Chapter2.ppt – Assignment: – EssaysForYou

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
2

Economics: The Framework for Business
Define economics and discuss the evolving global economic crisis
Analyze the impact of fiscal and monetary policy on the economy
Explain and evaluate the free market system and supply and demand
*

2-1

2-2

2-3

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
2

Economics: The Framework for Business
Explain and evaluate planned market systems
Describe the trend toward mixed market systems
Discuss key terms and tools to evaluate economic performance
*

2-4

2-5

2-6

Economics
Study of the choices that people, companies, and governments make in allocating society’s resources
Guide decision-making
Help understand broad forces that affect business and personal life
Economy: Financial and social system of how resources flow through society
*

Macro and Micro Economics
*
Macroeconomics: Study of a country’s overall economic dynamics
Employment rate, gross domestic product, and taxation policies
Microeconomics: Study of smaller economic units
Individual consumers, families, and individual businesses

Global Economic Crisis
Started with slump in dot-com business followed by the 9/11 terrorist attacks Stock market dropped
Unemployment rose
Economic experts feared that the U.S. was on the edge of a full-blown recession
*

Global Economic Crisis
Subprime mortgage loans – Loans to borrowers with:
Low credit scores
High debt-to-income ratios
Other signs of a reduced ability to repay the money they borrow
Financial institutions suffered when mortgage-backed funds lost value
*

Steps Taken by the Federal Government and the Federal Reserve
Troubled Assets Relief Program (TARP) – $700 billion economic bailout plan
American Recovery and Reinvestment Act
Designed to turn the economy around over the next two years

Managing the Economy: Fiscal & Monetary Policy
Help achieve the goal of controlled sustained economic growth
Fiscal policy: Government efforts to influence the economy through taxation and spending
Monetary policy: Federal reserve decisions that shape the economy by influencing interest rates and supply of money
*

Debt Ceiling and Fiscal Cliff
Debt Ceiling – Maximum amount Congress lets the government borrow
Limits amount that government can borrow
Fiscal cliff – Package of across-the-board spending cuts and sharp tax hikes
Aimed to decrease the U.S. budget deficit
Not beneficial if the U.S. economy goes over the fiscal cliff
*

Budget
*

Outlines expected revenue from taxes and fees, and expected spending

Revenue is higher than expenses over a given period

Budget surplus

Expenses are higher than revenue over a given period

Budget deficit

Sum of all the money borrowed and not yet repaid by they federal government

Federal debt

Federal Reserve Banks
Execute Fed policies
Perform banking services for commercial banks in their districts
Commercial banks: Privately owned financial institutions
Accept demand deposits
Make loans
Provide other services for the public
*

Money Supply
Total amount of money within the overall economy
Money: Medium of exchange, a measure of value, or a means of payment
Commonly used definitions
M1: All currency plus checking accounts and traveler’s checks
*

Money Supply
M2: M1 money supply plus most savings accounts, money market accounts, and certificates of deposit
When economy contracts, Fed increases the money supply
When prices rise, Fed reduces the money supply
*

Open Market Operations
Federal Reserve function of buying and selling government securities
Includes treasury bonds, notes, and bills
Federal Deposit Insurance Corporation (FDIC): Federal agency that insures deposits in banks and thrift institutions for up to $250,000 per customer, per bank
*

Discount Rate and Reserve Requirement
Discount rate: Rate of interest that the Federal Reserve charges when it loans funds to banks
Reserve requirement: Rule set by the Fed which specifies minimum amount of reserves a bank must hold
Expressed as a percentage of the bank’s deposits
*

Capitalism: Free Market System
Economic system based on private ownership, economic freedom, and fair competition
Known as the private enterprise or free market system
Economic system: Structure for allocating limited resources
*

Fundamental Rights of Capitalism
*

Degrees of Competition
*

Market structure with many competitors selling virtually identical products
Barriers to entry are quite low

