Part II: Business Environment Introduction to Business 3e 4 Copyright © 2004 South-Western. All...
-
Upload
molly-snow -
Category
Documents
-
view
218 -
download
2
Transcript of Part II: Business Environment Introduction to Business 3e 4 Copyright © 2004 South-Western. All...
Copyright © 2004 South-Western. All rights reserved.
Part II: Business EnvironmentPart II: Business Environment
Jeff MaduraIntroduction to
Business 3e
Introduction to Business 3e
44Assessing Economic Assessing Economic ConditionsConditions
Assessing Economic Assessing Economic ConditionsConditions
Copyright © 2004 South-Western. All rights reserved. 4–3
Learning GoalsLearning Goals• Identify macroeconomic factors that affect business performance.
•Explain how market prices are determined.
•Explain how the government influences economic conditions.
Copyright © 2004 South-Western. All rights reserved. 4–4
Assessing Economic Assessing Economic ConditionsConditions
Copyright © 2004 South-Western. All rights reserved. 4–5
Economic ConditionsEconomic Conditions•Reflect the level of production and consumption for a particular country, area, or industry– Macroeconomic conditions
Overall economic state of a country
– Microeconomic conditions Focus on conditions in a particular business
or industry
Copyright © 2004 South-Western. All rights reserved. 4–6
Impact of Economic Impact of Economic ConditionsConditions
•Economic conditions can affect:– Revenues of a business– Expenses of a business– Total value of a business
Copyright © 2004 South-Western. All rights reserved. 4–7
Impact of Economic Impact of Economic ConditionsConditions
•Some firms are more sensitive to changes in economic conditions than others:– Demand for fast food demand is not very
sensitive to declining economic conditions.– Demand for new automobiles is more
sensitive to weak economic conditions than food products.
Copyright © 2004 South-Western. All rights reserved. 4–8
Harley Davidson ExampleHarley Davidson Example•Demand for motorcycles is stronger when: – The economy is strong.– Customers have more income to buy
motorcycles.
•High demand for Harley Davidson’s motorcycles:– Generates greater revenue.– Improves company performance.
Copyright © 2004 South-Western. All rights reserved. 4–9
Harley Davidson ExampleHarley Davidson Example•Demand for motorcycles is weaker when: – The economy is weak.– Customers have less income to buy
motorcycles.
•Lower demand for Harley Davidson’s motorcycles:– Generates less revenue.– Weakens company performance.
Copyright © 2004 South-Western. All rights reserved. 4–10
Harley Davidson ExampleHarley Davidson Example•Harley Davidson tries to predict demand so it will have a sufficient supply of motorcycles to meet future demand.– Demand for motorcycles depends on
economic conditions.– Number of motorcycles produced also
depends on economic conditions.
•Government policies also affect economic conditions.
Copyright © 2004 South-Western. All rights reserved. 4–11
Harley Davidson ExampleHarley Davidson Example•Harley Davidson must determine:
– How prevailing economic conditions will affect the demand for the motorcycles it produces.
– How prevailing government policies will affect the demand for its motorcycles.
Copyright © 2004 South-Western. All rights reserved. 4–12
Macroeconomic Effects Macroeconomic Effects • The performance of most firms depends on three macroeconomic factors:– Economic growth
Changes in the general level of economic activity
– Inflation Increases in general level of prices over
specific period of time
– Interest rates Changes in the cost of borrowed money
Copyright © 2004 South-Western. All rights reserved. 4–13
Economic GrowthEconomic Growth•When the change in the general level of economic activity is higher than normal:– Total income level of all U.S. workers is
relatively high.– There is a higher volume of spending on
products and services.– Firms that sell products and services should
generate higher revenues.
