Understanding business 10th chapter 2b understanding how economics affects business

Chapter 02

Understanding
Economics and
How It Affects Business

McGraw-Hill/Irwin

Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.





What Is
Economics?

ECONOMICS: WHAT IS IT?

2-5


•

Economics -- The study of how society employs resources to produce goods and
services for distribution among various groups and individuals.

2-6


The MAJOR BRANCHES of

ECONOMICS

•

Macroeconomics -- Concentrates on the operation of a nation’s economy as a whole.

•

Microeconomics -- Concentrates on the behavior of people and organizations in
markets for particular products or services.

2-7


What Is
Economics?

RESOURCE DEVELOPMENT

LG1

•

Resource Development -- The
study of how to increase resources
and create conditions that will make
better use of them.

2-8

Economic Theories

2-11


Economic Theories

Thomas Malthus

•
•

2-12

“Dismal Science”
Too many people


THOMAS MALTHUS and
the DISMAL SCIENCE

•

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.

2-13


Economic Theories
Adam Smith (1776)

•
•
•
•
•

2-15

Advocated creating
wealth through
entrepreneurship
Freedom is vital
“Invisible Hand”


Adam Smith & the Creation of
Wealth

ADAM SMITH the
FATHER of ECONOMICS

LG1

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.

2-16


The INVISIBLE HAND THEORY

•

Invisible Hand -- When self-directed gain leads to social and economic benefits for the

whole community.

•

As people improve their own situation in life, they help the economy prosper through
the production of goods, services and ideas.

2-17


Example of
INVISIBLE HAND THEORY

•
•

A farmer earns money by selling his crops.
To earn more, the farmer hires farmhands to
produce more crops.

•

When the farmer produces more, there is plenty of
food for the community.

•

The farmer helped his employees and his community
while helping himself.

2-18


Three Economic Systems

2-20


Three Economic Systems

Socialism

(Highly Controlled)

Communism

2-21

(Little Control)

Capitalism


Capitalism

2-22


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

2-23


The Foundations of Capitalism

CAPITALISM’S
FOUR BASIC RIGHTS

LG2

1.

The right to own private property.

2.

The right to own a business and keep all that
business’s profits.

3.

The right to freedom of competition.

4.

The right to freedom of choice.

2-24


FREE MARKETS

•

Free Market -- Decisions about what and how much to produce are made by the market.

•

Consumers send signals about what they like and how they like it.

•

Price tells companies how much of a product they should produce. If something is

wanted but hard to get, the price will rise until more products are available.

2-27


Supply and Demand

2-28


Supply Curve
Supply -- The quantities of products businesses are willing to sell at different prices.

High

Price(P)

S

Low

2-29

Quantity(S)

High


Demand Curve
•

Demand -- The quantities of products consumers are willing to buy at different prices.

High

Price(P)

D
Low

2-30

Quantity(D)

High


Equilibrium Point
•

Market Price (Equilibrium Point) -- Determined by supply and demand, this is the
negotiated price.
Surplus

High

Market Equilibrium

Price

S
Low
2-31

Shortage

Quantity

D
High