Pure competition

Market structure with many competitors selling differentiated products
Barriers to entry are low

Monopolistic competition

Market structure with only a handful of competitors selling products that can be similar or different
Barriers to entry are typically high

Oligopoly

Monopoly
*

One producer completely dominates the industry, leaving no room for any significant competitors

Barriers to entry tend to be virtually insurmountable

Natural monopoly: Market structure with one company as the supplier of a product

Reason – Nature of that product makes a single supplier more efficient
Government sanctioned and regulated

Capitalism: Supply & Demand
Explains the dynamic interaction between buyers and sellers that directly affects:

Supply

Quantity of products that producers are willing to offer for sale at different market price

Demand

Quantity of products that consumers are willing to buy at different market prices

Supply
To make profits, businesses produce:
More of a product that commands a higher market price
Less of a product that commands a lower price
Supply curve: Graphed relationship between price and quantity from a supplier standpoint
*

Exhibit 2.3 – Supply Curve
*

Demand
To get the products at the lowest possible prices consumers buy:
More products with lower prices
Fewer products with higher prices
Demand curve: Graphed relationship between price and quantity from a demand standpoint
*

Exhibit 2.4 – Demand Curve
*

Equilibrium Price
Associated with the point at which the quantity demanded equals the quantity supplied
Constant interaction between supply and demand determines the market price
*

Exhibit 2.5 – Equilibrium
*

Socialism
Economic system based on the principle that the government owns and operates key enterprises that directly affect public welfare
Has higher taxes, designed to distribute wealth more evenly through society
Cause of slump in socialist economies
High taxes and lavish social programs
*

Communism
*
System that calls for public ownership of all enterprises, under a strong central government
Did not thrive due to following reasons
Authoritarian governments suspended individual rights and choices
Developed crippling shortages and surpluses
Corruption at every level of government

Mixed Economies
Embody elements of both planned and market-based economic systems
Federal government partly owns number of financial institutions
Government intervenes in the free market by creating regulations
Privatization: Converting government-owned businesses to private ownership
*

Evaluating Economic Performance
*

Gross Domestic Product (GDP)
Total value of all final goods and services produced within a nation’s physical boundaries over a given period of time
Used to:
Measure the economic performance of individual nations
Compare the growth among nations
*

Employment Level
Tracked through unemployment rate
Unemployment rate: Percentage of people in the labor force over age 16 who do not have jobs and are actively seeking
Categories of unemployment
Frictional – Temporary unemployment
Structural – Long term unemployment
Cyclical – Layoffs during recessions
Seasonal – Job loss related to the time of year
*

Business Cycle
*

Periodic contraction and expansion that occur over time in every economy

Recession: Decrease in the GDP for two consecutive quarters
Depression: Long and deep recession

Contraction: Period of brief economic downturn

Recovery: Period of rising economic growth and employment

Expansion: Period of robust economic growth and high employment

Price Levels
Inflation: Period of rising average prices across the economy
Hyperinflation: Average monthly inflation rate of more than 50 percent
*

Price Levels
Disinflation: Period of slowing average price increases across the economy
Deflation: Period of falling average prices across the economy
*

Price Indexes to Evaluate Inflation
Consumer price index (CPI): Evaluates the change in the weighted-average price of goods and services that the average consumer buys each month
Producer price index (PPI): Evaluates the change over time in the weighted-average wholesale prices
*

Productivity
Relationship between:
Output – Production of goods or services
Input – Resources required to produce goods or services
*
Productivity = Output/Input

Define economics and discuss the evolving global economic crisis
Analyze the impact of fiscal and monetary policy on the economy
Explain and evaluate the free market system and supply and demand
*

2-1

2-2

2-3

Explain and evaluate planned market systems
Describe the trend toward mixed market systems
Discuss key terms and tools to evaluate economic performance
*

2-4

2-5

2-6

Is this the question you were looking for? Place your Order Here