©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
2
Economics: The Framework for Business
Define economics and discuss the evolving global economic crisis
Analyze the impact of fiscal and monetary policy on the economy
Explain and evaluate the free market system and supply and demand
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2-1
2-2
2-3
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
2
Economics: The Framework for Business
Explain and evaluate planned market systems
Describe the trend toward mixed market systems
Discuss key terms and tools to evaluate economic performance
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2-4
2-5
2-6
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Economics
Study of the choices that people, companies, and governments make in allocating society’s resources
Guide decision-making
Help understand broad forces that affect business and personal life
Economy: Financial and social system of how resources flow through society
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©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Macro and Micro Economics
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Macroeconomics: Study of a country’s overall economic dynamics
Employment rate, gross domestic product, and taxation policies
Microeconomics: Study of smaller economic units
Individual consumers, families, and individual businesses
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Global Economic Crisis
Started with slump in dot-com business followed by the 9/11 terrorist attacks Stock market dropped
Unemployment rose
Economic experts feared that the U.S. was on the edge of a full-blown recession
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©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Global Economic Crisis
Subprime mortgage loans – Loans to borrowers with:
Low credit scores
High debt-to-income ratios
Other signs of a reduced ability to repay the money they borrow
Financial institutions suffered when mortgage-backed funds lost value
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©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Steps Taken by the Federal Government and the Federal Reserve
Troubled Assets Relief Program (TARP) – $700 billion economic bailout plan
American Recovery and Reinvestment Act
Designed to turn the economy around over the next two years
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©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Managing the Economy: Fiscal & Monetary Policy
Help achieve the goal of controlled sustained economic growth
Fiscal policy: Government efforts to influence the economy through taxation and spending
Monetary policy: Federal reserve decisions that shape the economy by influencing interest rates and supply of money
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©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Debt Ceiling and Fiscal Cliff
Debt Ceiling – Maximum amount Congress lets the government borrow
Limits amount that government can borrow
Fiscal cliff – Package of across-the-board spending cuts and sharp tax hikes
Aimed to decrease the U.S. budget deficit
Not beneficial if the U.S. economy goes over the fiscal cliff
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©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Budget
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Outlines expected revenue from taxes and fees, and expected spending
- Revenue is higher than expenses over a given period
Budget surplus
- Expenses are higher than revenue over a given period
Budget deficit
- Sum of all the money borrowed and not yet repaid by they federal government
Federal debt
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Federal Reserve Banks
Execute Fed policies
Perform banking services for commercial banks in their districts
Commercial banks: Privately owned financial institutions
Accept demand deposits
Make loans
Provide other services for the public
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©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Money Supply
Total amount of money within the overall economy
Money: Medium of exchange, a measure of value, or a means of payment
Commonly used definitions
M1: All currency plus checking accounts and traveler’s checks
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©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Money Supply
M2: M1 money supply plus most savings accounts, money market accounts, and certificates of deposit
When economy contracts, Fed increases the money supply
When prices rise, Fed reduces the money supply
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©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Open Market Operations
Federal Reserve function of buying and selling government securities
Includes treasury bonds, notes, and bills
Federal Deposit Insurance Corporation (FDIC): Federal agency that insures deposits in banks and thrift institutions for up to $250,000 per customer, per bank
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©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Discount Rate and Reserve Requirement
Discount rate: Rate of interest that the Federal Reserve charges when it loans funds to banks
Reserve requirement: Rule set by the Fed which specifies minimum amount of reserves a bank must hold
Expressed as a percentage of the bank’s deposits
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©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Capitalism: Free Market System
Economic system based on private ownership, economic freedom, and fair competition
Known as the private enterprise or free market system
Economic system: Structure for allocating limited resources
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©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Fundamental Rights of Capitalism
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©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Degrees of Competition
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- Market structure with many competitors selling virtually identical products
- Barriers to entry are quite low
Pure competition
- Market structure with many competitors selling differentiated products
- Barriers to entry are low
Monopolistic competition
- Market structure with only a handful of competitors selling products that can be similar or different
- Barriers to entry are typically high
