Economics: The Framework for Business

1. Economics:The Framework for Business What is economics? What is driving the current global economic crisis? How does fiscal and monetary policy impact the economy? What is the free market system and the supply/demand relationship? What are planned market systems? What are mixed market systems? What tools are used to evaluate economic performance?

3. DOES the United States Government CONTROL our Economic Wheel? • Yes Or No

4. The answer is NO!! It does not control it, BUT it can influence it. The question is HOW? To Speed the wheel up….. • Lower Taxes • Lower Interest Rates • Increase Government Spending • NOW, HOW DO YOU SLOW IT DOWN?

5. Economics Microeconomics Consumers Families Businesses Macroeconomics Country’s Overall Economy

6. MICROECONOMICS…..

7. The Fundamental Rights of Capitalism • The right to own a business and keep after-tax profits. • The right to private property • The right to free choice • The right to fair competition

8. ONE Example. Federal and State Income Tax • Paid by both Consumers and Business • Federal Tax is a Progressive Tax…the more you make the more you pay. • Pay as you go System…W-4, W-2, 1040 blue or 1040 Pink or 1040ez. • Based on Your income – Exemptions – Deductions = Taxable Income = Tax Owed • Tax Owed vs Amount Withheld = Refund or what you owe.

9. ONE Example. Federal and State Income Tax • State Income Tax less complicated. • Static Tax typically in most states. • Based on a certain percentage of your taxable income from the Federal return minus an exemption amount will equal you State Tax that you owe. • In Illinois, they just recently raised the rate from 3% to 5%.

11. Other Taxes………………. • Social Security or FICA tax • Medicare Tax • Property Taxes ( if you own real estate) • Estate Taxes • Sales Tax • Other misc taxes and fees like Driver’s License.

12. Taxes • SO…..WHAT HAPPENS ON BOTH THE CONSUMER AND GOVERNMENT SIDE WHEN THE GOVERNMENT LOWERS TAXES?

13. Supply and Demand: Fundamental Principles of a Free Market The Foundation of the Free Market • How much can we make/sell? • How much will consumers buy? • At what price? Interaction of buyers & sellers • Impact prices • Competition

14. Supply and Demand: Fundamental Principles of a Free Market • Demand (CONSUMER): the relationship between the price of a good and the quantity buyers are willing and can afford to buy • When price falls, consumers tend to buy more . • Demand curve: a graph of the demand relationship • The demand curve slopes downward showing that quantity demanded increases as price falls.

15. Supply and Demand: Fundamental Principles of a Free Market • Supply (BUSINESS): the relationship between the price of a good and the quantity sellers are willing and able to offer for sale • Sellers tend to supply a greater quantity as the price rises. • Supply curve: a graph of the supply relationship • The supply curve slopes upward to the right showing that quantity supplied increases as price rises.

16. Supply and Demand: Fundamental Principles of a Free Market • Forces of supply and demand drive equilibrium price • The point where supply and demand intersect • Market price adjusts to the equilibrium price

17. Capitalism: The Free Market System • The Free Market: • Private Ownership • Economic Freedom • Fair Competition • Innovation and Hard Work • Businesses offer Value to: • Customers • Employees • Suppliers Adam Smith

18. MACROECONOMICS

19. Planned Economies: Socialism and Communism Free Market Planned Economies Capitalism Socialism Communism Mixed Economies

20. Planned Economies: Socialism and Communism Communism • Public Ownership of Enterprise • Strong Central Government Socialism • Government Control Key Enterprises • Higher Taxes

21. Four Degrees of Competition • Pure Competition • Monopolistic Competition • Oligopoly • Monopoly 21

22. HOW IS Capitalism doing? • http://www.studentsoftheworld.info/infopays/rank/PNB2.html • http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)

23. Evaluating Economic Performance: What’s Working? Gross Domestic Product Unemployment Rate Consumer Price Index Producer Price Index Productivity

24. Managing on Influencing the Economy Through Fiscal and Monetary Policy • Fiscal Policy – government efforts to influence the economy: • Taxation…sales taxes and income taxes – Federal and State • Government Spending • Controlled by Congress/Budget Process • Monetary Policy – Federal Reserve actions to shape the economy: • Supply & Demand of Money • Cost of Credit • Controlled by the Federal Reserve (FED) • Seven Member Board • Chairman

25. Global Economic Crisis: How did the happen? (Source: Based on data from S&P/Case-Shiller Home Price Indices, August 2008 data, Standard & Poor’s website, http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices_csmahp/0,0,0,0,0,0,0,0,0,1,1,0,0,0,0,0.html, accessed November 6, 2008.)

