11 1-1

MUSOLINOMUSOLINO

How Economics Affects

Business: The Creation

and Distribution of Wealth

2

CH

AP

TER

22

Economics: Create WealthEconomics: Create Wealth

Study of how society chooses Study of how society chooses to employ resources to to employ resources to produce goods & services and produce goods & services and distribute them among distribute them among competing groups/individualscompeting groups/individuals

Micro v. MacroMicro v. Macro

Resource DevelopmentResource Development

33

Four “What’s” of Four “What’s” of an Economic Systeman Economic System

$ What is produced?What is produced?

$ What amount is produced?What amount is produced?

$ What is the method of output What is the method of output distribution?distribution?

$ What is the rate of economic What is the rate of economic growth?growth?

Adapted from:Adapted from: Edwin Mansfield Economics (New York: W.W. Norton, 1976), p.8

44

Economic TheoriesEconomic Theories

Thomas Malthus (Early 1800s)Thomas Malthus (Early 1800s) “ “Dismal Science”Dismal Science” Too many people Too many people

Adam Smith (1776)Adam Smith (1776) Freedom is vitalFreedom is vital ““Invisible Hand”Invisible Hand”

55

Circular Flow ModelCircular Flow Model

66

Three Economic SystemsThree Economic Systems

CommunismCommunism

SocialismSocialism

CapitalismCapitalism

(Highly Controlled(Highly Controlled)) (Little Control(Little Control))

MixedMixed

77

Free-Market CapitalismFree-Market Capitalism

Private PropertyPrivate Property

Business Ownership/ ProfitsBusiness Ownership/ Profits

Freedom of CompetitionFreedom of Competition

Freedom of ChoiceFreedom of Choice

88

Supply CurveSupply Curve

Quantity(S)Quantity(S)

HighHigh

HighHighLowLow

Price(P)Price(P)

SS

99

Demand CurveDemand Curve

Price(P)

Quantity(D)

High

HighLow

D

1010

Quantity

High

HighLow

Price

Equilibrium Point

Market Equilibrium

S D

Surplus

Shortage

1111

Free-Market CompetitionFree-Market Competition

SellersSellers

OneOne ManyMany

MonopolyMonopoly

OligopolyOligopoly

Monopolistic Monopolistic

CompetitionCompetition

Perfect Perfect CompetitionCompetition

1212

Perfect CompetitionPerfect Competition

BuyerBuyer

SellersSellers

1313

Monopolistic Competition:Monopolistic Competition: Many Sellers With Many Sellers With PerceivedPerceived

DifferencesDifferences

Fast FoodFast Food

CollegesColleges

1414

Oligopoly: Few SellersOligopoly: Few Sellers

AutomobilesAutomobiles

• TobaccoTobacco

1515

Monopoly: One SellerMonopoly: One Seller

UtilitiesUtilities

• Microsoft?Microsoft?

1616

Limits of Free-MarketsLimits of Free-Markets

Inequality of Wealth- Inequality of Wealth- Causes National & World Causes National & World TensionTension

Greed Compromises EthicsGreed Compromises Ethics

Limitations Push Country Limitations Push Country towards Socialism = towards Socialism = Government RegulationGovernment Regulation

1717

Number of Workers perNumber of Workers perSocial Security RecipientSocial Security Recipient

0

1

2

3

4

5

6

1960 2000 2075(Est.)

Source: Investors.com

1818

Industrialized Nations’ Industrialized Nations’ Top Individual Tax RateTop Individual Tax Rate

0% 10% 20% 30% 40% 50% 60% 70%

Denmark

Austria

France

Spain

Italy

Germany

Japan

U.S.

Source: www.worldwide-tax.com, May 9, 2006

1919

SocialismSocialism

Private & Public Ownership Private & Public Ownership

Some Choices are LimitedSome Choices are Limited

• Creates Social EqualityCreates Social Equality

• Reduces Individual Incentive Reduces Individual Incentive - Brain Drain- Brain Drain

2020

CommunismCommunism

Public OwnershipPublic Ownership Almost all major factors of Almost all major factors of

productionproduction

Central Planning/Controlled Central Planning/Controlled EconomyEconomy

• Shortages of food and other products Shortages of food and other products may developmay develop• Lack of motivation to work hard for Lack of motivation to work hard for business peoplebusiness people

2121

Mixed EconomiesMixed EconomiesFree-Market Economy = CapitalismFree-Market Economy = Capitalism

Command EconomyCommand Economy SocialismSocialism CommunismCommunism

Trend Results in Blend/MixTrend Results in Blend/Mix Capitalism > SocialismCapitalism > Socialism Socialism > CapitalismSocialism > Capitalism

2222

Why is the U.S. Why is the U.S. an Economic Success?an Economic Success?

Major ReasonMajor Reason PercentPercent**

ConstitutionConstitution 8585

Free ElectionsFree Elections 8484

Free Enterprise SystemFree Enterprise System 8181

Abundant ResourcesAbundant Resources 7878

Cultural DiversityCultural Diversity 7171* Respondents could choose more than one.* Respondents could choose more than one.

Source: Investors Business Daily Survey

2323

U.S. EconomyU.S. EconomyKey Economic IndicatorsKey Economic Indicators

Productivity in the U.S.Productivity in the U.S.

