978-0078023163 Chapter 2 Part 2

Chapter 02 – Understanding Economics and How It Affects Business

2-16

bonus case 2-1

FOUNDATIONS OF THE CAPITALIST

SYSTEM

What are the moral, ethical, and spiritual foundations of capi-

talism? (See the complete case, discussion questions, and sug-

gested answers beginning on page 2.75 of this manual.)

PPT 2-16

Capitalism

CAPITALISM

2-16

• Countries with capitalist

foundations:

– United States

– England

– Australia

– Canada

LO 2-2

• Capitalism — All or most of the land, factories and

stores are owned by individuals, not the government,

and operated for proﬁt.

lecture enhancer 2-3

TRACKING THE UNDERGROUND

ECONOMY

Not all incomes are reported to the IRS. Is the U.S. govern-

ment losing out? (See the complete lecture enhancer on page

2.64 of this manual.)

lecture enhancer 2-4

EU NATIONS ADD UNDERGROUND

ECONOMIES TO GDP

EU countries like U.K., Italy, and Ireland are adding illicit

activities like drug sales, prostitution, and even smuggling to

their lists of official goods and services to boost their GDP.

(See the complete lecture enhancer on page 2.65 of this manu-

al.)

PPT 2-17

State Capitalism

STATE CAPITALISM

2-17

LO 2-2

• State Capitalism — When the state, rather than

private owners, run some businesses.

• Well-known countries practicing state capitalism:

– China

– Russia

• These countries have experienced some success

using capitalistic principles, but the future is still

uncertain.

Chapter 02 – Understanding Economics and How It Affects Business

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c. The right to FREEDOM OF COMPETITION

d. The right to FREEDOM OF CHOICE

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:

a. Freedom of SPEECH AND EXPRESSION

b. Freedom to WORSHIP IN YOUR OWN WAY

c. Freedom from WANT

d. Freedom from FEAR

C. HOW FREE MARKETS WORK

1. In a free-market system, decisions about what to

produce and in what quantities are made by THE

MARKET.

2. CONSUMERS send signals to PRODUCERS

about what to make, how many, and so on

through the mechanism of PRICE. (Text example:

T-shirts supporting favorite baseball teams.)

3. In a free market the PRICE tells producers how

much to produce, reducing the chances of a long-

term shortage of goods.

D. HOW PRICES ARE DETERMINED

1. Prices in a free market are not determined by

sellers; rather, buyers and sellers negotiating in

the marketplace determine them.

2. Price is determined through the economic con-

cepts of supply and demand.

E. THE ECONOMIC CONCEPT OF SUPPLY

Chapter 02 – Understanding Economics and How It Affects Business

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PPT 2-18

Capitalism’s Four Basic Rights

CAPITALISM’S

FOUR BASIC RIGHTS

2-18

LO 2-2

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.

PPT 2-19

Roosevelt’s Four Additional Rights

ROOSEVELT’S FOUR

ADDITIONAL RIGHTS

2-19

LO 2-2

1. Freedom of speech and

expression.

2. Freedom to worship in your

own way.

3. Freedom from want.

4. Freedom from fear.

PPT 2-20

Free Markets

FREE MARKETS

2-20

LO 2-2

• 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.

lecture enhancer 2-5

THE CIRCULAR FLOW MODEL

The Circular Flow Model is used to explain how businesses

and individuals interact in a free-market economy. (See the

complete lecture enhancer on page 2.65 of this manual.)

PPT 2-21

Circular Flow Model

CIRCULAR FLOW MODEL

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LO 2-2

PPT 2-22

Pricing

PRICING

2-22

LO 2-2

• A seller may want to sell

shirts for $50, but only a

few people may buy them

at that price.

• If the seller lowers the price

to $30, more people buy

the shirts.

• The seller establishes a

price of $30 based on what

consumers are willing to

pay.

Chapter 02 – Understanding Economics and How It Affects Business

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1. SUPPLY refers to the quantity of products that

manufacturers or owners are willing to sell at dif-

ferent prices at a specific time.

