Chapter 02 – Understanding Economics and How It Affects Business
2-1
Understanding
Economics and How
It Affects Business
chapter
=
what’s new in this edition 2.2
brief chapter outline and learning goals 2.3
lecture outline and lecture notes 2.5
PowerPoint slide notes 2.44
lecture links 2.65
lecture link 2-1: INDIA’S UPCOMING ERA OF GROWTH 2.65
lecture link 2-2: THE GRADUAL RETURN OF AMERICAN OPTIMISM 2.66
lecture link 2-3: A NEW CROP OF CONSUMERS IN AFRICA 2.66
lecture link 2-4: THE CIRCULAR FLOW MODEL 2.67
lecture link 2-5: THE ECONOMIC IMPACT OF THE OIL SPILL 2.67
lecture link 2-6: OTHER ECONOMIC INDICATORS 2.68
lecture link 2-7: NEW ECONOMIC MEASURES 2.69
lecture link 2-8: CHINA’S POTENTIAL REAL ESTATE BUST 2.69
lecture link 2-9: WHAT IS A DEPRESSION? 2.70
lecture link 2-10: CONTROLLING YOUR PERSONAL MONEY SUPPLY 2.71
2
Chapter 02 – Understanding Economics and How It Affects Business
2-2
critical thinking exercises 2.73
bonus case 2.79
bonus case 2-1: FOUNDATIONS OF THE CAPITALIST SYSTEM 2.79
what’s new in
this edition
additions to the 10th edition:
revisions to the 10th edition:
deletions from the 9th edition:
Chapter 02 – Understanding Economics and How It Affects Business
2-3
brief chapter outline
and learning goals
c h a p t e r 2
Understanding Economics and How
It Affects Business
Getting To Know JOHN MAYNARD KEYNES, ECONOMIST
learning goal 1
Explain basic economics.
I. HOW ECONOMIC CONDITIONS AFFECT BUSINESSES
A. What Is Economics?
Chapter 02 – Understanding Economics and How It Affects Business
2-4
III. UNDERSTANDING SOCIALISM
A. The Benefits of Socialism
B. The Negative Consequences of Socialism
IV. UNDERSTANDING COMMUNISM
learning goal 4
V. THE TREND TOWARD MIXED ECONOMIES
learning goal 5
VI. UNDERSTANDING THE U.S. ECONOMIC SYSTEM
A. Key Economic Indicators
B. Productivity in the United States
C. Productivity in the Service Sector
D. The Business Cycle
learning goal 6
E. Stabilizing the Economy through Fiscal Policy
F. Fiscal Policy in Action During the Recent Economic Crisis
G. Using Monetary Policy to Keep the Economy Growing
VII. SUMMARY
Chapter 02 – Understanding Economics and How It Affects Business
2-5
Getting to Know JOHN MAYNARD KEYNES, ECONOMIST
Keynes was one of the economists who had a great influence on U.S. economic policy. He
believed if the economy was in a recession, the government should increase spending and cut
taxes to stimulate the economy. Keynesian theory has been in and out of favor since the 1930s
and what Presidents Bush and Obama had in mind when they attempted to stimulate the econ-
omy.
learning goal 1
Explain basic economics.
I. HOW ECONOMIC CONDITIONS AFFECT BUSI-
NESSES
This organization lends small amounts of money to people in poor countries. For example, it
loaned a woman in Uganda enough to buy a refrigerator. She was able to sell fresh food from
the refrigerator and make enough money for her family to succeed. Name this organization.
Students should read the chapter before guessing the company’s name: Foundation for
International Community Assistance (FINCA)
Chapter 02 – Understanding Economics and How It Affects Business
2-6
(See complete PowerPoint slide notes on page 2.44.)
(See complete PowerPoint slide notes on page 2.44.)
(See complete PowerPoint slide notes on page 2.45.)
(See complete PowerPoint slide notes on page 2.45.)
Chapter 02 – Understanding Economics and How It Affects Business
vices and distribute them for consumption among
various competing groups and individuals.
2. MACROECONOMICS is the part of economic
study that looks at the operation of a nation’s
that population growth would outstrip resources.
2. Others believe that a large population can be a
valuable resource, especially if people are edu-
cated.
3. The SECRET TO ECONOMIC DEVELOPMENT
can be summed up in the saying, “give a man a
fish and you feed him for a day, but teach a man
to fish and you feed him for a lifetime.”
4. Business owners provide JOBS AND ECONOM-
IC GROWTH for their employees as well as for
themselves.
a. Rather than dividing fixed resources, Smith
they have INCENTIVES for doing so.
