INTRO_CHAPT2-Economics the Creation and Distribution of Wealth
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Transcript of INTRO_CHAPT2-Economics the Creation and Distribution of Wealth
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*Chapter Two
Understanding How Economics Affects Business
Economics: Use of scarce resources to produce
goods/services, distribute them among competing groups/individuals
• Land
• Labor
• Capital
• Entrepreneurship
• Knowledge
• Economics -- The study of how society employs resources to produce goods and services for consumption among various groups and individuals.
• Macroeconomics -- Concentrates on the operation of a nation’s economy as a whole.
For example: Why Interest rate changes? Why unemployment goes up?
• Microeconomics -- Concentrates on the behavior of people and organizations in markets for particular products or services.• For Example: Why people choose to use Gas (CNG conversion)
rather than oil.
• Why people more buy more of a product at reduced price?
The MAJOR BRANCHES of ECONOMICS
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• Economics is the study of the allocation of scarce resources which emphasizes on Resource Development.
• Businesses can contribute to an economic system by
inventing products that greatly increase the available resources.
• For example: By discovering new energy sources (hydrogen fuel for autos), new ways of growing foods (hydroponics, organics), new ways producing goods and services (nanotechnology).
What is ECONOMICS?
DIFFERENCE BETWEEN MICRO AND MACRO ECONOMICS : MICRO ECONOMICS:-1.Evolution of micro economics took place earlier than macro economics.2.It is branch of economics, which studies individual economic variables like demand, supply, price etc.3.It has a very narrow scope i.e. an individual, a market etc.4.Demand,supply,market forms etc. related to micro economics.5.It is helpful in analysis of an individual economics unit like firm.6.Theory of demand, theory of production, price determination theory etc develop from micro economics.
MACRO ECONOMICS:-1.It evolved only after the publication of Keynes‘ book, General theory of employment interest and money.2.It is a branch of economics which studies aggregate economic variables, like aggregate demand, aggregate supply, price level etc.3.It has a very wide scope i.e. a country.4.Aggregate demand aggregate supply, national income etc. related to macro economics.5.It is helpful for analyzing the level of employment, income, economic growth etc.6.Theory of national income, theory of employment theory of money, theory of general price level etc. develop from macro economics.
Economic Theory
• Thomas Malthus (Early 1800s)– “Dismal Science”– Too many people
• Adam Smith (1776)– Freedom is vital– “Invisible Hand”
• Malthus believed that if the rich had most of the wealth and the poor had most of the population, resources would run out.
• This belief led the writer Thomas Carlyle to call economics “The Dismal Science.”
• Neo-Malthusians believe there are too many people in the world and believe the answer is radical birth control.
• Nations like Japan, Germany, Italy, Russia, Canada, and USA suffer from low population growth (Story of Canada…..having children is a gift!) with more old people less of young generation (Story of USA….Olds are being a major burden for the nation but it makes joke by offering senior citizens status).
THOMAS MALTHUS and the DISMAL SCIENCE
2-7
*Adam Smith & the Creation of Wealth
Smith believed that:
• Freedom was vital to any economy’s survival.
• Freedom to own land or property and the right to keep the profits of a business is essential.
• People will work hard if they believe they will be rewarded.
He is considered as the father of modern economics!
ADAM SMITH the FATHER of ECONOMICS
LG1 *
2-8
Four “What’s” of an Economic System
$ What (how it) is produced
$ What amount is produced
$ What method of output distribution
$ What rate of economic growth
Adapted from:Adapted from: Edwin Mansfield Economics (New York: W.W. Norton, 1976), p.8
Three Economic Systems
CommunismCommunism
SocialismSocialism
CapitalismCapitalism
(Highly Controlled(Highly Controlled)) (Little Control(Little Control))
MixedMixed
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*Understanding Free-Market Capitalism
• Capitalism -- All or most of the land, factories and stores are owned by individuals, not the government, and operated for profit.
• Countries with capitalist foundations:- United States- England- Australia- Canada
CAPITALISM/ Market economy
LG2
2-11
Capitalism
• Private PropertyIndividuals can buy, sell and properties.
• Profit/OwnershipProfit acts as incentive for taking risk and initiative.
• Freedom of CompetitionPossesses right to compete each other.
• Freedom of ChoiceFree to choose what to do and what not.