Oligopoly
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Monopoly
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One producer completely dominates the industry, leaving no room for any significant competitors
- Barriers to entry tend to be virtually insurmountable
Natural monopoly: Market structure with one company as the supplier of a product
- Reason – Nature of that product makes a single supplier more efficient
- Government sanctioned and regulated
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Capitalism: Supply & Demand
Explains the dynamic interaction between buyers and sellers that directly affects:
- Range of products
- Prices
Supply
- Quantity of products that producers are willing to offer for sale at different market price
Demand
- Quantity of products that consumers are willing to buy at different market prices
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©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Supply
To make profits, businesses produce:
More of a product that commands a higher market price
Less of a product that commands a lower price
Supply curve: Graphed relationship between price and quantity from a supplier standpoint
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©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Exhibit 2.3 – Supply Curve
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©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Demand
To get the products at the lowest possible prices consumers buy:
More products with lower prices
Fewer products with higher prices
Demand curve: Graphed relationship between price and quantity from a demand standpoint
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©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Exhibit 2.4 – Demand Curve
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©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Equilibrium Price
Associated with the point at which the quantity demanded equals the quantity supplied
Constant interaction between supply and demand determines the market price
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©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Exhibit 2.5 – Equilibrium
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©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Socialism
Economic system based on the principle that the government owns and operates key enterprises that directly affect public welfare
Has higher taxes, designed to distribute wealth more evenly through society
Cause of slump in socialist economies
High taxes and lavish social programs
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©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Communism
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System that calls for public ownership of all enterprises, under a strong central government
Did not thrive due to following reasons
Authoritarian governments suspended individual rights and choices
Developed crippling shortages and surpluses
Corruption at every level of government
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Mixed Economies
Embody elements of both planned and market-based economic systems
Federal government partly owns number of financial institutions
Government intervenes in the free market by creating regulations
Privatization: Converting government-owned businesses to private ownership
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©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Evaluating Economic Performance
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©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Gross Domestic Product (GDP)
Total value of all final goods and services produced within a nation’s physical boundaries over a given period of time
Used to:
Measure the economic performance of individual nations
Compare the growth among nations
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Employment Level
Tracked through unemployment rate
Unemployment rate: Percentage of people in the labor force over age 16 who do not have jobs and are actively seeking
Categories of unemployment
Frictional – Temporary unemployment
Structural – Long term unemployment
Cyclical – Layoffs during recessions
Seasonal – Job loss related to the time of year
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©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Business Cycle
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Periodic contraction and expansion that occur over time in every economy
- Recession: Decrease in the GDP for two consecutive quarters
- Depression: Long and deep recession
Contraction: Period of brief economic downturn
Recovery: Period of rising economic growth and employment
Expansion: Period of robust economic growth and high employment
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Price Levels
Inflation: Period of rising average prices across the economy
Hyperinflation: Average monthly inflation rate of more than 50 percent
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©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Price Levels
Disinflation: Period of slowing average price increases across the economy
Deflation: Period of falling average prices across the economy
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©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Price Indexes to Evaluate Inflation
Consumer price index (CPI): Evaluates the change in the weighted-average price of goods and services that the average consumer buys each month
Producer price index (PPI): Evaluates the change over time in the weighted-average wholesale prices
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©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Productivity
Relationship between:
Output – Production of goods or services
Input – Resources required to produce goods or services
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Productivity = Output/Input
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Define economics and discuss the evolving global economic crisis
Analyze the impact of fiscal and monetary policy on the economy
Explain and evaluate the free market system and supply and demand
*
2-1
2-2
2-3
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Explain and evaluate planned market systems
Describe the trend toward mixed market systems
Discuss key terms and tools to evaluate economic performance
*
2-4
2-5
2-6
