Lecture 2 Business PDF

How Economics Affects Business Sepideh Mahdikhani 2 Dr. habil Madai Hajnalka Economic conditions affect business Major part of the US business success in the past was due to an economic and social climate that allowed most...

How Economics Affects Business Sepideh Mahdikhani 2 Dr. habil Madai Hajnalka Economic conditions affect business Major part of the US business success in the past was due to an economic and social climate that allowed most businesses to operate freely. Any change in the US economic or political system has a major influence on the success of the business system.. Global economics and global politics also have a major influence on businesses in the US. The U.S. is a relatively wealthy country compare to Mexico Basic Economics Economics Economics is the study of how society chooses to employ resources to produce goods and services and distribute them for consumption among various competing groups and individuals Macroeconomics Macroeconomics looks at the operation of a nation’s economy as a whole (e.g.: the whole US) Microeconomics Microeconomics is the part of economic study that looks at the behavior of people and organizations in particular markets  Branches of Economics Microeconomics Macroeconomics + The part of economics study that looks at + The part of economics study that the behaviour of people and organizations looks at the operation of a nations in particular markets. economy as a whole. + To keep it simple, it is the study of social + Studies things such as GDP, inflation, behaviour in decision making and allocation of resources. unemployment rate etc. + For example, examining how a company + The difference between micro and could maximize its production and macro is that micro is the study of capacity so that it could lower prices and individuals and business decisions, compete better in its industry. while macro looks at the decisions of countries and governments.  GDP? Measuring GDP + GDP measures the monetary value of final goods and services—that is, those that are bought by the final user—produced in a country in a given period of time + It counts all of the output generated within the borders of a country. GDP is composed of goods and services produced for sale in the market and also includes some nonmarket production, such as defense or education services provided by the government. + GDP is measured in the currency of the country in question. That requires adjustment when trying to compare the value of output in two countries using different currencies.The usual method is to convert the value of GDP of each country into U.S. dollars and then compare them. Conversion to dollars can be done either using market exchange rates—those that prevail in the foreign exchange market—or purchasing power parity (PPP) exchange rates. + It is also important to understand what GDP cannot tell us. GDP is not a measure of the overall standard of living or well-being of a country. Although changes in the output of goods and services per person (GDP per capita) are often used as a measure of whether the average citizen in a country is better or worse off, it does not capture things that may be deemed important to general well-being.  GDP? Meaning of GDP GDP is important because it gives information about the size of the economy and how an economy is performing. The growth rate of real GDP is often used as an indicator of the general health of the economy. In broad terms, an increase in real GDP is interpreted as a sign that the economy is doing well. When real GDP is growing strongly, employment is likely to be increasing as companies hire more workers for their factories and people have more money in their pockets. When GDP is shrinking, as it did in many countries during the recent global economic crisis, employment often declines. GDP growth does move in cycles over time. Economies are sometimes in periods of boom, and sometimes in periods of slow growth or even recession (with the latter often defined as two consecutive quarters during which output declines). In the United States, for example, there were six recessions of varying length and severity between 1950 and 2011.  Real GDP growth, Annual percent change, World average:3,2% https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/OEMDC/ADVEC/WEOWORLD Trends of GDP https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/OEMDC/ADVEC/WEOWORLD GDP: Gross domestic product is the monetary value of all finished goods and services made within a country during a specific period. (Table: Growth rate of GDP in 2024 by Country) When it is growing, especially if inflation is not a problem, workers and businesses are generally better off than when it is not GDP per capita, current prices, U.S. dollars per capita https://www.imf.org/external/datamapper/NGDPDPC@WEO/OEMDC/ADVEC/WEOWORLD  Inflation Inflation is the rate of increase in prices over a given period of time. Inflation is typically a broad measure, such as the overall increase in prices or the increase in the cost of living in a country. But it can also be more narrowly calculated—for certain goods, such as food, or for services, such as a haircut, for example. Whatever the context, inflation represents how much more expensive the relevant set of goods and/or services has become over a certain period, most commonly a year. Measuring inflation Consumers’ cost of living depends on the prices of many goods and services and the share of each in the household budget. To measure the average consumer’s cost of living, government agencies conduct household surveys to identify a basket of commonly purchased items and track over time the cost of purchasing this basket. (Housing expenses, including rent and mortgages, constitute the largest component of the consumer basket in the United States.) The cost of this basket at a given time expressed relative to a base year is the consumer price index (CPI), and the percentage change in the CPI over a certain period is consumer price inflation, the most widely used measure of inflation. (For example, if the base year CPI is 100 and the current CPI is 110, inflation is 10 percent over the period.) Inflation rate in the European Union and the Euro area