* * * How Economics Affects Business: The Creation and Distribution of Wealth Nickels * McHugh McGraw-Hill/Irwin Understanding Business, 8e * * CHAPTER ** McHugh 1-1 2-1 © 2008 The McGraw-Hill Companies, Inc., All Rights * * * Economics: Create Wealth • Study of how society chooses to employ resources to produce goods & services and distribute them among competing groups/individuals • Micro v Macro • Resource Development 2-2 * * * Four “What’s” of an Economic System $ What is produced? $ What amount is produced? $ What is the method of output distribution? $ What is the rate of economic growth? Adapted from: Edwin Mansfield Economics (New York: W.W Norton, 1976), p.8 2-3 * * * Economic Theories • Thomas Malthus (Early 1800s) • “Dismal Science” • Too many people • Adam Smith (1776) • Freedom is vital • “Invisible Hand” 2-4 * * * Circular Flow Model 2-5 * * * Three Economic Systems Mixed Socialism (Highly Controlled) (Little Control) Communism Capitalism 2-6 * * * Free-Market Capitalism • Private Property • Business Ownership/ Profits • Freedom of Competition • Freedom of Choice 2-7 * * * Supply Curve High Price(P) S Low Quantity(S) High 2-8 * * * Demand Curve High Price(P) D Low Quantity(D) High 2-9 * * * Equilibrium Point Surplus High Market Equilibrium Price S Low Shortage Quantity D High 2-10 * * * U.S Economy • • • • • • Key Economic Indicators Productivity in the U.S Productivity in the Service Sector Business Cycles • • • Recession Depression Recovery Stabilization • • Fiscal Policy National Debt Economic Growth through Monetary Policy 2-23 * * * Key Economic Indicators • Gross Domestic Product (GDP) • Unemployment Rate • Price Indexes • Consumer Price Index (CPI) • Producer Price Index (PPI) 2-24 * * * U.S Gross Domestic Product In Billions of U.S $ Source: U.S Dept of Commerce, Bureau of Economic Analysis 2-25 * * * Share of World GDP(%) •G-8 Countries •U.S only •China •India •Latin America •Africa 1975 55 22 2004 44 21 13 6 Source: www.dlc.org/ppi, July 6, 2005 2-26 * * * U.S Unemployment (%) Source: U.S Bureau of Labor Statistics Source: U.S Bureau of Labor Statistics 2-27 * * * What Makes Up The Consumer Price Index? Source: U.S Bureau of Labor Statistics 2-28 * * * Consumer Price Index 1982-84 = 100 Source: U.S Dept of Labor, Bureau of Labor Statistics 2-29 * * * Percent Change in Labor Productivity- U.S Source: U.S Dept of Commerce, Bureau of Labor Statistics 2-30 * * * Where Does the Government Get Its Money? Source: Office of Management & Budget, 2002 2-31 * * * Federal Spending Source: Congressional Budget Office 2-32 * * * Biggest Economic Challenges • Over the Next 3-5 years the U.S can be expected to face these challenges: • Pension & Health care costs • The Federal Deficit • High Energy and Commodity Costs • Balance of payments • Terrorism Source: Investors Business Daily January 9, 2006 2-33 * * * Healthcare Expenditure Projections (Percent of National GDP) Source: FORTUNE May 3, 2004 2-34 * * * Rising U.S Trade Deficit Source: US Dept of Commerce, Bureau of Economic Analysis 2-35 * * * Where are the Homeland Security Dollars Spent? Source: Business Week June 14, 2004 2-36 * * * What is the National Debt? • • • • The debt has reached $8.36 trillion+ (May 2006) If $1,000 bills were stacked: • • • $1 Million = 4.29 Inches $1 Billion = 357.5 Feet $1 Trillion = 67 Miles The debt is equal to 560.1 miles in $1,000 bills National Debt Clock- http:// www.brillig.com/debt_clock/ 2-37 ... than one Source: Investors Business Daily Survey 2-22 * * * U.S Economy • • • • • • Key Economic Indicators Productivity in the U.S Productivity in the Service Sector Business Cycles • • • Recession... Economy • Shortages of food and other products • may develop • Lack of motivation to work hard for business people 2-20 * * * Mixed Economies • Free-Market Economy = Capitalism • Command Economy... Controlled) (Little Control) Communism Capitalism 2-6 * * * Free-Market Capitalism • Private Property • Business Ownership/ Profits • Freedom of Competition • Freedom of Choice 2-7 * * * Supply Curve