Chapter 02 – Understanding How Economics Affects Business
2-46
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.
Malthus viewed a large population as a negative. However,
many economists today see a highly educated population as a
valuable, scarce resource. Countries like Japan and Germany
are examples of nations that have become economically suc-
cessful due to large well-educated populations producing so-
phisticated high-value products.
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.
Adam Smith’s ideas were laid out in his seminal book, An In-
quiry into the Nature and Causes of the Wealth of Nations.
Smith believed strongly in more “natural liberty” and less gov-
ernment intervention into the economy (an idea that was an
anathema to Malthus). Smith argued that allowing people the
freedom to own land and the right to keep profit would not cre-
ate chaos as Malthus had argued, but rather would create great-
er resources for all.
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.
The invisible hand was at the heart of Adam Smith’s theory
describing the process of turning self-directed gain into social
and economic benefits for all.
Chapter 02 – Understanding How Economics Affects Business
2-47
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.
PPT 2-14
How Corruption Harms the Econo-
my
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?
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?
1. Macroeconomics looks at the operations of a nation’s
economy as a whole. Microeconomics looks at the behav-
ior of people and organizations in markets for particular
products or services.
2. To create wealth in an economy, it is better to teach a man
to start a fish farm, whereby he will be able to feed a vil-
lage for a lifetime.
3. The invisible hand is the term used by Adam Smith to de-
scribe the processes that turn self–directed gains into so-
cial and economic benefits for all. To become wealthy,
people working in their own self-interest producing goods
and services expand by hiring others to provide employ-
ment and increases the well-being of others. They also
tend to reach out to help the less fortunate over time.
Chapter 02 – Understanding How Economics Affects Business
2-48
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.
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.
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.
The four basic rights under a capitalist system are straightfor-
ward, but which of the four basic rights has been weakened in
the United States over the past 30 years? When asked this ques-
tion, rarely do students touch on the concept of eminent domain
and the weakening of the right to own private property due to
the Kelo vs. New London Supreme Court case of 2005. If time
permits, students can explore this case and the potential impact
the case may have on American capitalism.
.
Chapter 02 – Understanding How Economics Affects Business
2-49
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.
PPT 2-21
Circular Flow Model
CIRCULAR FLOW MODEL
2-21
LO 2-2
In a free-market economy, business activity involves two major
players: individuals (households) who own the resources that
are the inputs into the productive process, and businesses that
use these inputs (factors of production) to create goods and ser-
vices.
1. In the Resource Market (top part of the model)
a. Businesses demand resources.
b. Households own the resource.
c. Income from providing these resources flows back
to the households.
d. The price of these resources is set by laws of supply
and demand.
2. In the Product Market (lower part of the model)
a. Businesses use these resources to create goods and
services.
b. Households (individuals) demand these goods and
services.
c. Individuals use their income to purchase goods and
services.
Chapter 02 – Understanding How Economics Affects Business
2-50
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 $30 based on what
consumers are willing to
pay.
Prices are determined by consumers negotiating with the
sellers.
PPT 2-23
Supply Curves
SUPPLY CURVES
0
5
10
15
20
25
30
35
40
45
50
Price ($)
510 15 20 25 30
Quantity of T–Shirts
35 40 45 50
Supply curve
2-23
LO 2-2
• Supply — The quantities of products businesses are
willing to sell at different prices.
PPT 2-24
Demand Curves
DEMAND CURVES
2-24
LO 2-2
• Demand — The quantities of products consumers are
willing to buy at different prices.
Chapter 02 – Understanding How Economics Affects Business
2-51
PPT 2-25
Equilibrium
EQUILIBRIUM
2-25
LO 2-2
• Market Price (Equilibrium Point) — Determined
by supply and demand, this is the negotiated price.
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 How Economics Affects Business
2-52
PPT 2-28
Free-Market Benefits and Limita-
tions
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
1. Students may be surprised at the difference between the
rates in the United States and many other countries. For
example the U.S. rate seems low compared to Bel-
gium’s rate which is 50%.
2. To help explain the difference between the U.S. rate
and Belgium’s higher rate, you can discuss some of the
differences between capitalism and socialism. (Social-
ism believes that the government should provide in-
creased services for people by redistributing income
from the richer people to the poor. Explain to the stu-
dents that in socialist countries citizens are given free
education, free health care, and more employee bene-
fits (like longer vacations and family leave). Therefore
they must pay higher taxes to support these benefits.
3. Point out the major disadvantages of socialism:
• Reduced incentives to work harder result in less
innovation.
• Marginal tax rates are higher and can sometimes
approach 85% after a person reaches a certain
amount of income (in other words, eight-five
cents of each dollar earned is paid in taxes.
• Brain drain.
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
A little bit about the lighter side of taxes.
Chapter 02 – Understanding How Economics Affects Business
2-53
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?
