Chapter 2 Business in Action 8e Bovée/Thill PDF

Developing a Business Mindset Chapter 2 Business in Understanding Action 8e Basic Economics Bovée/Thill  Introduction This chapter offers  A brief introduction to economics from a business professional’s perspective  A high-level look at the study of ec...

Developing a Business Mindset Chapter 2 Business in Understanding Action 8e Basic Economics Bovée/Thill  Introduction This chapter offers  A brief introduction to economics from a business professional’s perspective  A high-level look at the study of economics, types of economic systems, and the interaction of supply and demand Understanding basic economic principles is essential to successful business management Copyright © 2017 Pearson Education, Inc. 2-2  Learning Objectives 1. Define economics, and explain why scarcity is central to economic decision making. 2. Differentiate among the major types of economic systems. 3. Explain the interaction between demand and supply. Copyright © 2017 Pearson Education, Inc. 2-3  Learning Objectives (cont.) 4. Identify four macroeconomic issues that are essential to understanding the behavior of the economy. 5. Outline the debate over deregulation, and identify four key roles that governments play in the economy. 6. Identify the major ways of measuring economic activity. Copyright © 2017 Pearson Education, Inc. 2-4  What Is This Thing Called The Economy? Economy  The sum total of all the economic activity within a given region Economics  The study of how a society uses its scarce resources to produce and distribute goods and services Copyright © 2017 Pearson Education, Inc. 2-5  What Is This Thing Called The Economy? (cont.) Microeconomics  The study of how consumers, businesses, and industries collectively determine the quantity of goods and services demanded and supplied at different prices Macroeconomics  The study of “big picture” issues in an economy, including competitive behavior among firms, the effect of government policies, and overall resource allocation issues Copyright © 2017 Pearson Education, Inc. 2-6  Factors of Production Natural resources  Land, forests, minerals, water, and other tangible assets usable in their natural state Human resources  All the people who work in an organization or on its behalf Copyright © 2017 Pearson Education, Inc. 2-7  Factors of Production (cont.) Capital  The funds that finance the operations of a business as well as the physical, human-made elements used to produce goods and services, such as factories and computers Entrepreneurship  The combination of innovation, initiative, and willingness to take the risks required to create and operate new businesses Copyright © 2017 Pearson Education, Inc. 2-8  Factors of Production (cont.) Knowledge  Expertise gained through experience or association Copyright © 2017 Pearson Education, Inc. 2-9 Exhibit 2.1 Factors of Production Copyright © 2017 Pearson Education, Inc. 2-10 The Economic Impact of Scarcity Scarcity  A condition of any productive resource that has finite supply Opportunity cost  The value of the most appealing alternative not chosen Copyright © 2017 Pearson Education, Inc. 2-11  Economic Systems Economic system  The policies that define a society’s particular economic structure; the rules by which a society allocates economic resources  Free-market, planned Copyright © 2017 Pearson Education, Inc. 2-12  Free Market Systems Free-market system  An economic system in which decisions about what to produce and in what quantities are decided by the market’s buyers and sellers Capitalism  Economic system based on economic freedom and competition Copyright © 2017 Pearson Education, Inc. 2-13  Planned Systems Planned system  Economic system in which the government controls most of the factors of production and regulates their allocation. Socialism  Economic system characterized by public ownership and operation of key industries combined with private ownership and operation of less-vital industries Copyright © 2017 Pearson Education, Inc. 2-14 Exhibit 2.2 Economic Systems Copyright © 2017 Pearson Education, Inc. 2-15  Nationalization and Privatization Nationalization Privatization  A government’s  Turning over takeover of services once selected companies performed by the or industries government and allowing private businesses to perform them instead Copyright © 2017 Pearson Education, Inc. 2-16 The Forces of Demand and Supply Demand  Buyers’ willingness and ability to purchase products at various price points Supply  A specific quantity of a product that the seller is able and willing to provide at various prices Demand curve  A graph of the quantities of a product that buyers will purchase at various prices Copyright © 2017 Pearson Education, Inc. 2-17 Exhibit 2.3 Demand Curve Copyright © 2017 Pearson Education, Inc. 2-18  Understanding Supply Supply curve  A graph of the quantities of a product that sellers will offer for sale, regardless of demand, at various prices Copyright © 2017 Pearson Education, Inc. 2-19 Exhibit 2.4 Supply Curve Copyright © 2017 Pearson Education, Inc. 2-20  Understanding How Demand and Supply Interact Equilibrium point  The point at which quantity supplied equals quantity demanded Because the supply and demand curves are dynamic, so is the equilibrium point. As variables affecting supply and demand change, so will the equilibrium price Copyright © 2017 Pearson Education, Inc. 2-21 Exhibit 2.5 The Relationship Between Supply and Demand Copyright © 2017 Pearson Education, Inc. 2-22  Competition in a Free-Market System Competition  Rivalry among businesses for the same customers Pure competition  A situation in which so many buyers and sellers exist that no single buyer or seller can individually influence market prices Copyright © 2017 Pearson Education, Inc. 2-23  Competition in a Free-Market System (cont.) Monopoly  A situation in which one company dominates a market to the degree that it can control prices Monopolistic competition  A situation in which many sellers differentiate their