Management Tools - Session 2 - Chapter 2 - Basic Economics PDF

Management Tools & Principles Session 4 Professor TARSICIO MERINO IE Business School Mandatory!!! All electronic devices MUST be stored NOW Today’s subject: Economics 1. Godfather Companies Which company? News? Events? Accomplishments? 2. Recent articles and news about the economy? Understand...

Management Tools & Principles Session 4 Professor TARSICIO MERINO IE Business School Mandatory!!! All electronic devices MUST be stored NOW Today’s subject: Economics 1. Godfather Companies Which company? News? Events? Accomplishments? 2. Recent articles and news about the economy? Understanding Basic Economics Learning Objectives 1. 2. 3. 4. Define economics, and why scarcity is central. Major types of economic systems. Demand and supply. Macroeconomic issues essential to understanding the economy. 5. Deregulation and role of governments. 6. Measuring economic activity. What Is This Thing Called The Economy? Economy The total sum of all the economic activity within a given region (The economy of the city of Segovia, of Segovia province, of CyL, of Spain, of the European Union...) Economics The study of how a society uses its scarce resources to produce and distribute goods and services Economics Microeconomics How consumers, businesses, and industries determine the quantity of goods demanded/supplied at different prices Macroeconomics “Big picture” issues in an economy: competitive behavior among firms, effect of government policies, and overall resource allocation issues Factors of Production Resources owned by a certain country/society Every Good or Service is created from a combination of the 5 factors of Production The 5 Factors of Production • Natural resources Land, forests, minerals, water, fuels,… • Human resources People who work in an organization or on its behalf • Capital Funds that finance the operations of a business + Physical elements used to produce goods and services (machinery, tractors, computers) • Entrepreneurship Willingness to take the risks to create and operate new businesses • Knowledge (Know-How) Expertise gained through experience or association Exhibit 2.1 Factors of Production The Economic Impact of Scarcity Scarcity A condition of any productive resource that has finite supply Scarcity generates competition and forces trade-offs Opportunity cost The value of the most appealing alternative not chosen Trade-offs force us to chose alternatives and generate opportunity costs Economic Systems Economic system Policies that define a society’s particular economic structure Rules by which a society allocates resources Planned------------------------------------Free Market Exhibit 2.2 Economic Systems Free Market Systems Decisions about what and how much to produce, are made by the market’s buyers and sellers, not the government Capitalism Economic system based on economic freedom and competition Planned Systems Government controls most of the factors of production and regulates their allocation Socialism Public ownership/operation of key industries combined with private ownership and operation of less-vital industries Nationalization and Privatization Nationalization Privatization A government’s takeover of selected companies or industries Turning over services once performed by the government and allowing private businesses to perform them instead Current News Nationalization US Court Rules Argentina Must Pay $16 Billion for Wrongful YPF Nationalization New York Judge Loretta Preska has ruled in favor of the Burford Capital, while the Argentine Government has anticipated that it will appeal the decision The event happened back in 2012 Full Article bloomberglinea.com/english/us-court-rules-argentina-must-payus16-billion-for-wrongful-ypf-nationalization/ CheckPoint • CRITICAL THINKING: (1) Why is entrepreneurship considered a factor of production? (2) Is it a scarce resource? (3) Why there are no economies truly free? (4) What are the risks of privatizing basic services such as water supply or infrastructures? The Forces of Demand and Supply • Demand The quantity of a certain product or service that buyers are willing and able to purchase at different price points • Supply The quantity of a certain product or service that sellers are willing and able to sell at different price points • Demand curve A graph of the quantities of a product that buyers will purchase at various prices • Supply curve A graph of the quantities of a product that sellers will offer for sale, regardless of demand, at various prices Exhibit 2.3 Demand Curve Exhibit 2.4 Supply Curve Copyright © 2017 Pearson Education, Ltd. 2-21 Understanding How Demand and Supply Interact • Equilibrium point Point at which quantity supplied equals quantity demanded • The supply and demand curves are dynamic and so is the equilibrium point • As variables affecting supply and demand change, so will the equilibrium price Exhibit 2.5 The Relationship Between Supply and Demand Competition in a Free-Market System Competition Rivalry among businesses for the same customers “Competition is the situation in which two or more suppliers of a product are rivals in the pursuit of the same customers” Competition in a Free-Market System Pure Competition (The opposite of a Monopoly) So many buyers and sellers exist that no single buyer or seller can individually influence market prices Peter Thiel – Book: Zero to One: “Pure competition is considered both “the ideal” and the “default” state of business” WHY? Competition in a Free-Market System Monopoly (The Opposite of a Pure Competition) One company dominates a market to the degree that it can control prices Can be Pure Monopoly – Happens naturally or Can be regulated monopoly – By gov. mandate Competition in a Free-Market System Oligopoly Market situation in which a very small number of suppliers, sometimes only two, provide a particular good or service Exhibit 2.6 Categories of Competition Business Cycles Business cycles Fluctuations in the rate of growth that an economy experiences over a period of several years Business Cycles Recession A period during which national income, employment, and production all fall; defined as at least six months (2 quarters) of decline in the GDP Economic expansion (growing economy) Vs. Economic detraction (falling economy) Exhibit 2.7 Fluctuations in the U.S. Economy Unemployment Unemployment rate The portion of the labor force (everyone over 16 who has or is looking for a job) currently without a job Exhibit 2.8 Types of Unemployment Inflation and Deflation Inflation Economic condition in which prices rise steadily throughout the economy Deflation Economic condition in which prices fall steadily throughout the economy What represents inflation / deflation? Are they good or bad? Inflation and Deflation Current News Article about Inflation Lyn Adel - The Importance of Price Signals https://www.lynalden.com/price-signals/?s=03 Government’s Role in a Free-Market System • Protecting stakeholders • Fostering competition • Encouraging innovation and economic development • Stabilizing and stimulating the economy Government’s Role in a Free-Market System Regulation Deregulation Relying more on laws and policies than on market forces to govern economic activity Removing regulations to allow the market to prevent excesses and correct itself over time Government’s Role in a Free-Market System Stabilizing and Stimulating the Economy Monetary policy Government policy and actions taken by country’s central bank (Federal Reserve in the US; EU Central Bank in Europe) to regulate the nation’s money supply Fiscal policy Strategy for the use of government revenue collection and spending to influence the business cycle Exhibit 2.10 Major Types of Taxes Economic Measures and Monitors Economic indicators Statistics that measure the performance of the economy. Two Types: • Leading Indicators – Show future Predictions • Lagging Indicators – Show Confirmation of past events Price Indexes • Consumer price index (CPI) Monthly statistic that measures changes in the prices of a representative collection of consumer goods and services • Producer price index (PPI) Statistical measure of price trends at the producer and wholesaler levels Exhibit 2.11 Composition of the Consumer Price Index National Economic Output Gross domestic product (GDP) 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