Copyright © 2004 South-Western. All rights reserved. 4–14
RecessionRecession• Occurs when economic growth is negative for two consecutive quarters
• Lowers demand for products and services– Reduces the revenue of firms that sell products
and services.– Can cause firms to shut down factories in
response to low economic growth. General Motors Ford
Copyright © 2004 South-Western. All rights reserved. 4–15
Indicators of Economic Indicators of Economic GrowthGrowth
•Gross Domestic Product (GDP)– The level of total production of products and
services in the economy– Total market value of all final products and
services produced in the U.S.
•Aggregate Expenditures– Total amount of expenditures
Copyright © 2004 South-Western. All rights reserved. 4–16
Trend of Gross Domestic Product Trend of Gross Domestic Product (GDP)(GDP)
Exhibit 4.1
Copyright © 2004 South-Western. All rights reserved. 4–17
Indicators of Economic Indicators of Economic GrowthGrowth
• In the U.S., these indicators are closely related:– High level of consumer spending reflects a
large demand for products and services.– Total production level depends on total
demand for products and services.
Copyright © 2004 South-Western. All rights reserved. 4–18
Alternative Indicators Alternative Indicators of Economic Growthof Economic Growth
•Unemployment level• Industrial production level•New housing starts•Personal income level
Copyright © 2004 South-Western. All rights reserved. 4–19
Unemployment LevelsUnemployment Levels• Frictional unemployment– People who are
between jobs.
• Seasonal unemployment– People whose
services are not needed during some seasons.
• Cyclical unemployment– People unemployed
due to poor economic conditions.
– Best indicator of economic conditions.
• Structural unemployment– People who do not
have adequate skills.
Copyright © 2004 South-Western. All rights reserved. 4–20
Trend of U.S. UnemploymentTrend of U.S. Unemployment
Exhibit 4.2
Copyright © 2004 South-Western. All rights reserved. 4–21
InflationInflation•An increase in the general level of prices of products and services over a specified period of time.– Estimated by measuring percentage
changes in the consumer price index (CPI).– CPI is a market basket of prices on a wide
variety of consumer products: Grocery products, housing, gasoline,
medical services, electricity, etc.
Copyright © 2004 South-Western. All rights reserved. 4–22
U.S. Inflation Rates over U.S. Inflation Rates over TimeTime
Exhibit 4.3
Copyright © 2004 South-Western. All rights reserved. 4–23
Impact of InflationImpact of Inflation•Can affect a company’s operating expenses– Can increase cost of supplies and materials.– Can impact indexed wages (labor cost).– Higher inflation can cause large increases in
operating expenses.
•Can affect a company’s revenues– Companies may charge higher prices to
compensate for their higher expenses.
Copyright © 2004 South-Western. All rights reserved. 4–24
Cost-Push InflationCost-Push Inflation•Occurs when firms must charge higher prices because their production (input) costs are higher.– Change in price of oil impacts gasoline
prices and transportation costs.– Change in aluminum prices impacts
packaging cost of beer production.– Change in pulp prices impacts the cost of
paper towel production.
Copyright © 2004 South-Western. All rights reserved. 4–25
Demand-Pull InflationDemand-Pull Inflation•Occurs when product and services prices are pulled up by consumer demand.– Strong consumer demand can cause
shortages in the production of products. Firms that anticipate shortages may
increase prices for their products.
– Strong consumer demand may put pressure on wages and reduce unemployment. Firms may increase prices to recover higher
operating expenses.
Copyright © 2004 South-Western. All rights reserved. 4–26
Interest RatesInterest Rates• Represent the cost of borrowing money– Firm’s interest expense is based on market
interest rates and can have significant impact on a firm’s profitability. Firms may postpone expansion and other
projects when interest rates are too high.
– Interest rates also impact a firm’s revenue The increased cost of financing new homes
reduces demand for new homes. Revenues for construction firms and
equipment manufacturers also decline.
Copyright © 2004 South-Western. All rights reserved. 4–27
Effect of Interest Effect of Interest Rates Rates
on Interest on Interest Expenses Expenses and Profitsand Profits
Exhibit 4.4
Note: Assume that the firm’s revenue equals $400,000 and its operating expenses equal $300,000.