products from those of competitors in at least some small way Copyright © 2017 Pearson Education, Inc. 2-24  Competition in a Free-Market System (cont.) Oligopoly  A market situation in which a very small number of suppliers, sometimes only two, provide a particular good or service Copyright © 2017 Pearson Education, Inc. 2-25 Exhibit 2.6 Categories of Competition Copyright © 2017 Pearson Education, Inc. 2-26  Business Cycles Recession  A period during which national income, employment, and production all fall; defined as at least six months of decline in the GDP. Business cycles  Fluctuations in the rate of growth that an economy experiences over a period of several years Copyright © 2017 Pearson Education, Inc. 2-27  The Hypothetical Business Cycle The four phases of the hypothetical business cycle Real GDP Business Trend line are expansion, peak, peak Trend line contraction, and recessionary trough. Business peak In contrast with the business Recessionary cycle represented here, as the trough previous exhibit illustrated, real world business cycles are Recessionary characterized by expansions trough and contractions of varying Time duration and magnitude. Exhibit 2.7 Fluctuations in the U.S. Economy Copyright © 2017 Pearson Education, Inc. 2-29  Unemployment Unemployment rate  The portion of the labor force (everyone over 16 who has or is looking for a job) currently without a job Copyright © 2017 Pearson Education, Inc. 2-30  U.S. Population, Employment, and Unemployment: April 2013 245.2 million Civilian population 16 and over 155.2 million 89.9 million Not in the Civilian 11.7 million labor force labor force Household workers Students Retirees Disabled Unemployed Employed Employees New entrants Self-employed Reentrants 143.6 million workers Lost last job Quit last job Laid off Labor Force Civilian labor force Participation Rate = Civilian population (16+) = Employment / Number employed Population Ratio = Civilian population (16+) = Rate of Number unemployed Unemployment = Civilian labor force =  U.S. Population, Employment, and Unemployment: April 2013 245.2 million Civilian population 16 and over 155.2 million 89.9 million Not in the Civilian 11.7 million labor force labor force Household workers Students Retirees Disabled Unemployed Employed Employees New entrants Self-employed Reentrants 143.6 million workers Lost last job Quit last job Laid off Labor Force Civilian labor force 155.2 Participation Rate = Civilian population (16+) = 245.2 = 63.3% Employment / Number employed 143.6 Population Ratio = Civilian population (16+) = 245.2 = 58.6% Rate of Number unemployed 11.7 Unemployment = Civilian labor force = 155.2 = 7.5% Exhibit 2.8 Types of Unemployment Copyright © 2017 Pearson Education, Inc. 2-33  Inflation and Deflation Inflation Deflation  An economic  An economic condition in which condition in which prices rise steadily prices fall steadily throughout the throughout the economy economy Copyright © 2017 Pearson Education, Inc. 2-34  Government’s Role in a Free-Market System Protecting stakeholders Fostering competition Encouraging innovation and economic development Stabilizing and stimulating the economy Copyright © 2017 Pearson Education, Inc. 2-35  Government’s Role in a Free-Market System (cont.) Regulation Deregulation  Relying more on  Removing laws and policies regulations to allow than on market the market to forces to govern prevent excesses economic activity and correct itself over time Copyright © 2017 Pearson Education, Inc. 2-36  Stabilizing and Stimulating the Economy Monetary policy  Government policy and actions taken by the Federal Reserve Board to regulate the nation’s money supply By increasing or decreasing the money supply Fiscal policy  Strategy for the use of government revenue collection and spending to influence the business cycle Copyright © 2017 Pearson Education, Inc. 2-37 Exhibit 2.9 Major Government Agencies and What They Do Copyright © 2017 Pearson Education, Inc. 2-38 Exhibit 2.10 Major Types of Taxes Copyright © 2017 Pearson Education, Inc. 2-39  Economic Measures and Monitors Economic indicators  Statistics that measure the performance of the economy Leading indicators suggest changes that may happen to the economy in the future and are therefore valuable for planning. lagging indicators provide confirmation that something has occurred in the past. Copyright © 2017 Pearson Education, Inc. 2-40  Price Indexes Consumer price index (CPI)  A monthly statistic that measures changes in the prices of a representative collection (Bread or Basket Bundle) of consumer goods and services. This is important to identify the rate of inflation. Rate of inflation = Current year CPI – Base year(last) CPI Base Year CPI Calculate the rate of inflation between 2008 (CPI $12 623) and 2015 (CPI $15685) Producer price index (PPI)  A statistical measure of price trends at the producer and wholesaler levels Copyright © 2017 Pearson Education, Inc. 2-41  Composition of the Exhibit 2.11 Consumer Price Index Copyright © 2017 Pearson Education, Inc. 2-42  National Economic Output Gross domestic product (GDP)  The value of all the final goods and services produced by businesses located within a nation’s borders; excludes outputs from overseas operations of domestic companies Copyright © 2017 Pearson Education, Inc. 2-43  Applying What You’ve Learned 1. Define economics, and explain why scarcity is central to economic decision making. 2. Differentiate among the major types of economic systems. 3. Explain the interaction between demand and supply. Copyright © 2017 Pearson Education, Inc. 2-44  Applying What You’ve Learned (cont.) 4. Identify four macroeconomic issues that are essential to understanding the behavior of the economy. 5. Outline the debate over deregulation, and identify four key roles that governments play in the economy. 6. Identify the major ways of measuring economic activity. Copyright © 2017 Pearson Education, Inc. 2-45 Copyright © 2017 Pearson Education, Inc. 2-46  2-47 Copyright © 2017 Pearson Education, Inc.