• Competition
• Perfect
many sellers in the market and no seller is large enough to dictate the price of a product (salt)
• Monopolistic
large number of sellers produce products that are very similar but are perceived by buyers as different (computers, T-shirts)
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Capitalism (cont.)
• Competition (cont.)
• Oligopoly
a few sellers dominate a market (soft drinks, aircrafts)
• Monopoly
only one seller for a product or service (power suppliers) Deregulation (long distance calls)
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Socialism
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Socialism
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An economic system based on the premise that some, if not most, basic businesses should be owned by the government so that profits can be distributed among the people
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Socialism (cont)
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Socialism
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Private & public ownership Creates social equality (not quite)
Free social services (healthcare, education) – but quality?
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•
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Reduces individual incentive - Brain Drain
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Communism
• Communism
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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
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Communism (cont)
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Public Ownership of almost all major factors of production Central Planning/Controlled Economy
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shortages of food and other products
lack of motivation to work hard
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Mixed Economies
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Free-Market Economy
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Capitalism
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Command Economy
• •
Socialism
Communism
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Mixed Economies (U.S.)
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U.S. Economy
• • • • • •
Key Economic Indicators Productivity in the U.S. Productivity in the Service Sector Business Cycles Stabilization – Fiscal Policy Economic Growth through Monetary Policy
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Key Economic Indicators
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Gross Domestic Product (GDP)
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The total value of goods and services produced in a country in a given year
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Unemployment Rate
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The number of civilians at least 16 years old who are unemployed and tried to find a job within the prior four weeks
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Unemployment Rate (cont.)
U.S. unemployment rate
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Unemployment Rate (cont.)
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Key Economic Indicators (cont.)
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Price Indexes
measure the health of the economy
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Inflation
a general rise in the prices of goods and services over time
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Disinflation
price increases are slowing (the inflation rate is declining)
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Key Economic Indicators (cont.)
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Deflation
prices are actually declining - countries produce many goods that people cannot afford to buy
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Stagflation
the economy is slowing, but prices keep going up
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Key Economic Indicators (cont.)
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Consumer Price Index (CPI)
Monthly statistics that measure the pace of inflation or deflation
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Producer Price Index (PPI)
Index that measures prices at the wholesale level
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Productivity in the U.S.
• U.S. Productivity
• Has gone up in recent years
• The U.S. economy is a service economy
very labor intensive – productivity issues which productivity went up faster: general business or manufacturing
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Productivity in the U.S. (cont.)
• Productivity In The Service Sector
• Computers, word processors, and other technology increase productivity
• Sometimes they increase only quality
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Business Cycles
• Business Cycles
• The periodic rises and falls that occur in economies over time
• • • • Economic boom Recession Depression (deflation) Recovery
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Business Cycles (cont.)
© Wikipedia
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The Business Cycle (cont.)
• Stabilization
• Fiscal policy
federal government’s efforts to keep the economy stable by increasing or decreasing taxes or government spending – does it work?
• May lead to National Deficit (it usually does )
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National Debt
© Microsoft Corporation - Encarta
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The Business Cycle (cont.)
• Monetary Policy
• The management of the monetary supply and interest rates
• Federal Reserve System
• Independent form the government • Controls the money supply
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