Copyright © 2004 South-Western. All rights reserved. 4–28
business onlinebusiness online ee -- businessbusiness
Copyright © 2004 South-Western. All rights reserved. 4–29
How Macroeconomic Factors How Macroeconomic Factors Affect a Firm’s ProfitsAffect a Firm’s Profits
Exhibit 4.5
Copyright © 2004 South-Western. All rights reserved. 4–30
Market Price Market Price DeterminationDetermination
•Market price of a product is influenced by: – The total demand for that product by all
customers– Supply of that product produced by firms
•The interaction between demand and supply determines the market price.
Copyright © 2004 South-Western. All rights reserved. 4–31
Demand and SupplyDemand and Supply•Demand schedule
– Indicates the quantity of the product that would be demanded by customers at each possible price.
– Quantity demanded is higher when the price is lower.
Copyright © 2004 South-Western. All rights reserved. 4–32
How the Equilibrium Price is How the Equilibrium Price is Determined by Supply and DemandDetermined by Supply and Demand
Exhibit 4.6a
Copyright © 2004 South-Western. All rights reserved. 4–33
How the Equilibrium Price is How the Equilibrium Price is Determined by Supply and DemandDetermined by Supply and Demand
Exhibit 4.6b
Copyright © 2004 South-Western. All rights reserved. 4–34
Demand and Supply Demand and Supply (cont’d)(cont’d)
•Supply schedule– Indicates the quantity of the product that
would be supplied (produced) by manufacturers at each possible price.
– Quantity supplied (produced) is higher when the price is higher.
Copyright © 2004 South-Western. All rights reserved. 4–35
Interaction of Supply and Interaction of Supply and DemandDemand
• Interaction of demand and supply schedules determines the market price– Surplus: the quantity supplied by firms is
more than the quantity demanded by customers.
– Shortage: the quantity supplied by firms is less than the quantity demanded by customers.
– Equilibrium price: occurs when quantities supplied and demanded are equal.
Copyright © 2004 South-Western. All rights reserved. 4–36
Impact of Shifts in Impact of Shifts in DemandDemand
•Changing conditions can cause a demand schedule or supply schedule for a specific product to change.– Changes the equilibrium price of a product.
Increased product popularity (demand) results in a shortage of the product.
The shortage is corrected when the price is increased to the level at which the quantity supplied equals the quantity demanded.
Copyright © 2004 South-Western. All rights reserved. 4–37
How the Equilibrium Price is How the Equilibrium Price is Affected by a Change in DemandAffected by a Change in Demand
Exhibit 4.7
Copyright © 2004 South-Western. All rights reserved. 4–38
How the Equilibrium Price is How the Equilibrium Price is Affected by a Change in DemandAffected by a Change in Demand
Exhibit 4.7
Copyright © 2004 South-Western. All rights reserved. 4–39
Impact of Shifts in SupplyImpact of Shifts in Supply•Change in supply can impact the equilibrium price of the product.– Technological improvements can lead to
reduced production costs causing firms to produce a larger supply at any given price. The supply schedule changes and yields a
surplus which can be sold only by lowering the price.
The surplus is eliminated when the price decreases to a level at which the quantity supplied equals the quantity demanded.
Copyright © 2004 South-Western. All rights reserved. 4–40
How the Equilibrium Price is How the Equilibrium Price is Affected by a Change in SupplyAffected by a Change in Supply
Exhibit 4.8
Copyright © 2004 South-Western. All rights reserved. 4–41
How the Equilibrium Price is How the Equilibrium Price is Affected by a Change in SupplyAffected by a Change in Supply
Exhibit 4.8
Copyright © 2004 South-Western. All rights reserved. 4–42
Factors Influencing Market Factors Influencing Market PricesPrices
•Consumer income– Determines the amount of products and
services individuals can purchase High levels of economic growth result in
more income for consumers. Increased demand causes demand
schedule shifts and price increases.