2. The amount supplied will INCREASE as the price

INCREASES (DIRECT relationship).

3. The quantity producers are willing to SUPPLY at

certain prices is illustrated on a SUPPLY CURVE.

F. THE ECONOMIC CONCEPT OF DEMAND

1. DEMAND refers to the quantity of products that

people are willing to buy at different prices at a

specific time.

2. The quantity demanded will DECREASE as the

price INCREASES (INVERSE relationship).

3. The quantities consumers are willing to buy at

certain prices are illustrated on a DEMAND

CURVE.

G. THE EQUILIBRIUM PRICE, OR MARKET PRICE

1. The key factor in determining the quantity sup-

plied and the quantity demanded is PRICE.

a. At the EQUILIBRIUM POINT, the supply and

demand curves cross, and the quantity de-

manded equals the quantity supplied.

b. MARKET PRICE is the price determined by

supply and demand.

2. In free-market economies it is the INTERACTION

between SUPPLY and DEMAND that determines

the market price in the long run.

a. If SURPLUSES (too many products) develop,

a signal is sent to sellers to LOWER the price.

Chapter 02 – Understanding Economics and How It Affects Business

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PPT 2-23

Supply Curves

TEXT FIGURE 2.1

The Supply Curve at Various Prices

SUPPLY CURVES

0

5

10

15

20

25

30

35

40

45

50

Price ($)

510 15 20 25 30

Quantity of T-Shirts

35 40 45 50

Supply curve

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LO 2-2

• Supply — The quantities of products businesses are

willing to sell at different prices.

PPT 2-24

Demand Curves

TEXT FIGURE 2.2

Demand Curves

DEMAND CURVES

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LO 2-2

• Demand — The quantities of products consumers are

willing to buy at different prices.

PPT 2-25

Equilibrium

TEXT FIGURE 2.3

The Equilibrium Point

EQUILIBRIUM

2-25

LO 2-2

• Market Price (Equilibrium Point) — Determined

by supply and demand, this is the negotiated price.

critical thinking

exercise 2-3

FINDING THE EQUILIBRIUM POINT

How does the equilibrium price of a product change when

forces in the economy change? (See the complete exercise on

page 2.72 of this manual.)

Chapter 02 – Understanding Economics and How It Affects Business

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b. If SHORTAGES (not enough products) devel-

op, a signal is sent to sellers to INCREASE the

price.

c. Eventually, supply will again equal demand.

3. In countries without a free-market system, there is

no such mechanism, so there are often SHORT-

AGES OR SURPLUSES.

4. When government interferes in free markets, sur-

pluses and shortages may develop.

H. COMPETITION WITHIN FREE MARKETS

1. Competition exists in different degrees, ranging

from perfect to nonexistent.

2. PERFECT COMPETITION is the degree of com-

petition in which there are many sellers in a market

and none is large enough to dictate the price of a

product.

a. Sellers produce products that appear to be

IDENTICAL.

b. There are no true examples of perfect competi-

tion, but agricultural products are often used as

an example.

3. MONOPOLISTIC COMPETITION is the degree of

competition in which a large number of sellers

produce very similar products that buyers never-

theless perceive as different.

a. PRODUCT DIFFERENTIATION, making buy-

ers think similar products are different, is a key

to success.

b. The fast-food industry is an example.

Chapter 02 – Understanding Economics and How It Affects Business

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SPOTLIGHT ON

small business

PPT 2-26

Bugs Bug Orange Farmers and

Drive Prices Up

BUGS BUG ORANGE FARMERS

and DRIVE PRICES UP

2-26

• The 2013 Florida orange crop

experienced a major disruption

because of bugs.

• As a result, orange prices rose

as much as 16%!

• With circumstances out of their

control, farmers have to hope

that nothing else harms their

crops.

PPT 2-27

Four Degrees of Competition

FOUR DEGREES

of COMPETITION

2-27

LO 2-2

1. Perfect

Competition

2. Monopolistic

Competition

3. Oligopoly

4. Monopoly 

Chapter 02 – Understanding Economics and How It Affects Business

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4. An OLIGOPOLY is a degree of competition in

which just a few sellers dominate a market.

a. The INITIAL INVESTMENT required to enter

the market is usually high.

b. Prices among competing firms tend to be close

to the same.

c. Examples include breakfast cereal and soft

drinks.