26. The Business Cycle • Depression • Recession • Expansion • BOOM

27. So as a country, how do we get out of a recession knowing that it is a vicious cycle. • Answer…the government gets involved • Through Fiscal and Monetary Policy

28. Federal Government Revenue and Expenses Source: TABLE B–81.—Federal receipts, outlays, surplus or deficit, and debt, fiscal years 2003–2008 (2008 estimates based on Final Monthly Treasury Statement, issued October 2008), Economic Report of the President: 2009 Spreadsheet Tables, Updated January 14, 2009, Government Printing Office website, http://www.gpoaccess.gov/eop/tables09.html, accessed January 20, 2009.

29. Managing the Economy Through Fiscal and Monetary Policy The federal government budget outlines revenue and expenses • When revenue is higher than spending, there is a budget surplus • When spending is higher than revenue, the government incurs a budget deficit • The sum of all the money borrowed is the federal debt

30. WHEN GOVERNMENT SPENDING IS MORE THAN GOVERNMENT INCOME YOU HAVE A DEFICIT. What do we have going on Today! • http://www.brillig.com/debt_clock/

31. A Trillion Dollars? • If you had started spending a million dollars – every day, without fail – at the start of the Roman Empire, you still wouldn’t have spent a trillion dollars by 2010. • One trillion dollars laid end-to-end would stretch farther than the distance from the earth to the sun. • You could wrap your chain of bills more than 12,000 times around the earth’s equator. • If you flew a jet at the speed of sound, spooling out a roll of dollar bills behind you, it would take you more than fourteen years to release a trillion dollars.

32. Managing on Influencing the Economy Through Fiscal and Monetary Policy • Fiscal Policy – government efforts to influence the economy: • Taxation…sales taxes and income taxes – Federal and State • Government Spending • Controlled by Congress/Budget Process • Monetary Policy – Federal Reserve actions to shape the economy: • Supply & Demand of Money • Cost of Credit • Controlled by the Federal Reserve (FED) • Seven Member Board • Chairman

33. Federal Reserve • Conduct Monetary Policy: • Changes in the Discount Rate • Changes in Reserve Requirement • Open Market Operations • Check Clearing Process • Banking Services for Government and other banks

34. Unprecedented Action by the FED In addition to expanding lending and lowering interest rates, since September 2008 the FED has: • Pumped additional liquidity into the banking industry • Approved the mergers of several large banks • Introduced the Term Asset Backed Securities Loan Facility (TALF) • Introduced the Trouble Asset Relief Program (TARP) • Purchased mortgage backed securities • Approved General Motors Finance Company (GMAC) to become a bank holding company

35. Managing the Economy Through Fiscal and Monetary Policy M1 Money Supply - all currency—paper bills and metal coins—plus checking accounts and traveler’s checks. M2 Money Supply - all M1 plus most savings accounts, money market accounts, and certificates of deposit.

36. Looking to multiply your money? Look no further than your local bank The bank must hold 10% of your deposit based on Federal Reserve Requirements. You deposit $5,000 The bank loans Anne $4,500 Anne buys a car from Jake for $4,500 Jake deposits the $4,500 Although you still have $5,000, the money supply has increased to $9,500

37. Going Green: Good for the Bottom Line • Going green is about doing right by the planet, attracting new customers, and reducing costs • Environmental concerns have become a dominant driver of global corporations • Wal-Mart began selling concentrated laundry detergent and in 3-years • Saved 95 million pounds of plastic resin • Preserved 400 million gallons of water • Conserved 520,000 gallons of diesel gasoline • Reduced 125 million pounds of cardboard

38. Mixed Economies: The Story of the Future Market and Planned Economies don’t meet all needs • Neither planned nor market economies meet all needs • Planned Economies will not create enough value As a market dominant economy, the U.S. government still owns/supports enterprises • Postal Service • Universities • Parks • Libraries

39. Mixed Economies: The Story of the Future As Mixed Economies become The Story of the Future, how much government intervention is too much? What industries should be regulated? Why?

40. 2008-2009 American Automobile Bailout • After bailing out the financial industry, GM and Chrysler announced they needed a bailout. • Bankruptcy was in the near future • 2.5 million auto industry-related jobs were at risk • The Treasury Department infused $700 billion in a partial auto bailout. • Under the Obama Administration, an Automobile Task Force was developed to evaluate the industry. • A variety of changes continue in the auto industry as the country rebuilds the economy.

41. Inflation The rate of price changes across the economy is another basic measure of economic well-being • Inflation means that prices are rising • Hyperinflation is when average prices increase more than 50% per month • Disinflation is when prices increases slow down • Deflation is when average prices actually decrease. The government measures prices using the Consumer Price Index (CPI) and the Producer Price Index (PPI)

42. Productivity The relationship between inputs and outputs is productivity A high level of productivity correlates with healthy GDP. The U.S. has experienced strong productivity growth due to technology.

43. Looking Back What is economics? What is driving the current global economic crisis? How does fiscal and monetary policy impact the economy? What is the free market system and the supply/demand relationship? What are planned market systems? What are mixed market systems? What tools are used to evaluate economic performance?