Economics Lecture 1.2 PDF

2 Economics: The Framework for Business BUSN ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1 ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or dup...

2 Economics: The Framework for Business BUSN ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1 ©2011 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 What is economics? What is driving the current global economic crisis? How does fiscal and monetary policy impact the economy? What is the free market system and the supply/demand relationship? What are planned market systems? What are mixed market systems? What tools are used to evaluate economic performance? BUSN ©2011 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  2 Economics: The Framework for Business Economics Macroeconomics Country’s Overall Economy Microeconomics Consumers Families Businesses BUSN ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3  2 Economics: The Framework for Business Global Economic Crisis: How did the happen? In late 2008: √ The banking system hovered on the edge of collapse √ Property values plummeted √ Home foreclosures soared √ Layoffs put more than a million Americans out of work √ The stock market lost more than 1/3 its value BUSN ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4  2 Economics: The Framework for Business Global Economic Crisis: How did the happen? (Source: Based on data from S&P/Case-Shiller Home Price Indices, August 2008 data, Standard & Poor’s website, http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices_csmahp/0,0,0,0,0,0,0,0,0,1,1,0,0,0,0,0.html, accessed November 6, 2008.) BUSN ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 5  2 Economics: The Framework for Business 2008-2009 American Automobile Bailout  After bailing out the financial industry, GM and Chrysler announced they needed a bailout. Bankruptcy was in the near future 2.5 million auto industry-related jobs were at risk  The Treasury Department infused $700 billion in a partial auto bailout.  Under the Obama Administration, an Automobile Task Force was developed to evaluate the industry.  A variety of changes continue in the auto industry as the country rebuilds the economy. BUSN ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6  2 Economics: The Framework for Business A Trillion Dollars? If you had started spending a million dollars – every day, without fail – at the start of the Roman Empire, you still wouldn’t have spent a trillion dollars by 2010. One trillion dollars laid end-to-end would stretch farther than the distance from the earth to the sun. You could wrap your chain of bills more than 12,000 times around the earth’s equator. If you flew a jet at the speed of sound, spooling out a roll of dollar bills behind you, it would take you more than fourteen years to release a trillion dollars. BUSN ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 7  2 Economics: The Framework for Business Managing the Economy Through Fiscal and Monetary Policy Fiscal Policy – government efforts to influence the economy:  Taxation  Government Spending  Controlled by Congress/Budget Process Monetary Policy – Federal Reserve actions to shape the economy:  Supply & Demand of Money  Cost of Credit  Controlled by the Federal Reserve (FED)  Seven Member Board  Chairman BUSN ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 8  2 Economics: The Framework for Business Federal Reserve Conduct Monetary Policy:  Changes in the Discount Rate  Changes in Reserve Requirement  Open Market Operations Check Clearing Process Banking Services for Government and other banks BUSN ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9  2 Economics: The Framework for Business Unprecedented Action by the FED In addition to expanding lending and lowering interest rates, since September 2008 the FED has: Pumped additional liquidity into the banking industry Approved the mergers of several large banks Introduced the Term Asset Backed Securities Loan Facility (TALF) Introduced the Trouble Asset Relief Program (TARP) Purchased mortgage backed securities Approved General Motors Finance Company (GMAC) to become a bank holding company BUSN ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10  2 Economics: The Framework for Business Managing the Economy Through Fiscal and Monetary Policy M1 Money Supply - all currency—paper bills and metal coins—plus checking accounts and traveler’s checks. M2 Money Supply - all M1 plus most savings accounts, money market accounts, and certificates of deposit. BUSN ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 11  2 Economics: The Framework for Business Looking to multiply your money? Look no further than your local bank The bank must hold 10% of You deposit $5,000 your deposit based on Federal Reserve The bank loans Anne $4,500 Requirements. Anne buys a car from Jake for $4,500 Jake deposits the $4,500 Although you still have $5,000, the money supply has increased to $9,500 BUSN ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12  2 Economics: The Framework for Business Managing the Economy Through Fiscal and Monetary Policy The federal government budget outlines revenue and expenses When revenue is higher than spending, there is a budget surplus When spending is higher than revenue, the government incurs a budget deficit The sum of all the money borrowed is the federal debt BUSN ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 13  2 Economics: The Framework for Business Federal Government Revenue and Expenses Source: TABLE B–81.