3
Part
I Business
Environment
Part II:
Business Environment
4
Assessing Economic Conditions
Introduction
to Business
3e
Introduction
to Business
Jeff Madura
Copyright © 2004 South-Western. All rights reserved.
Jeff Madura
Learning Goals
Explain how economic growth affects
business performance.
• Explain how inflation affects business
performance.
• Explain how interest rates affect business
performance.
• Explain how market prices are
determined.
• Explain how the government influences
economic conditions.
•
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4–2
Key Terms
aggregate expenditure 总支出
• cost-push inflation 成本推进式通货膨胀
• cyclical unemployment 周期性失业
• demand schedule 需求表
• demand-pull inflation需求拉动式通货膨胀
• economic growth 经济增长
• equilibrium price平衡价格
• excise taxes 消费税
•
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4–3
Key Terms
federal budget deficit 联邦预算赤字
• federal reserve system 联邦储备系统
• fiscal policy 财政政策
• frictional unemployment 摩擦性失业
• gross domestic product (GDP) 国内生产总
•
值
inflation 通货膨胀
• monetary policy 货币政策
• money supply 货币供应量
•
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4–4
Key Terms
recession (经济)衰退
• seasonal unemployment 季节性失业
• shortage 短缺
• structural unemployment 结构性失业
• supply schedule 供给表
• surplus 过剩
•
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4–5
Economic Conditions
– Macroeconomic conditions
Overall economic state of a
country
– Microeconomic conditions
Focus on conditions in a
particular business or industry
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4–6
Macroeconomic Effects
•
The performance of most firms depends
on three macroeconomic factors:
– Economic growth (employment rate)
– Inflation
– Interest rates
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4–7
Strong Economic Growth
•
general level of economic activity is
higher than normal:
– Total income level is relatively high.
– higher volume of spending
– higher revenues
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4–8
How the Impact of
a Strong Economy Spreads
1
2
3
Increased
demand for
products.
＊Firms hire
more
employees.
＊Increased
demand for
supplies,
construction
services and
materials.
General
income level
rises.
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4–9
Weak Economic Growth
•
Weak economic growth results in:
– low demand for products and services
– lower revenues
Recession: Occurs when economic
growth is negative for two consecutive
quarters
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4–10
How the Impact of
a Weak Economy Spreads
1
2
3
＊ Workers
are laid off.
＊Demand
for products
are reduced.
＊Firms
reduce
production
＊cutback on
plans for
expansion.
Declined
demand for
supplies,
construction
services and
materials.
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4–11
Indicators of Economic Growth
Gross Domestic Product (GDP)
- the total market value of all final
products and services produced in a
country.
- Economic growth is interpreted as the
percentage of change in the GDP
• Aggregate Expenditures
- total amount of expenditures in the
economy
•
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4–12
Trend of Gross Domestic Product (GDP)
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Exhibit 3.1
4–13
Indicators of Economic Growth
•
An alternative indicator is unemployment level.
– Frictional Unemployment
people who are between jobs
– Seasonal Unemployment
people whose jobs are not needed during
some seasons
– Cyclical Unemployment
people who are unemployed because of
poor economic conditions (best indicator)
– Structural Unemployment
people who are unemployed because they
don’t have adequate skills
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4–14
Trend of U.S. Unemployment
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4–15
Variation in the Sensitivity to
Economic Growth
McDonald’s
Food
Which are
more sensitive?
Starbuck’s
Coffee
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New
Cars
4–16
Inflation
•
An increase in the general level of prices
of products and services over a specified
period of time.
– Estimated by the consumer price index (CPI).
– CPI is a market basket of prices
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4–17
U.S. Inflation Rates over Time
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Exhibit 4.3
4–18
Impact of Inflation
Can affect a company’s operating
expenses.
• Can affect a company’s revenues
•
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Types of Inflation
Cost-Push Inflation
- the situations when higher prices
charged by firms are caused by higher
costs
- consumers pay higher prices for products
→they are forced to reduce spending on
other products
→demand for those products declines
•
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4–20
Types of Inflation
Demand-Pull Inflation
- the situations when prices of products and
services are pulled up because of strong
consumer demand
- ① strong consumer demand
→production shortages
→higher prices
- ② strong economic growth
→fewer unemployed people
→workers negotiate for higher wages
→production costs rise
→higher prices to recover higher expenses
•
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4–21
Variation in the
Sensitivity to Inflation
Travel
Agency
Delivery
Service
Firm
Dental
Office
?
Real
Estate
Agency
Which firms are more sensitive to
the changes in oil prices?