– When consumer income declines: Demand decreases and creates a surplus
as the demand schedule shifts and prices decrease.
Copyright © 2004 South-Western. All rights reserved. 4–43
Factors Influencing Market Factors Influencing Market PricesPrices
•Changes in consumer tastes and preferences:– Impact the quantity of products and services
demanded by consumers Increased demand leads to price increase. Decreased demand leads to price decrease.
Copyright © 2004 South-Western. All rights reserved. 4–44
Factors Influencing Market Factors Influencing Market PricesPrices
•Change in production expenses– A decrease in expenses can lead to increase
in quantity supplied and create a surplus. Firms must lower prices in order to
eliminate the surplus.
– An increase in expenses can lead to decrease in quantity supplied and create a shortage. Firms can increase prices until shortage is
corrected.
Copyright © 2004 South-Western. All rights reserved. 4–45
Monetary Policy Monetary Policy Impacts Economic Impacts Economic
ConditionsConditions•Monetary policy
– Made by the Federal Reserve System “Fed” is the central bank of the U.S.
– Decisions by Fed about the money supply: Impact interest rates. Impact firms’ interest expenses. Impact demand for products purchased
with borrowed funds.
Copyright © 2004 South-Western. All rights reserved. 4–46
Fed’s Impact on Interest Fed’s Impact on Interest RatesRates
•Maintains funds outside the banking system that are not loanable to firms or individuals
Used to buy Treasury securities held by individuals and companies
Provide individuals and firms with new funds for deposit in commercial banks– Deposits increase the money supply and the
supply of loanable funds.– Should result in decreased interest rates and
stimulate economic growth.
Copyright © 2004 South-Western. All rights reserved. 4–47
Fed’s Impact on Interest Fed’s Impact on Interest RatesRates
•Fed can pull funds out of commercial banks and other financial institutions to reduce the money supply.– Reduces the supply of funds available to
lend to borrowers (shortage) causing: Interest rates to increase. Individuals and companies to borrow less. Spending levels to decrease. The level of inflation to decline.
Copyright © 2004 South-Western. All rights reserved. 4–48
Fiscal PolicyFiscal Policy•How the federal government sets tax rates and spends money:– Personal income tax rates
Reduced tax rates produce higher after-tax incomes that stimulate spending and increase demand for products and services.
– Corporate taxes Impacts after-tax earnings
– Excise taxes Taxes on particular products that increase
prices consumers pay for these products.
Copyright © 2004 South-Western. All rights reserved. 4–49
Fiscal PolicyFiscal Policy•Sets the amounts of federal tax revenue government and federal spending– Federal budget deficit
Occurs when federal spending exceeds federal taxes and other revenue collected by the federal government.
Government borrowing to make up the difference creates higher demand for loanable funds and can drive up interest rates.
Copyright © 2004 South-Western. All rights reserved. 4–50
Example of How a Budget Deficit Example of How a Budget Deficit OccursOccurs
Exhibit 4.9
Copyright © 2004 South-Western. All rights reserved. 4–51
How Government Policies Affect How Government Policies Affect Business PerformanceBusiness Performance
Exhibit 4.10
Copyright © 2004 South-Western. All rights reserved. 4–52
Federal Government’s Federal Government’s Dilemma Dilemma
•A restrictive monetary or fiscal policy can be used to:– Maintain low rate of economic growth
Prevent inflationary pressure caused by excessive demand
Can also create unemployment
– Also requires a trade-off
Copyright © 2004 South-Western. All rights reserved. 4–53
Chapter SummaryChapter Summary•Firm performance depends on three macroeconomic factors: economic growth, inflation, and interest rates.
•Demand and supply conditions determine market prices.
•Federal government uses monetary and fiscal policies to influence macroeconomic conditions.