from 2019 to 2029 (compared to the previous year) Impressive Economic Growth Idea Thomas Malthus Adam Smith Relationship between poverty and population Thomas solution to poverty: radical birth control, including forced abortions and sterilization Malthus In some industrial countries - Japan, Germany, Italy, Russia, US - so slow: there will be too many old people and too few young to care for them (1766-1834) In the developing world - population climb relatively quickly and it may lead to greater poverty and unrest. Father of modern economics Adam Smith Envisioned: creating more resources so that everyone could become wealthier The most famous book: The Wealth of Nations, 1776 (1723-1790) He believed freedom was vital to the survival of any economy, especially the freedom to own land or property. He believed people will work long and hard if they have incentives for doing so. (keep the profits from working the land or running the business) The economy will also prosper, with the plenty of food and all kinds of products available to everyone. Invisible hand A phrase coined by Adam Smith to describe the process that turns self- directed gain into social and economic benefits for all.  Free- market capitalism According to the ideas of Adam Smith on free-market principles One way to businesspeople in the US, Europe, become wealthy 85K Japan, Canada and etc. began to create more wealth than ever before to start a 85K they hired workers to work on their successful farms and in their factories and their business of your nations began to prosper as a result own! 85K Businesspeople soon became the wealthiest people in society (large 85K homes, fancy cars, etc. Capitalism An economic system in which all or most of he factors of production and distribution are privately owned and operated for profit. The Foundations of Capitalism 4 The right to freedom of choice 3 The right to freedom of competition The right to own a business and keep 2 all that business’s profit 1 The right to own a private property Supply & Demand Supply Demand The quantity of The quantity of products that products that manufacturers people are or owners are willing to buy at willing to sell at different prices different prices at a specific at a specific time. time. The amount The quantity supplied will demanded will increase as the increase as the price increases price decreases. because sellers can make more money with a higher price. Equilibrium Point/Market Price 1 The point of the graph where supply and demand intersects is known as equilibrium point. 2 It is the point where quantity supplied and quantity demanded is equal. 3 This will be known as the market price (the price toward which the market will trend). Competition within Free Markets  Communism An economic system An economic and based on the premise political system in that most basic which the government businesses should be makes all economic owned by the decisions and owns all government so that the major factors of profits can be more production. evenly distributed amongst the people. Socialism  Benefits Negatives  Removes incentives for business growth.  Social equality  Tax rates in socialist economies are way  Government takes income from the higher than tax rates in capitalist wealthy, in the form of taxes, and economies. redistributes it to the poorer people through different government  This generally results in the best and programs. brightest people leaving their countries to go to a capitalist state, as that’s where  For example free education, their businesses and ideas will thrive. healthcare and child care.  Consequently, there is less innovation and inventions in socialist economies because those that come up with ideas are not rewarded as well as they would be in a capitalist economy. Socialism  More intensive version of socialism.  The issue is the government must guess what the people need as the prices don’t reflect supply and demand as they do in free markets.  There’s no exact way of knowing what to produce. This can result in a shortage of supplies. Communism THE TREND TOWARD MIXED ECONOMIES Mixed economic systems are not laissez-faire systems, because the government is involved in planning the use of some resources and can exert control over businesses in the private sector. Governments may seek to redistribute wealth by taxing the private sector and using funds from taxes to promote social objectives. Trade protection, subsidies, targeted tax credits, fiscal stimulus, and public-private partnerships are common examples of government intervention in mixed economies. These unavoidably generate economic distortions but are instruments to achieve specific goals that may succeed despite their distortionary effect. Countries often interfere in markets to promote target industries by creating agglomerations and reducing barriers to entry in an attempt to achieve comparative advantage. This was common among East Asian countries in the 20th century development strategy known as Export Led Growth, and the region has turned into a global manufacturing center for a variety of industries. Some nations have come to specialize in textiles, while others are known for machinery, and others are hubs for electronic components. These sectors rose to prominence after governments protected young companies as they achieved competitive scale and promoted adjacent services such as shipping.  What led to the emergence of socialism? As a political ideology, socialism arose largely in response to the economic and social consequences of the Industrial Revolution. There is an abundance of literature that attests to the dramatic way in which the industrialization of Europe affected the daily lives of individuals, particularly the working classes Today, the existing communist states in the world are in China, Cuba, Laos and Vietnam. These communist states often do not claim to have achieved socialism or communism in their countries, but to be building and working toward the establishment of socialism in their countries. What are the characteristics of a mixed economy? Existence of Joint Sector. Motive of Business Concerns. Regulation of Private Sector. Planned Economy. Private Property. THANK YOU For your attention!!