1. The four basic rights are: the right to own private prop-
erty, the right to own a business and keep all that busi-
ness’s profits, the right to freedom of choice, and the
right to freedom of competition.
2. Decisions about what to produce and in what quantity
are decided by the market, consumers sending signals
about what to make, how many, in what color and so
on.
3. Prices are determined by the economic concepts of
supply and demand.
4. The four degrees of competition are:
• Perfect competition—such as a farmer’s market
where good are indistinguishable. Today, how-
ever, there are no good examples of perfect
competition.
• Monopolistic competition—such as fast-food
restaurants where products are similar but con-
sumers perceive the products to be different.
Product differentiation is a key here.
• Oligopoly—a situation where just a few major
producers dominate a market such as tobacco,
gasoline, automobiles, and so on. A few sellers
dominate because the initial investment to enter
such a market is significant.
• Monopoly—a situation where only one producer
exists in a market. U.S. law prohibits the crea-
tion of monopolies.
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.
Chapter 02 – Understanding How Economics Affects Business
2-54
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
Such education benefits helped Finland become the world lead-
er in student achievement.
PPT 2-34
The 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 How Economics Affects Business
2-55
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.
PPT 2-37
Mixed Economies
MIXED ECONOMIES
2-37
LO 2-4
• Mixed Economies — Some allocation of resources
is made by the market and some by the government.
• Neither free-market nor command economies
have created sound economic conditions so
countries use a mix of the two economic systems.
PPT 2-38
Trending toward Mixed Economies
• Communist governments are disappearing.
TRENDING TOWARD MIXED
ECONOMIES
2-38
LO 2-4
• Socialist governments are
cutting back on social
programs, lowering taxes and
moving toward capitalism.
• Capitalist countries are
increasing social programs
and moving more toward
socialism.
Chapter 02 – Understanding How Economics Affects Business
2-56
PPT 2-39
Economic Expansion in Africa
ECONOMIC EXPANSION
in AFRICA
2-39
• For much of the 20th century, focus has been placed
on Africa’s poverty levels.
• Over the last decade, 6 of the 10 fastest growing
countries have been African.
• Africa has outpaced the growth of East Asia, including
Japan.
• Experts hope that the younger generation of Africans
will take advantage of new opportunities.
PPT 2-40
Test Prep
TEST PREP
2-40
• What led to the emergence of socialism?
• What are the benefits and drawbacks of
socialism?
• What countries still practice communism?
• What are the characteristics of a mixed economy?
1. Socialists believe that wealth should be more evenly dis-
tributed than in free-market capitalism. Government
should be empowered to carry out the distribution of
wealth.
2. Free education through college, free health care, and free
child-care are some of the benefits of socialism. The key
drawback of socialism is high taxes often causing a
“brain drain” in the economy. Socialism also tends to in-
spire less innovation.
3. Most nations have drifted away from communism but
North Korea and Cuba still espouse communism. Russia,
Vietnam, and China still have some communist practices
in place.
4. Mixed economies have systems where the allocation of
resources is made by the market and some by the gov-
ernment. Like most nations of the world, the United
States is a mixed economy.
PPT 2-41
Gross Domestic Product
GROSS DOMESTIC PRODUCT
2-41
LO 2-5
• Gross Domestic Product (GDP) — Total value of
final goods and services produced in a country in a
given year. As long as a company is within a
country
’
s border, their numbers go into the country
’
s
GDP (even if they are foreign-owned).
• When the GDP changes, businesses feel the
effect.
• Gross Output (GO) — A measure of total sales
volume at all stages of production.
Chapter 02 – Understanding How Economics Affects Business
2-57
PPT 2-42
The United States GDP
Source:WorldBa nk,www.worldbank.org,accessed October2014.
The UNITED STATES GDP
2-42
LO 2-5
1. In 2014, the U.S. gross domestic product was nearly
$17 trillion.
2. This compares to the GDP of $ 5.8 trillion in 1990 and
$ 2.8 trillion in 1980. As can be seen on the slide, the
U.S. GDP has grown over 400% since 1980.
PPT 2-43
Playing Catch Up
Source:WorldBa nk,www.worldbank.org,accessedOctober2014
.
PLAYING CATCH-UP
Countries Challenging the U.S. in GDP
2-43
LO 2-5
1. America is often referred to as “the engine that runs the
world’s economy.” It is easy to see the truth in this
statement with U.S. gross domestic product far exceed-
ing the four other countries listed on the slide.
2. While China has grown dramatically since 1975, their
economy is still dwarfed by that of the United States.
3. Much is made of the economic growth of China, India,
Russia and Brazil, but students must understand the
sum of these four countries’ gross domestic products is
approximately half that of the United States.
PPT 2-44
Unemployment
• Unemployment Rate — The percentage of
civilians at least 16-years-old who are unemployed
and tried to find a job within the prior four weeks.
