978-0078023163 Chapter 2 Part 1

Chapter 02 – Understanding Economics and How It Affects Business

2-1

chapter

=

Understanding

Economics and How It Af-

fects Business

what’s new in this edition 2.3

brief chapter outline and learning objectives 2.5

lecture outline and lecture notes 2.7

PowerPoint slide notes 2.43

lecture enhancers 2.63

lecture enhancer 2-1: INDIA’S UPCOMING ERA OF GROWTH 2.63

lecture enhancer 2-2: A NEW CROP OF CONSUMERS IN AFRICA 2.63

lecture enhancer 2-3: TRACKING THE UNDERGROUND ECONOMY 2.64

lecture enhancer 2-4: EU NATIONS ADD UNDERGROUND ECONOMIES TO GDP 2.65

lecture enhancer 2-5: THE CIRCULAR FLOW MODEL 2.65

lecture enhancer 2-6: OTHER ECONOMIC INDICATORS 2.66

lecture enhancer 2-7: HOW ACCURATE IS THE GDP? 2.67

lecture enhancer 2-8: HONDA BECOMES AN AMERICAN EXPORTER 2.67

lecture enhancer 2-9: WHAT IS A DEPRESSION? 2.68

2



Chapter 02 – Understanding Economics and How It Affects Business

2-2

critical thinking exercises 2.70

critical thinking exercise 2-1: KNOW YOUR HISTORY OF ECONOMICS 2.70

critical thinking exercise 2-2: APPLYING ECONOMIC PRINCIPLES TO 2.71

EDUCATION

critical thinking exercise 2-3: FINDING THE EQUILIBRIUM POINT 2.72

critical thinking exercise 2-4: STANDARD OF LIVING COMPARISON 2.74

bonus case 2.75

bonus case 2-1: FOUNDATIONS OF THE CAPITALIST SYSTEM 2.75

Chapter 02 – Understanding Economics and How It Affects Business

2-3

what’s new in

this edition

additions to the 11th edition:

• Getting to Know Matt Flannery of Kiva

• Name That Company: Florida Public Service Commission

• New key term: Core Inflation

• Spotlight on Small Business: Bugs Bug Orange Farmers and Drive Prices Up

• Reaching Beyond Our Borders: Economic Expansion in Africa

revisions to the 11th edition:

• Statistical data and examples throughout the chapter were updated to reflect current information.

• Making Ethical Decisions: How Corruption Harms the Economy

deletions from the 10th edition:

• Getting to John Maynard Keynes

• Name That Company: FINCA

• Reaching Beyond Our Borders

• Thinking Green

• Spotlight on Small Business

• Figure 2.7: How the Consumer Price Index is Put Together

Chapter 02 – Understanding Economics and How It Affects Business

2-4

Chapter 02 – Understanding Economics and How It Affects Business

2-5

brief chapter outline

and learning objectives

CHAPTER 2

UNDERSTANDING ECONOMICS AND HOW IT AFFECTS

BUSINESS

 Getting to Know MATT FLANNERY

 learning objective 1

Explain basic economics.

I. HOW ECONOMIC CONDITIONS AFFECT BUSINESSES

A. What Is Economics?

B. The Secret to Creating a Wealthy Economy

C. Adam Smith and the Creation of Wealth

D. How Businesses Benefit the Community

 learning objective 2

Explain what capitalism is and how free markets work.

II. UNDERSTANDING FREE-MARKET CAPITALISM

A. The Foundations of Capitalism

B. How Free Markets Work

C. How Prices Are Determined

D. The Economic Concept of Supply

E. The Economic Concept of Demand

F. The Equilibrium Point, or Market Price

G. Competition within Free Markets

H. Benefits and Limitations of Free Markets

 learning objective 3

Compare socialism and communism.

III. UNDERSTANDING SOCIALISM

A. The Benefits of Socialism

B. The Negative Consequences of Socialism

Chapter 02 – Understanding Economics and How It Affects Business

2-6

IV. UNDERSTANDING COMMUNISM

 learning objective 4

Analyze the trend toward mixed economies.

V. THE TREND TOWARD MIXED ECONOMIES

 learning objective 5

Discuss the economic system of the United States, including the significance of

key economic indicators (especially GDP), productivity, and the business cycle.

VI. UNDERSTANDING THE U.S. ECONOMIC SYSTEM

A. Key Economic Indicators

1. Gross Domestic Product

2. The Unemployment Rate

3. Inflation and Price Indexes

B. Productivity in the United States

C. Productivity in the Service Sector

D. The Business Cycle

 learning objective 6

Contrast fiscal policy and monetary policy, and explain how each affects the

economy.

E. Stabilizing the Economy through Fiscal Policy

F. Fiscal Policy in Action during an Economic Crisis

G. Using Monetary Policy to Keep the Economy Growing

VII. SUMMARY

Chapter 02 – Understanding Economics and How It Affects Business

2-7

Getting to Know MATT FLANNERY

Before he co-founded the microfunding company, Kiva.org, Matt Flannery tried to

start ent other companies, but his heart wasn’t in them. Flannery found his “dream job”

in Kiva.

 learning objective 1

Explain basic economics.