5. A MONOPOLY is a degree of competition in which

only one seller controls the total supply of a prod-

uct or service, and sets the price.

a. U.S. laws prohibit the creation of monopolies,

but do permit APPROVED MONOPOLIES in

markets for public utilities.

b. New laws have ended the monopoly status of

utilities in some areas, creating intense compe-

tition among utility companies.

c. DEREGULATION is meant to increase compe-

tition and lower prices for consumers.

I. BENEFITS AND LIMITATIONS OF FREE MARKETS

1. The free market allows open competition among

companies.

2. Free-market capitalism provides opportunities for

poor people to work their way out of poverty.

3. Capitalism also creates INEQUITIES between

those who have gained wealth and those who are

not able to.

4. Not all businesspeople agree on how to deal with

this INEQUITY.

Chapter 02 – Understanding Economics and How It Affects Business

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critical thinking

exercise 2-4

STANDARD OF LIVING

COMPARISON

This exercise asks students to research key economic indi-

cators for a capitalist country, a socialist country, and a com-

munist country. (See the complete exercise on page 2.74 of

this manual.)

PPT 2-28

Free Market Benefits and

Limitations

FREE MARKET BENEFITS

and LIMITATIONS

2-28

LO 2-2

Beneﬁts:

• It allows for open

competition among

companies.

• Provides opportunities for

poor people to work their

way out of poverty.

Limitations:

• People may start to let

greed drive them.

PPT 2-29

The Government Needs . . .

Source: Worldwide Tax, www.worldwide-tax.com, accessed October 2014.

The GOVERNMENT NEEDS…

Individual Tax Rates from Around the World

2-29

LO 2-2

PPT 2-30

Atypical Taxes

Source: Forbes.com, accessed October 2014.

ATYPICAL TAXES

Strange Taxes in Some U.S. States

2-30

State Tax

California

Tax exclusion if you were

persecuted by the Ottoman Empire

and won a settlement.

Maryland

An aquaculture ﬂoat credit is

available for oyster ﬁsheries, but

not other shellﬁsh.

Minnesota

(and others) Marijuana tax of $3.50 per gram.

New York

Sales-tax exemption for musical

comedies and operas if the tickets

are over 10¢, can’t be used by

haunted houses with music.

LO 2-2

Chapter 02 – Understanding Economics and How It Affects Business

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5. Greed has led some businesspeople to engage in

UNETHICAL PRACTICES and deceive the public.

6. Some government REGULATIONS ARE NECES-

SARY to protect stockholders and vulnerable citi-

zens.

 learning objective 3

Compare socialism and communism.

III. UNDERSTANDING SOCIALISM

A. SOCIALISM is an economic system based on the

premise that some, if not most, basic businesses

should be owned by the government so that profits can

be distributed among the people.

1. Entrepreneurs can own small businesses, but their

profits are STEEPLY TAXED to pay for social pro-

grams.

2. Advocates of socialism acknowledge the major

benefits of capitalism, but believe that WEALTH

SHOULD BE MORE EVENLY DISTRIBUTED.

B. The MAJOR BENEFIT of socialism is SOCIAL

EQUALITY.

1. Income is taken from the wealthier people and re-

distributed to the poorer members of the popula-

tion.

2. Workers in socialist countries are given free edu-

cation, free health care, free child care, and more

employee benefits.

C. THE NEGATIVE CONSEQUENCES OF SOCIALISM

1. Socialism may create EQUALITY, but it TAKES

AWAY SOME WORK INCENTIVES.

Chapter 02 – Understanding Economics and How It Affects Business

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test

prep

PPT 2-31

Test Prep

TEST PREP

2-31

• What are the four basic rights that people have

under free-market capitalism?

• How do businesspeople know what to produce

and in what quantity?

• How are prices determined?

