*

*
*

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

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*
*

Four Whats 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

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*
*

Economic Theories

Thomas Malthus (Early 1800s)

Dismal Science
Too many people

Adam Smith (1776)

Freedom is vital
Invisible Hand
2-4

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*
*

Circular Flow Model

2-5

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*
*

Three Economic Systems

Mixed
Socialism

(Highly Controlled)

(Little Control)

Communism

Capitalism

2-6

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*
*

Free-Market Capitalism

Private Property

Business Ownership/ Profits

Freedom of Competition

Freedom of Choice

2-7

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*
*

Supply Curve
High

Price(P)

S
Low

Quantity(S)

High
2-8

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*
*

Demand Curve
High

Price(P)

D
Low

Quantity(D)

High
2-9

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*
*

Equilibrium Point
Surplus

High

Market Equilibrium

Price

S
Low

Shortage

Quantity

D
High
2-10

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*
*

Free-Market Competition
Monopolistic
Oligopoly

Competition

One

Many
Perfect
Competition

Monopoly

Sellers
2-11

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*
*

Perfect Competition

Sellers

Buyer
2-12

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*
*

Monopolistic Competition:

Many Sellers With Perceived Differences

Fast Food

Colleges
2-13

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*
*

Oligopoly: Few Sellers

Automobiles

Tobacco

2-14

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*
*

Monopoly: One Seller

Utilities

Microsoft?

2-15

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*
*

Limits of Free-Markets

Inequality of Wealth- Causes

National & World Tension

Greed Compromises Ethics

Limitations Push Country

towards Socialism =
Government Regulation

2-16

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*
*

Number of Workers per

Social Security Recipient

Source: Investors.com

2-17

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*
*

Industrialized Nations
Top Individual Tax Rate

Source: www.worldwide-tax.com, May 9, 2006

2-18

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*
*

Socialism

Private & Public Ownership

Some Choices are Limited

Creates Social Equality

Reduces Individual Incentive
- Brain Drain
2-19

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*
*

Communism

Public Ownership

Almost all major factors of

production

Central Planning/Controlled
Economy
Shortages of food and other products

may develop
Lack of motivation to work hard for
business people

2-20

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*
*

Mixed Economies

Free-Market Economy = Capitalism

Command Economy

Socialism
Communism

Trend Results in Blend/Mix

Capitalism > Socialism

Socialism > Capitalism
2-21

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*
*

Why is the U.S.

an Economic Success?
Major Reason

Percent*

Constitution

85

Free Elections

84

Free Enterprise System

81

Abundant Resources

78

Cultural Diversity

71

* Respondents could choose more than one.

Source: Investors Business Daily Survey

2-22

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*
*

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

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*
*

Key Economic Indicators

Gross Domestic Product (GDP)

Unemployment Rate

Price Indexes

Consumer Price Index (CPI)

Producer Price Index (PPI)
2-24

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*
*

U.S. Gross
Domestic Product

In Billions of U.S. $

Source: U.S. Dept. of Commerce, Bureau of Economic Analysis

2-25

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*
*

Share of World GDP(%)

G-8 Countries
U.S. only
China
India
Latin America
Africa

1975

55
22
5
3
7
3

2004

44
21
13
6
6
3

Source: www.dlc.org/ppi, July 6, 2005

2-26

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*
*

U.S. Unemployment (%)

Source: U.S. Bureau of Labor Statistics

Source: U.S. Bureau of Labor Statistics

2-27

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*
*

What Makes Up The

Consumer Price Index?

Source: U.S. Bureau of Labor Statistics

2-28

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*
*

Consumer Price Index

1982-84 = 100

Source: U.S. Dept. of Labor, Bureau of Labor Statistics

2-29

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*
*

Percent Change in Labor

Productivity- U.S.

Source: U.S. Dept. of Commerce, Bureau of Labor Statistics

2-30

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*
*

Where Does the

Government Get Its
Money?

Source: Office of Management & Budget, 2002

2-31

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*
*

Federal Spending

Source: Congressional Budget Office

2-32

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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

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*
*

Rising U.S. Trade Deficit

Source: US Dept of Commerce, Bureau of Economic Analysis

2-35

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*
*

Where are the Homeland

Security Dollars Spent?

Source: Business Week June 14, 2004

2-36

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*
*

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