Chapter 02 – Understanding Economics and How It Affects Business
2-10
(See complete PowerPoint slide notes on page 2.47.)
thinking
green
(Text page 32
PPT 2-11
Bringing in the
Green with Green
Products
(See complete PowerPoint slide notes on page 2.47.)
The U.S. is banking on the “give a man a fish” philosophy
by extending the tax cuts from the 2009 stimulus package.
(See the complete lecture link on page 2.66 in this manual.)
(See complete PowerPoint slide notes on page 2.47.)
Principles such as competition and productivity apply to
nonprofit organizations, such as schools, as well as businesses.
(See complete exercise on page 2.73 of this manual.)
Chapter 02 – Understanding Economics and How It Affects Business
4. Smith is considered to be the FATHER OF MOD-
ERN ECONOMICS.
F. HOW BUSINESSES BENEFIT THE COMMUNITY
2-12
(See complete PowerPoint slide notes on page 2.48.)
(See complete PowerPoint slide notes on page 2.48.)
Africa has a growing middle class that rivals both China
and India. Despite the persisting wealth disparities, more Afri-
cans have disposable incomes in which they can buy goods
from others. (See the complete lecture link on page 2.66 in this
manual.)
MAKING
ethical
decisions
(Text page 34)
PPT 2-15
Corruption’s
Effect on the
Economy
(See complete PowerPoint slide notes on page 2.48.)
(See complete PowerPoint slide notes on page 2.49.)
Chapter 02 – Understanding Economics and How It Affects Business
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learning goal 2
Explain what capitalism is and how free markets work.
II. UNDERSTANDING FREE-MARKET CAPITAL-
ISM
A. Following the ideas of Adam Smith, businesspeople
created more wealth than every before.
Chapter 02 – Understanding Economics and How It Affects Business
2-14
What are the moral, ethical, and spiritual foundations of
capitalism? (See the complete case, discussion questions, and
suggested answers beginning on page 2.79 of this manual.)
(See complete PowerPoint slide notes on page 2.49.)
(See complete PowerPoint slide notes on page 2.49.)
SPOTLIGHT ON
small
business
(Text page 38
PPT 2-19
A Small Loan
Can Make a Big
Difference
(See complete PowerPoint slide notes on page 2.50)
Chapter 02 – Understanding Economics and How It Affects Business
a. The right to PRIVATE PROPERTY
2. One benefit of such rights is that people are willing
to take more RISKS than they would otherwise.
3. President Franklin Roosevelt believed FOUR AD-
DITIONAL FREEDOMS were essential:
Chapter 02 – Understanding Economics and How It Affects Business
(See complete PowerPoint slide notes on page 2.50.)
(See complete PowerPoint slide notes on page 2.50.)
(See complete PowerPoint slide notes on page 2.51.)
The Circular Flow Model is used to explain how businesses
and individuals interact in a free market economy. (See the
complete lecture link on page 2.67 of this manual.)
PPT 2-23
Circular Flow Model
(See complete PowerPoint slide notes on page 2.51.)
(See complete PowerPoint slide notes on page 2.52.)
2-17
2. Price is determined through the economic con-
cepts of supply and demand.
E. THE ECONOMIC CONCEPT OF SUPPLY
specific time.
Chapter 02 – Understanding Economics and How It Affects Business
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This text figure shows a simple supply curve for T-shirts.
The curve rises from left to right. The higher the price, the
more will be supplied.
(See complete PowerPoint slide notes on page 2.52.)
This is a simple demand curve showing the quantity of T-
shirts demanded at different prices. The demand curve falls
from left to right.
PPT 2-26
Demand Curves
(See complete PowerPoint slide notes on page 2.52.)
This text figure shows the equilibrium point, the point at
which the supply and demand curves intersect—where quanti-
ty demanded equals quantity supplied.
PPT 2-27
Equilibrium
(See complete PowerPoint slide notes on page 2.53.)
How does the equilibrium price of a product change when
forces in the economy change? (See complete exercise on
page 2.74 of this manual.)
Chapter 02 – Understanding Economics and How It Affects Business
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the market price in the long-run.
2. PERFECT COMPETITION is the degree of com-
Chapter 02 – Understanding Economics and How It Affects Business
lecture link 2-5
THE ECONOMIC IMPACT OF THE
2010 OIL SPILL
The 2010 oil leak from BP’s Deepwater Horizon didn’t just
affect gas prices, property values and the fishing industry were
also hit hard. (See complete lecture link on page 2.67 of this
manual.)
PPT 2-28
Four Degrees of Competition
(See complete PowerPoint slide notes on page 2.53.)