• What are the four degrees of competition and

what are some examples of each?

PPT 2-32

Socialism

SOCIALISM

2-32

LO 2-3

• Socialism — An economic system based on the

premise that some basic businesses, like utilities,

should be owned by the government in order to more

evenly distribute proﬁts among the people.

• Entrepreneurs run smaller businesses.

• Citizens are highly taxed.

• Government is more involved in protecting the

environment and the poor.

PPT 2-33

Benefits of Socialism

BENEFITS of SOCIALISM

2-33

LO 2-3

• Social equality

• Free education

• Free healthcare

• Free childcare

• Longer vacations

• Shorter work weeks

• Generous sick leave

Chapter 02 – Understanding Economics and How It Affects Business

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2. Tax rates in some nations once reached 83%.

3. Because wealthy professionals have very high tax

rates, many of them leave socialist countries for

countries with lower taxes.

4. The loss of the best and brightest people to other

countries is called BRAIN DRAIN.

5. Socialist systems can result in FEWER INVEN-

TIONS AND LESS INNOVATION.

IV. UNDERSTANDING COMMUNISM

A. COMMUNISM is an economic and political system in

which the government makes almost all economic de-

cisions and owns almost all the major factors of pro-

duction.

B. PROBLEMS WITH COMMUNISM

1. The government has no way of knowing what to

produce because prices don’t reflect SUPPLY and

DEMAND.

2. SHORTAGES of many items may develop.

3. Communism doesn’t inspire businesspeople to

work hard, and is slowly disappearing as an alter-

native economic form.

C. Most communist countries today are SUFFERING

SEVERE ECONOMIC DEPRESSION, including North

Korea and Cuba.

1. Some countries, such as Venezuela, are moving

toward communism.

2. The former Soviet Union is moving toward free

markets.

Chapter 02 – Understanding Economics and How It Affects Business

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PPT 2-34

Negatives of Socialism

NEGATIVES of SOCIALISM

2-34

LO 2-3

• Few incentives for businesspeople to take risks.

• Brain Drain: Some of a country

’

s best and brightest

workers (i.e. doctors, lawyers and business owners)

move to capitalistic countries.

• Fewer inventions and innovations because the

reward is not as great as in capitalistic countries.

PPT 2-35

Communism

COMMUNISM

2-35

LO 2-3

• Communism — An economic and political system in

which the government makes almost all economic

decisions and owns almost all the major factors of

production.

• Prices don’t reﬂect demand which may lead to

shortages of items, including food and clothing.

• Most communist countries today suffer severe

economic depression and citizens fear the

government.

Chapter 02 – Understanding Economics and How It Affects Business

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3. Russia now has a flat tax of 13%, a much lower

tax rate than the U.S. has.

4. The trend toward free markets is growing.

 learning objective 4

Analyze the trend toward mixed economies.

V. THE TREND TOWARD MIXED ECONOMIES

A. There are two dominant economic systems:

1. FREE-MARKET ECONOMIES

a. FREE-MARKET ECONOMIES are economic

systems in which the market largely deter-

mines what goods and services get produced,

who gets them, and how the economy grows.

b. This system is commonly known as CAPITAL-

ISM.

2. COMMAND ECONOMIES

a. COMMAND ECONOMIES are economic sys-

tems in which the government largely decides

what goods and services will be produced, who

will get them, and how the economy will grow.

b. These economies are known as SOCIALISM

and COMMUNISM.

B. No one economic system is perfect by itself.

1. Free-market mechanisms haven’t been responsive

enough to a nation’s social and economic needs

and haven’t adequately protected the environ-

ment.

2. Socialism and communism haven’t always created

enough jobs or wealth to keep economies growing

Chapter 02 – Understanding Economics and How It Affects Business

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PPT 2-36

Two Major Economic Systems

TWO MAJOR

ECONOMIC SYSTEMS

2-36

LO 2-4

• Free-Market Economies — The market largely

determines what goods and services are

produced, who gets them, and how the economy

grows.

• Command Economies — The government

largely determines what goods and services are

produced, who gets them, and how the economy

will grow.