Supply Curve
Quantity(S)Quantity(S)
HighHigh
HighHighLowLow
Price(P)Price(P)
SS
Demand Curve
Price(P)Price(P)
Quantity(D)Quantity(D)
HighHigh
HighHighLowLow
DD
QuantityQuantity
HighHigh
HighHighLowLow
PricePrice
EQUILIBRIUM EQUILIBRIUM POINTPOINT
Market EquilibriumMarket Equilibrium
SS DD
SurplusSurplus
ShortageShortage
Degrees of Competition
SellersSellers
OneOne ManyMany
MonopolyMonopoly
OligopolyOligopoly
Monopolistic Monopolistic
CompetitionCompetition
Pure CompetitionPure Competition
Monopoly = One Seller• Diamonds
– South-Africa
• Utilities– WASA– DESA
Oligopoly = Few Sellers• Tobacco
– Gold-Leaf -Banson– Pall Mall -Sheikh– More -Garam -Pine
• Automobiles– Toyota -Ford– Porshe -Nissan
Monopolistic Competition =Many Sellers With Perceived Differences
• Fast Food– McDonald’s -KFC– Pizza Hut -Subway
• University/College– Harvard– Stanford– Orford
Pure Competition
BuyerBuyer
SellersSellers
Limitations of Free-Market
• Inequality of Wealth- Causes National & World Tension
• Potential Environmental Damage
• Limitations Push Country towards Socialism = Government Regulation
• Socialism -- An economic system based on the premise that some basic businesses, like utilities, should be owned by the government in order to more evenly distribute profits among the people.
• Entrepreneurs run smaller businesses
• Citizens are highly taxed almost 60% usually.
• Government is more involved in protecting the environment and the poor
SOCIALISM
2-22
Brain-drain: The loss of best and brightest people to other countries
Socialism
• Private & Public Ownership• Some Choices are Limited• Creates Social Equality• Reduces Individual Incentive
• Communism -- An economic and political system in which the government makes almost all economic decisions and owns almost all the major factors of production.
• Prices don’t reflect demand which may lead to shortages of items, including food and clothing.
• Most communist countries today suffer severe economic depression and citizens fear the government.
• Some countries even don’t allow its citizens to practice different religions, change jobs, or move to a different town they prefer.
• Example: North Korea, Cuba, Venezuela practice Socialism. China also practices Communism but it is rapidly being open.
COMMUNISM
2-24
Communism• Public Ownership
– Productive Capacity– Capital
• Central Planning/Controlled Economy
• Managers = Mandatory Party Membership
Comparison of the main economic systems
• Mixed Economies -- Some allocation of resources is made by the market and some by the government.
• Neither free-market nor command economies have created sound economic conditions so countries use a mix of the two economic systems.
• Bangladesh is a vibrant example of Mixed Economy!
MIXED ECONOMIES
2-27
Mixed Economies
• Free-Market Economy = Capitalism• Command Economy
– Socialism– Communism
• Trend Results in Blend– Capitalism > Socialism– Socialism > Capitalism
Understanding Economic System
Key Economic Indicators Gross Domestic Product (GDP)
Unemployment Rate
Price Indexes Consumer Price Index(CPI) Producer Price Index(PPI)
• Gross Domestic Product (GDP): Total value of final goods and services produced in a country in a given year. As long as a company is within a country’s border, their numbers go into the country’s GDP (even if they are foreign-owned).
• Gross national product (GNP) is the total income earned by a country’s factors of production in a year or a given time period, regardless of where assets are located (nations' output).
• Net national product (NNP) is the total market value of all final goods and services produced by residents in a country during a given time period.
GDP, GNP and NNP
2-30
What Makes Up the 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
Inflation: A general rise in the prices of goods and services over time.
Disinflation: A situation in which price increases are slowing (the inflation rate is decreasing).
Deflation: A situation in which prices are declining.
Stagflation: A situation when the economy is slowing but prices are going up anyhow.
Consumer price Index (CPI): Monthly statistics that measure the pace of inflation or deflation.
Economic Scenarios
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*The Business Cycle
• Business Cycles -- Periodic rises and falls that occur in economies over time.
• Four Phases of Long-Term Business Cycles:1. Economic Boom
2. Recession – Two or more consecutive quarters of decline in the GDP.
3. Depression – A severe recession.
4. Recovery – When the economy stabilizes and starts to grow. This leads to an Economic Boom.
BUSINESS CYCLES
LG5
2-33
Government Economic Tools• Monetary Policy- (management of money supply)
– Expansionary Monetary Policy– Contractionery Monetary Policy
• Fiscal Policy- management of taxes and government
expenditures
• National Debt- Refers total debt/loan owed by a nation
– Internal Debt -External Debt
Government’s Role in Economics
• Enforces Rules/Regulations• Provides Public Goods• Transfers Payments• Fosters Competition• Contributes to Economic Stability
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*Stabilizing the Economy Through Fiscal Policy
• Fiscal Policy -- The federal government’s efforts to keep the economy stable by increasing or decreasing taxes or government spending.
• Tools of Fiscal Policy:- Taxation- Government Spending
FISCAL POLICY
LG6
2-36
Industrialized Nations Tax Rate
0% 10% 20% 30% 40% 50% 60% 70%
Denmark
Finland
France
Spain/Sweden
Germany
Canada
Italy
Austria/Japan
U.S.
Source: Parade Magazine, Apr. 12, 1998.
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*Using Monetary Policy to Keep the Economy Growing
• Monetary Policy -- The management of the money supply and interest rates by the Federal Reserve Bank (the Fed).
• The Fed’s most visible role is increasing and lowering interest rates.- When the economy is booming, the Fed tends to
increase interest rates.- When the economy is in a recession, the Fed
tends to decrease the interest rates.
MONETARY POLICY
LG6
2-38