—Federal receipts, outlays, surplus or deficit, and debt, fiscal years 2003–2008 (2008 estimates based on Final Monthly Treasury Statement, issued October 2008), Economic Report of the President: 2009 Spreadsheet Tables, Updated January 14, 2009, Government Printing Office website, http://www.gpoaccess.gov/eop/tables09.html, accessed January 20, 2009. BUSN ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 14  2 Economics: The Framework for Business Capitalism: The Free Market System The Free Market: Private Ownership Economic Freedom Fair Competition Innovation and Hard Work Businesses offer Value to: Customers Employees Suppliers Adam Smith BUSN ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 15  2 Economics: The Framework for Business Going Green: Good for the Bottom Line Going green is about doing right by the planet, attracting new customers, and reducing costs Environmental concerns have become a dominant driver of global corporations Wal-Mart began selling concentrated laundry detergent and in 3- years  Saved 95 million pounds of plastic resin  Preserved 400 million gallons of water  Conserved 520,000 gallons of diesel gasoline  Reduced 125 million pounds of cardboard BUSN ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 16  2 Economics: The Framework for Business The Fundamental Rights of Capitalism 1. The right to own a business and keep after-tax profits. 2. The right to private property 3. The right to free choice 4. The right to fair competition BUSN ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 17  2 Economics: The Framework for Business Four Degrees of Competition Pure Competition Monopolistic Competition Oligopoly Monopoly 18 BUSN ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 18  2 Economics: The Framework for Business Supply and Demand: Fundamental Principles of a Free Market The Foundation of the Free Market  How much can we make/sell?  How much will consumers buy?  At what price? Interaction of buyers & sellers  Impact prices  Competition BUSN ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 19  2 Economics: The Framework for Business Supply and Demand: Fundamental Principles of a Free Market Supply: the relationship between the price of a good and the quantity sellers are willing and able to offer for sale Sellers tend to supply a greater quantity as the price rises. Supply curve: a graph of the supply relationship The supply curve slopes upward to the right showing that quantity supplied increases as price rises. BUSN ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 20  2 Economics: The Framework for Business Supply and Demand: Fundamental Principles of a Free Market Demand: the relationship between the price of a good and the quantity buyers are willing and can afford to buy When price falls, consumers tend to buy more. Demand curve: a graph of the demand relationship The demand curve slopes downward showing that quantity demanded increases as price falls. BUSN ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 21  2 Economics: The Framework for Business Supply and Demand: Fundamental Principles of a Free Market Forces of supply and demand drive equilibrium price The point where supply and demand intersect Market price adjusts to the equilibrium price BUSN ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 22  2 Economics: The Framework for Business Planned Economies: Socialism and Communism Free Market Planned Economies Capitalism Socialism Communism Mixed Economies BUSN ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 23  2 Economics: The Framework for Business Planned Economies: Socialism and Communism Communism Public Ownership of Enterprise Strong Central Government Socialism Government Control Key Enterprises Higher Taxes BUSN ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 24  2 Economics: The Framework for Business Mixed Economies: The Story of the Future Market and Planned Economies don’t meet all needs Neither planned nor market economies meet all needs Planned Economies will not create enough value As a market dominant economy, the U.S. government still owns/supports enterprises Postal Service Universities Parks Libraries BUSN ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 25  2 Economics: The Framework for Business Mixed Economies: The Story of the Future As Mixed Economies become The Story of the Future, how much government intervention is too much? What industries should be regulated? Why? BUSN ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 26  2 Economics: The Framework for Business Evaluating Economic Performance: What’s Working? Gross Domestic Product Unemployment Rate Consumer Price Index Producer Price Index Productivity BUSN ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 27  2 Economics: The Framework for Business The Business Cycle BUSN ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 28  2 Economics: The Framework for Business Inflation The rate of price changes across the economy is another basic measure of economic well-being Inflation means that prices are rising Hyperinflation is when average prices increase more than 50% per month Disinflation is when prices increases slow down Deflation is when average prices actually decrease. The government measures prices using the Consumer Price Index (CPI) and the Producer Price Index (PPI) BUSN ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 29  2 Economics: The Framework for Business Productivity The relationship between inputs and outputs is productivity A high level of productivity correlates with healthy GDP. The U.S. has experienced strong productivity growth due to technology. BUSN ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 30  2 Looking Back What is economics? What is driving the current global economic crisis? How does fiscal and monetary policy impact the economy? What is the free market system and the supply/demand relationship? What are planned market systems? What are mixed market systems? What tools are used to evaluate economic performance? BUSN ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 31