UNEMPLOYMENT
2-44
LO 2-5
• Four Types of
Unemployment
1. Frictional
2. Structural
3. Cyclical
4. Seasonal
While the term unemployment seems simple enough, the Bu-
reau of Labor Statistics (BLS) has a very specific definition.
According to the BLS unemployment is the percentage of civil-
ians at least 16-years-old who are unemployed and tried to find
a job within the prior four weeks. The BLS figure does not in-
clude workers who had to take part-time jobs because they
couldn’t find full-time work, those who are underemployed
(working at jobs far below their qualifications), or those work-
ers who gave up looking for jobs altogether. If that was not
confusing enough there are four types of unemployment which
students are often surprised to discover.
Chapter 02 – Understanding How Economics Affects Business
2-58
PPT 2-45
U.S. Unemployment Rate
U.S. UNEMPLOYMENT RATE
2-45
* As of October 2014
LO 2-5
The unemployment rate in the United States over the past 50–
plus years has been as low as 3.9 percent, but more recently has
climbed past 10 percent. Although the unemployment rate is
climbing in the United States, it still has a long way to go to
reach the unemployment rate in Zimbabwe (80 percent).
PPT 2-46
Best and Worst Cities for a Job
Search
Source:MoneyM agazine,accessedOctober2014.
BEST and WORST CITIES
for a JOB SEARCH
2-46
Best
Washington, D.C.
San Jose, CA
New York, NY
Worst
St. Louis, MO
Detroit, MI
Miami, FL
LO 2-5
PPT 2-47
Inflation
INFLATION
2-47
LO 2-5
• Inflation — The general rise in the prices of goods
and services over time.
• Disinflation — When the price increases are slowing
(inflation rate declining).
• Deflation — Prices are declining because too few
dollars are chasing too many goods.
• Stagflation — Economy is slowing, but prices are
going up.
When discussing inflation, disinflation, deflation and stagfla-
tion, introducing the term hyperinflation is particularly interest-
ing to students. Historical examples of countries suffering from
hyperinflation post-World War I and currently Zimbabwe bring
this topic to life.
Chapter 02 – Understanding How Economics Affects Business
2-59
PPT 2-48
Consumer Price Index
CONSUMER PRICE INDEX
2-48
LO 2-5
• Consumer Price Index (CPI) — Monthly statistics
that measure the pace of inflation or deflation.
• The government computes the costs of goods and
services (housing, food, apparel, medical care,
etc.) to see if they are going up or down.
• The wages, rent/leases, tax brackets, government
benefits and interest rates of some citizens are
based upon the CPI.
After discussing hyperinflation in the previous slide, students
can appreciate the importance of monitoring a nation’s inflation
rate to prevent it from spiraling out of control. As inflation is
increasing, it acts as a hidden tax increase eroding the purchas-
ing power of the population.
PPT 2-49
Price Index
PRODUCER PRICE INDEX
2-49
LO 2-5
• Producer Price Index (PPI) — An index that
measures prices at the wholesale level.
PPT 2-50
Productivity
• Productivity in the U.S. has risen due to the
technological advances that have made
production faster and easier.
PRODUCTIVITY
2-50
LO 2-5
• Productivity in the
service sector grows
more slowly
because of fewer
technologies.
Chapter 02 – Understanding How Economics Affects Business
2-60
PPT 2-51
Productivity in the Service Sector
PRODUCTIVITY in the
SERVICE SECTOR
2-51
LO 2-5
• The higher the productivity, the lower the costs of
producing goods and services. This helps lower
prices.
• New technology adds to the quality of the
services provided, but not to the worker
’
s output.
• A new form of measurement needs to be created
to account for the quality as well as the quantity
of output.
PPT 2-52
Business Cycles
BUSINESS CYCLES
2-52
LO 2-5
• Business Cycles — Periodic rises and falls that
occur in economies over time.
• Four Phases of Long-Term Business Cycles:
1. Economic Boom
2. Recession – Two or more consecutive quarters of
decline in the GDP.
3. Depression – A severe recession.
4. Recovery – When the economy stabilizes and
starts to grow. This leads to an Economic Boom.
Yes, it is true that a recession is two or more consecutive quar-
ters of contracting gross domestic product, but students will be
interested to know that for a recession to be officially labeled a
recession it must be declared by the National Bureau of Eco-
nomic Research. Their website, www.nber.org, provides nu-
merous resources to further explain this part of the business
cycle.
PPT 2-53
Fiscal Policy
FISCAL POLICY
2-53
LO 2-6
• Fiscal Policy — The federal
government
’
s efforts to keep
the economy stable by
increasing or decreasing taxes
or government spending.
• Tools of Fiscal Policy:
– Taxation
– Government Spending
In the U.S., the percentage of the GDP the government takes
through taxes at all levels is about 28%. However, when you
count all fees, taxes on the highest-earning citizens could ex-
ceed 50%.