Productivity in the Service SectorProductivity in the Service Sector

Business CyclesBusiness Cycles RecessionRecession DepressionDepression RecoveryRecovery

StabilizationStabilization Fiscal PolicyFiscal Policy National DebtNational Debt

Economic Growth through Monetary PolicyEconomic Growth through Monetary Policy

2424

Key Economic IndicatorsKey Economic Indicators

Gross Domestic Product Gross Domestic Product (GDP)(GDP)

Unemployment RateUnemployment Rate

Price IndexesPrice Indexes Consumer Price Index (CPI)Consumer Price Index (CPI) Producer Price Index (PPI)Producer Price Index (PPI)

2525

U.S. Gross U.S. Gross Domestic ProductDomestic Product

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1940 1950 1960 1970 1980 1990 2000 2002 2005

In Billions of U.S. $In Billions of U.S. $

Source: U.S. Dept. of Commerce, Bureau of Economic Analysis

***

19751975 20042004G-8 CountriesG-8 Countries 55 55 4444U.S. onlyU.S. only 2222 2121ChinaChina 5 5 1313IndiaIndia 3 6 3 6 Latin AmericaLatin America 7 7 66AfricaAfrica 3 333

Share of World GDP(%)Share of World GDP(%)

Source: www.dlc.org/ppi, July 6, 2005

2-26

2727

U.S. Unemployment (%)U.S. Unemployment (%)

Source: U.S. Bureau of Labor Statistics

0

2

4

6

8

10

12

14

16

1940 1950 1960 1970 1980 1990 2000 2002 2005

Source:Source: U.S. Bureau of Labor Statistics

2828

What Makes Up TheWhat Makes Up TheConsumer Price Index?Consumer Price Index?

Transportation18%

Other5%

Medical Care6%

Food & Beverage

16%

Housing & Util.39%

Recreation6%

Medical Care/ Insurance

7%

Apparel5%

Source:Source: U.S. Bureau of Labor Statistics

2929

Consumer Price IndexConsumer Price Index

0

50

100

150

200

250

1940 1950 1960 1970 1980 1990 2000 2002 Apr.2006

1982-84 = 1001982-84 = 100

Source: U.S. Dept. of Labor, Bureau of Labor Statistics

3030

Percent Change in Labor Percent Change in Labor Productivity- U.S.Productivity- U.S.

-10123456789

1950 1960 1970 1980 1990 2000 2002 Q1 -2006

Source: U.S. Dept. of Commerce, Bureau of Labor Statistics

3131

Where Does the Where Does the Government Get Its Money?Government Get Its Money?

Source: Office of Management & Budget, 2002Source: Office of Management & Budget, 2002

4%4%

9%

40%

43%

Individual IncomeTaxes

Social Security &Payroll Taxes

Corporate Taxes

Excise Taxes

Other

3232

Federal SpendingFederal Spending

0%5%

10%15%20%25%30%35%40%45%50%

Medicare &Medicaid

SocialSecurity

Interest Defense Other

1966

2006

Source: Congressional Budget OfficeSource: Congressional Budget Office

3333

Biggest Economic Biggest Economic ChallengesChallenges

Over the Next 3-5 years the U.S. can Over the Next 3-5 years the U.S. can be expected to face these challenges:be expected to face these challenges:

Pension & Health care costsPension & Health care costs The Federal DeficitThe Federal Deficit High Energy and Commodity CostsHigh Energy and Commodity Costs Balance of paymentsBalance of payments TerrorismTerrorism

Source: Investors Business Daily January 9, 2006

3434

Healthcare Expenditure Healthcare Expenditure Projections Projections

(Percent of National GDP)(Percent of National GDP)

14.00%

14.50%

15.00%

15.50%

16.00%

16.50%

17.00%

17.50%

18.00%

2004 2006 2008 2010 2012

% of GDP

Source: FORTUNE May 3, 2004

3535

Rising U.S. Trade DeficitRising U.S. Trade Deficit

-800000

-700000

-600000

-500000

-400000

-300000

-200000

-100000

0

1980 1985 1990 1995 1999 2001 2003 2005

Deficit inMillions

Source: US Dept of Commerce, Bureau of Economic Analysis

3636

Where are the Homeland Where are the Homeland Security Dollars Spent?Security Dollars Spent?

0

2

4

6

8

10

12

14

Border & PortSecurity

Aviation Security ImmigrationEnforcement

BioDefense InfrastructureProtection

Source: Business Week June 14, 2004Source: Business Week June 14, 2004

3737

The debt has reached $8.36 The debt has reached $8.36 trillion+ (May 2006)trillion+ (May 2006)

If $1,000 bills were stacked:If $1,000 bills were stacked: $1 Million = 4.29 $1 Million = 4.29 InchesInches $1 Billion = $1 Billion = 357.5357.5 FeetFeet $1 Trillion = 67$1 Trillion = 67 MilesMiles

The debt is equal to The debt is equal to 560.1 miles560.1 miles in $1,000 billsin $1,000 bills

National Debt Clock- National Debt Clock- http://http://www.brillig.com/debt_clockwww.brillig.com/debt_clock//

What is the National Debt?What is the National Debt?