I. HOW ECONOMIC CONDITIONS AFFECT BUSI-

NESSES

A. An economic system either promotes or hinders busi-

ness activity.

B. Much of America’s business success is due to an

economic and social climate that allows businesses

to operate freely.

1. Any change in the U.S. economic system has a

major influence on the business system.

2. Also, GLOBAL ECONOMICS and WORLD POL-

ITICS have a major influence on U.S. business.

C. WHAT IS ECONOMICS?

1. ECONOMICS is the study of how society chooses

to employ resources to produce goods and ser-

This organization has administrative control over the Florida Power and Light Company be-

cause the United States wants to control potential monopolies. What is the name of this or-

ganization?

Students should read the chapter before guessing the company’s name: Florida Public

Service Commission

Chapter 02 – Understanding Economics and How It Affects Business

2-8

PPT 2-1

Chapter Title

McGraw-Hill/Irwin

Understanding

Economics

and

How it Affects

Business

CHAPTER 2

PPT 2-2

Learning Objectives

LEARNING OBJECTIVES

1-2

1. Explain basic economics.

2. Explain what capitalism is and how free markets

work.

3. Compare socialism and communism.

PPT 2-3

Learning Objectives

LEARNING OBJECTIVES

1-3

4. Analyze the trend toward mixed economies.

5. Describe the economic system of the U.S., including

the signiﬁcance of key economic indicators

(especially GDP), productivity and the business

cycle.

6. Contrast ﬁscal policy and monetary policy, and

explain how each affects the economy.

PPT 2-4

Matt Flannery

2-4

MATT FLANNERY

Kiva

• Co-founder of Kiva.org and

helps people in developing

countries get small loans.

• Microlending has been a

source of funding in the

developing world since the

1980s.

• Came up with the idea while

working in rural Africa.

PPT 2-5

Name That Company

NAME that COMPANY

1-5

This organization has administrative control over

the Florida Power and Light Company because

the United States wants to control potential

monopolies.

Name that organization!

(See the complete PPT slide notes on page 2.43 of this manu-

al.)

Chapter 02 – Understanding Economics and How It Affects Business

2-9

2. MACROECONOMICS is the part of economic

study that looks at the operation of a nation’s

economy as a whole.

3. MICROECONOMICS is the part of economic

study that looks at the behavior of people and or-

ganizations in particular markets.

4. Economics is sometimes defined as the allocation

of scarce resources.

5. RESOURCE DEVELOPMENT is the study of how

to increase resources and to create the conditions

that will make better use of those resources.

6. Businesses help economic systems by inventing

products and services that expand available re-

sources (example: mariculture, raising fish in

ocean pens).

D. THE SECRET TO CREATING A WEALTHY ECON-

OMY

1. The English economist Thomas Malthus believed

that population growth would outstrip resources.

a. In response, Thomas Carlyle called econom-

ics “THE DISMAL SCIENCE.”

b. Many still believe, like Malthus, that the solu-

tion to poverty is birth control.

c. WORLD POPULATION is currently growing

more slowly than expected.

d. But population in the DEVELOPING WORLD

will continue to climb quickly.

2. Others believe that a large population can be a

valuable resource, especially if people are edu-

cated.

Chapter 02 – Understanding Economics and How It Affects Business

2-10

PPT 2-6

The Major Branches of Economics

The MAJOR BRANCHES of

ECONOMICS

2-6

LO 2-1

• Economics — The study of how society employs

resources to produce goods and services for

consumption among various groups and individuals.

• 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.

PPT 2-7

Resource Development

RESOURCE DEVELOPMENT

2-7

LO 2-1

• Resource

Development — The

study of how to increase

resources and create

conditions that will make

better use of them.

PPT 2-8

Examples of Ways to Increase

Resources

EXAMPLES of WAYS to

INCREASE RESOURCES

2-8

LO 2-1

• New energy sources

– Hydrogen fuel

• New ways of growing

foods

– Hydroponics

• New ways of creating

goods and services

– Aquaculture

– Nanotechnology

PPT 2-9

Thomas Malthus and the Dismal

Science

THOMAS MALTHUS and

the DISMAL SCIENCE

2-9

LO 2-1

• 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.

critical thinking

exercise 2-1

KNOW YOUR HISTORY OF

ECONOMICS

This Internet exercise is designed to help students gather in-

formation about economics from a historic perspective. (See

the complete exercise on page 2.70 of this manual.)

lecture enhancer 2-1

INDIA’S UPCOMING ERA OF

GROWTH

India is a burgeoning economic powerhouse with one of the

fastest growing working-age populations. However, it must

overcome some bumps in the road. (See the complete lecture

enhancer on page 2.63 of this manual.)

Chapter 02 – Understanding Economics and How It Affects Business

2-11

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.

5. Economists and governments examine what

makes some countries relatively rich and other

countries relatively poor, then develop policies

that lead to INCREASED PROSPERITY for eve-

ryone.