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4–22
Impact of Interest Rates
Impact on a Firm’s Expenses
- Interest rates determine cost of borrowing
money.
- Interest rates influence a firm’s profit. (Exhibit
3.3)
- Firms may postpone expansion if interest rates
are high.
Impact on a Firm’s Revenue
- High interest rates lead to reduced demand for
products purchased with credit, with results in
lower sales.
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4–23
Variation in Sensitivity
to Interest Rates
Which are more sensitive?
Car
Travel
Agencies
Manufacturers
Construction
Firms
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4–24
Market Price Determination
•
Market price of a product is influenced by:
– The total demand for that product by all
customers
– Supply of that product produced by firms
The interaction between demand and
supply determines the market price
• The “Invisible Hand” – Adam Smith
•
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4–25
How the Equilibrium Price is
Determined by Supply and Demand
A demand schedule indicates the
quantity of a product demanded at each
possible price .
• A supply schedule indicates the
quantity of a product supplied (produced)
at each possible price.
• Equilibrium price
-is the price at which the quantity
supplied equals the quantity demanded;
-is the price at which firms attempt to sell
products.
•
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How the Equilibrium Price is
Determined by Supply and Demand
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Exhibit 3.4
4–27
Interaction of Demand and Supply
At any price above the equilibrium price,
firms are unable to sell all the products,
resulting in a surplus. Prices should be
reduced to eliminate the surplus.
• At any price below the equilibrium price,
the firms will not produce a sufficient
quantity to satisfy all the demand,
resulting in a shortage. Prices can be
raised to correct the shortage.
•
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4–28
Effect of a Change in Demand Schedule
Assuming the supply schedule remains
unchanged, if demand curve shifts
outward, the equilibrium price will rise.
• Simple Logic: demand increases →
shortage →firms can sell at a higher
price → the equilibrium price rises
•
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Effect of a Change in Demand Schedule
Assuming the supply schedule remains
unchanged, if demand curve shifts
outward, the equilibrium price will rise.
• Simple Logic: demand increases →
shortage →firms can sell at a higher
price → the equilibrium price rises
•
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4–30
Effect of a Change in Supply Schedule
Assuming the demand schedule remains
unchanged, if supply curve shifts outward,
the equilibrium price will fall.
• Simple Logic: supply increases → surplus
→firms should lower the price → the
equilibrium price falls
•
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Factors Influencing Market Prices
•
Consumer Income
higher consumer income → demand curve
shifts out →higher prices
•
Consumer Preferences
a product becomes less popular → demand
declines → lower prices
•
Production Expenses
lower production expenses → higher supply
→ surplus →lower prices
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4–32
Government Influence
on Economic Conditions
Government
Policy
Monetary
Policy
(decisions
on money
supply level)
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Fiscal Policy
(decisions
on how to
set taxed
and spend
money)
4–33
Monetary Policy
Impacts Economic Conditions
•
Monetary policy
– Made by the Federal Reserve System
 “Fed”
is the central bank of the U.S.
(Greenspan)
– Decisions by Fed about the money supply:
 Impact
interest rates (expense and product
demand)
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Fed’s Impact on Interest Rates
How the Fed’s Reduces Interest Rates
Assuming that demand for loanable funds
remains unchanged, increased money
supply will decrease interest rates and
stimulate economic growth.
• How the Fed’s Increases Interest Rates
Assuming that demand for loanable funds
remains unchanged, decreased money
supply will increase interest rates and
discourage consumers and firms from
borrowing.
Reduced spending leads to lower profit for
firms.
•
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Fiscal Policy
•
How the federal government sets tax
rates and spends money:
– Personal income tax rates
– Corporate taxes
– Excise taxes
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Fiscal Policy
Revision of Personal Income Tax Rates
lower personal income taxes → higher after-tax
incomes → higher aggregate demand
• Revision of Corporate Taxes
lower corporate taxes → higher after-tax earnings
• Revision in Excise Taxes
Higher excise taxes imposed on particular products
discourage consumption of these goods.
• Revision in Budget Deficit
- government spending ＞ federal taxes & other
revenues
- government borrows funds → higher demand for
loanble funds → higher interest rates
•
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Chapter Summary
•
Firm performance depends on three
macroeconomic factors: economic growth,
inflation, and interest rates.
•
Demand and supply conditions determine
market prices.
•
Federal government uses monetary and
fiscal policies to influence macroeconomic
conditions.
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4–38
Learning Goals (Revisited)
Explain how economic growth affects
business performance.
• Explain how inflation affects business
performance.
• Explain how interest rates affect business
performance.
• Explain how market prices are
determined.
• Explain how the government influences
economic conditions.
•
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4–39