Nickels
McHugh
McHugh
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.
Economics: Create Wealth
• Use Scarce Resources
to Produce Goods &
Services To Distribute
Among Competing
Groups/Individuals
• Micro v. Macro
• Resource Development
2-3
McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Four “What’s” of
an Economic System
$ What is produced?
$ What amount is produced?
$ What is the method of output
distribution?
$ What is the rate of economic growth?
Adapted from: Edwin Mansfield Economics (New York: W.W. Norton, 1976), p.8
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.
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
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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.
Number of Workers per
Social Security Recipient
6
5
4
3
2
1
0
1960
2000
2075(Est.)
Source: Investors.com
2-17
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
2-18
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
2-19
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Communism
•
Public Ownership
• Productive Capacity
• Capital
•
•
Central Planning/Controlled
Economy
Managers = Mandatory Party
Membership
2-20
McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Mixed Economies
•
•
Free-Market Economy = Capitalism
Command Economy
• Socialism
• Communism
•
Trend Results in Blend/Mix
• Capitalism > Socialism
• Socialism > Capitalism
2-21
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.
2-22
Source: Investors Business Daily Survey
McGraw-Hill/Irwin
Understanding Business, 7/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
U.S. Economy
• Key Economic Indicators
• Productivity
• Business Cycles
• Recession
• Depression
• Recovery
• Stabilization
• Fiscal Policy
• Monetary Policy
• National Debt
2-23
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)
2-24
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
2-25
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.
2-26
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
2-27
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.
2-28
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
2-29
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
2-30
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
2-31
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%
2-32
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
What $1 Billion Can Buy
An Egg McMuffin and large coffee for
the President & his 2,000 Secret Service
agents every morning for 575 years.
Average annual grocery bill for 250,000
families of 4.
One year’s food for 5 million cats &
dogs.
Tuition, room and board for freshman
classes at Brown, Cornell, Harvard,
Pennsylvania & Yale with $50M leftover
for books.
2-33
McGraw-Hill/Irwin
Understanding Business, 7/e
© 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/
2-34
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
2-35
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.