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
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2-1

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


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

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Micro v. Macro

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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
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Thomas Malthus (Early 1800s)

• “Dismal Science”
• Too many people

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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
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Private Property

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Business Ownership/ Profits

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Freedom of Competition

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Freedom of Choice

2-7

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Supply Curve
High

Price(P)

S
Low

Quantity(S)

High
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Demand Curve
High

Price(P)

D
Low

Quantity(D)

High
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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
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Perfect Competition

Sellers

Buyer
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Monopolistic Competition:
Many Sellers With Perceived Differences

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Fast Food

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Colleges
2-13


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Oligopoly: Few Sellers
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Automobiles

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Tobacco

2-14


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Monopoly: One Seller
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Utilities

• Microsoft?

2-15


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Limits of Free-Markets
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Inequality of Wealth- Causes
National & World Tension

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Greed Compromises Ethics

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Limitations Push Country
towards Socialism =
Government Regulation

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Number of Workers per
Social Security Recipient

Source: Investors.com

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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
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Private & Public Ownership

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Some Choices are Limited

• Creates Social Equality
• Reduces Individual Incentive
- Brain Drain
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Communism
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Public Ownership
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Almost all major factors of
production

Central Planning/Controlled
Economy
• Shortages of food and other products
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may develop
• Lack of motivation to work hard for
business people

2-20


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Mixed Economies
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Free-Market Economy = Capitalism

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Command Economy

• Socialism
• Communism
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Trend Results in Blend/Mix

• Capitalism > Socialism
• Socialism > Capitalism
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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

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

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Recession
Depression
Recovery

Stabilization

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Fiscal Policy
National Debt

Economic Growth through Monetary Policy
2-23

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Key Economic Indicators
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Gross Domestic Product (GDP)

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Unemployment Rate

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Price Indexes

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

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U.S. Gross

Domestic Product

In Billions of U.S. $

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

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