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Understanding business 8th by mcchugh nickels chapter 02

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How Economics
Affects
Business:
The Creation
and Distribution
of Wealth
Nickels

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McHugh

McGraw-Hill/Irwin
Understanding Business, 8e

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CHAPTER

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2

McHugh
1-1

2-1

© 2008 The McGraw-Hill Companies, Inc., All Rights


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Economics: Create
Wealth


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



Micro v. Macro



Resource Development
2-2


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Four “What’s” of
an Economic System

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

$ What is the rate of economic
growth?

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

2-3


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Economic Theories


Thomas Malthus (Early 1800s)

• “Dismal Science”
• Too many people


Adam Smith (1776)

• Freedom is vital
• “Invisible Hand”
2-4


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Circular Flow Model

2-5


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Three Economic Systems
Mixed
Socialism

(Highly Controlled)

(Little Control)

Communism

Capitalism

2-6


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Free-Market Capitalism


Private Property



Business Ownership/ Profits



Freedom of Competition



Freedom of Choice

2-7


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Supply Curve
High

Price(P)

S
Low

Quantity(S)

High
2-8


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Demand Curve
High

Price(P)

D
Low

Quantity(D)

High
2-9


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Equilibrium Point
Surplus

High

Market Equilibrium

Price

S
Low

Shortage

Quantity

D
High
2-10


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Free-Market Competition
Monopolistic
Oligopoly

Competition

One

Many
Perfect
Competition

Monopoly

Sellers
2-11


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Perfect Competition

Sellers

Buyer
2-12


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Monopolistic Competition:
Many Sellers With Perceived Differences



Fast Food



Colleges
2-13


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Oligopoly: Few Sellers


Automobiles



Tobacco

2-14


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Monopoly: One Seller


Utilities

• Microsoft?

2-15


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Limits of Free-Markets


Inequality of Wealth- Causes
National & World Tension



Greed Compromises Ethics



Limitations Push Country
towards Socialism =
Government Regulation

2-16


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Number of Workers per
Social Security Recipient

Source: Investors.com

2-17


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Industrialized Nations’
Top Individual Tax Rate

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

2-18


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Socialism


Private & Public Ownership



Some Choices are Limited

• Creates Social Equality
• Reduces Individual Incentive
- Brain Drain
2-19


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Communism


Public Ownership


Almost all major factors of
production

Central Planning/Controlled
Economy
• Shortages of food and other products


may develop
• Lack of motivation to work hard for
business people

2-20


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Mixed Economies


Free-Market Economy = Capitalism



Command Economy

• Socialism
• Communism


Trend Results in Blend/Mix

• Capitalism > Socialism
• Socialism > Capitalism
2-21


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

Percent*

Constitution

85

Free Elections

84

Free Enterprise System

81

Abundant Resources

78

Cultural Diversity

71

* Respondents could choose more than one.
Source: Investors Business Daily Survey

2-22


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U.S. Economy








Key Economic Indicators
Productivity in the U.S.
Productivity in the Service Sector
Business Cycles





Recession
Depression
Recovery

Stabilization




Fiscal Policy
National Debt

Economic Growth through Monetary Policy
2-23


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Key Economic Indicators


Gross Domestic Product (GDP)



Unemployment Rate



Price Indexes

• Consumer Price Index (CPI)
• Producer Price Index (PPI)

2-24


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U.S. Gross
Domestic Product

In Billions of U.S. $

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

2-25


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