E. ADAM SMITH AND THE CREATION OF WEALTH

1. ADAM SMITH believed wealth could be created

through entrepreneurship.

a. Rather than dividing fixed resources, Smith

envisioned creating more resources so that

everyone could be wealthier.

b. In 1776, Smith wrote THE WEALTH OF NA-

TIONS, in which he outlined steps for creat-

ing prosperity.

2. Smith believed that FREEDOM was vital to the

survival of any economy.

3. Also, he believed that people will work hard if

they have INCENTIVES for doing so.

4. Smith is considered to be the FATHER OF

MODERN ECONOMICS.

F. HOW BUSINESSES BENEFIT THE COMMUNITY

1. The INVISIBLE HAND is a phrase coined by Ad-

Chapter 02 – Understanding Economics and How It Affects Business

2-12

PPT 2-10

Population as a Resource

POPULATION as a RESOURCE

2-10

LO 2-1

• Contrary to Malthus, some

economists believe a large

population can be a

resource.

– An educated population is

highly valuable.

– Business owners provide jobs

and economic growth for their

employees and communities

as well as for themselves.

PPT 2-11

Adam Smith the Father of Econom-

ics

ADAM SMITH the

FATHER of ECONOMICS

2-11

LO 2-1

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.

critical thinking

exercise 2-2

APPLYING ECONOMIC PRINCIPLES

TO EDUCATION

Principles such as competition and productivity apply to

nonprofit organizations, such as schools, as well as businesses.

(See the complete exercise on page 2.71 of this manual.)

Chapter 02 – Understanding Economics and How It Affects Business

2-13

am Smith to describe the process that turns self–

directed gain into social and economic benefits for

all.

2. Basically, this meant that a person working hard to

make money for his or her own PERSONAL IN-

TEREST would (like an invisible hand) also BEN-

EFIT OTHERS.

a. For example, a farmer trying to make money

would grow as many crops as possible.

b. This would provide jobs and needed food for

others.

c. If everyone worked hard in his or her own self

interest, Smith said, society as a whole would

prosper.

3. Smith assumed that as people become wealthier,

they would reach out to help the less fortunate,

but that hasn’t always happened.

a. Many U.S. businesspeople are becoming con-

cerned about social issues and their obligation

to return to society some of what they’ve

earned.

b. It is important for businesses to be ethical as

well as generous.

 learning objective 2

Explain what capitalism is and how free markets work.

II. UNDERSTANDING FREE-MARKET CAPITALISM

Chapter 02 – Understanding Economics and How It Affects Business

2-14

PPT 2-12

The Invisible Hand Theory

The INVISIBLE HAND THEORY

2-12

LO 2-1

• As people improve their own situation in life, they

help the economy prosper through the production

of goods, services and ideas.

• Invisible Hand — When self-directed gain leads to

social and economic beneﬁts for the whole

community.

PPT 2-13

Understanding the Invisible Hand

Theory

UNDERSTANDING the

INVISIBLE HAND THEORY

2-13

LO 2-1

• 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.

lecture enhancer 2-2

A NEW CROP OF CONSUMERS

IN AFRICA

Africa has a growing middle class that rivals both China and

India. Despite the persisting wealth disparities, more Africans

have disposable incomes in which they can buy goods from

others. (See the complete lecture enhancer on page 2.63 of this

manual.)

MAKING

ethical

decisions

PPT 2-14

How Corruption

Harms the Econ-

omy

HOW CORRUPTION HARMS

the ECONOMY

2-14

• In many countries, a businessperson must bribe

the government to gain permission to own land,

build, and conduct business operations.

Imagine you are a restaurant owner in need of a liquor

license, but have been unable to get one. You know

people in government. Would you be tempted to make

large contributions to their re-election campaign to

receive that license?

test

prep

PPT 2-15

Test Prep

TEST PREP

2-15

• What is the difference between macroeconomics

and microeconomics?

• What is better for an economy than teaching a

man to ﬁsh?

• What does Adam Smith’s term invisible hand

mean? How does the invisible hand create wealth

for a country?

Chapter 02 – Understanding Economics and How It Affects Business

2-15

A. Following the ideas of Adam Smith, businesspeople

created more wealth than ever before.

1. But GREAT DISPARITIES in wealth remained or

even increased.

2. Although it is not easy, opportunities to start

one’s own business have always been there, es-

pecially in a free market.

3. CAPITALISM is an economic system in which all

or most of the factors of production and distribu-

tion are privately owned and operated for profit.

a. In capitalist countries, businesspeople decide

how to use their resources and how much to

charge.

b. No country is purely capitalist, but the foun-

dation of the U.S. is capitalism.

c. Capitalism is also the foundation for the eco-

nomics of England, Canada, Australia, and

most developed nations.

d. Some countries are practicing STATE CAPI-

TALISM where the state runs some busi-

nesses instead of private owners (e.g., Chi-

na).

B. THE FOUNDATIONS OF CAPITALISM

1. People under free-market capitalism have FOUR

BASIC RIGHTS:

a. The right to PRIVATE PROPERTY

b. The right to OWN A BUSINESS and to keep

all of that business’s profits after taxes