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1 & 3. Business and the Economy

1 & 3. Business and the Economy. Understanding Business and the Context in Which it Operates. Why Study Business?. To become a better-informed consumer and investor For help in choosing a career To be a successful employee To start your own business. Business: A Definition.

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1 & 3. Business and the Economy

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  1. 1 & 3. Business and the Economy Understanding Business and the Context in Which it Operates

  2. Why Study Business? • To become a better-informed consumer and investor • For help in choosing a career • To be a successful employee • To start your own business

  3. Business: A Definition • Business consists of: • The profit-seeking activities of those engaged in purchasing or selling goods and services to satisfy society’s needs and wants. • Satisfying needs wants • Ultimate objective of every firm • Business profit • What remains after business expenses are deducted from sales revenue

  4. Economic Systems • Economics: The study of how wealth is created & distributed • Macroeconomics: national economic issues • Microeconomics: consumers, individual businesses • Factors of production: Four inputs to economic systems • Natural resources • Human resources • Capital • Entrepreneurship

  5. Measuring Economic Performance • Economic indicators • Productivity measures • Gross domestic product (GDP) • Gross national product (GNP) • Price indexes • Consumer price index (CPI) • Producer price index (PPI) • Employment statistics • Labor force, employment, unemployment

  6. More on Economic Systems • Can be capitalistic, command/planned, or “mixed” • Address four basic economic questions: • Which & how many goods & services will be produced? • How will they be produced? • For whom will they be produced? • Who owns & controls the factors of production?

  7. Capitalism: The Private Enterprise System • Theories of Adam Smith (Wealth of Nations, 1776) • Society’s interests are best served when the individuals within society are allowed to pursue their own self-interest • Based on four principles: • Creation of wealth is the concern of private individuals, not government • Owners of resources should be free to determine how they are used • Economic freedom ensures existence of competitive markets (market economy) • Government should act only as rule-maker/umpire

  8. Capitalism: The Private Enterprise System (Cont.) • Basic rights of capitalist system: • Right to private property • Right of business owners to the profits (after taxes) generated by their activities • Freedom of choice (employment, purchases, investments) • Public (i.e, government) sets rules to protect competition

  9. Market Forces at Work in theCapitalist System • Supply & demand • Prices influenced by competition • Prices usually respond to forces of supply & demand

  10. Supply • Quantities of good/service that producers will provide on particular date at various prices • Law of supply: • Sellers supply more at higher price, less at lower

  11. Demand • Amount of good/service that consumers will buy on that date at various prices • Law of demand: • Buyers buy more at lower price, less at higher

  12. Theory Of Supply & Demand • Quantity supplied & quantity demanded interact continuously • Balance between them is reflected by current price

  13. Supply, Demand, & Profit Motive • Interact to regulate • What is produced • Amounts produced • Consumers get what they want & producers earn a profit

  14. Relationship Between Supply And Demand • Demand curve: relationship between price and quantity demanded • Supply curve: relationship between price and quantity provided • Equilibrium point: intersection of supply & demand curves

  15. Demand Curve • Changes in quantity demanded • Movement along curve • Changes in demand • Curve shifts to right (demand increased) or left (demand decreased) • Influences: preferences, incomes, substitute prices, no. buyers

  16. Supply Curve • Changes in quantity supplied • Movement along curve • Independent of demand • Changes in supply • Curve shifts to left (lowered supply) or right (increased supply) • Influence: factors of production

  17. Equilibrium Point • Point at which demand and supply curves intersect • Identifies prevailing market price • Discrepancies between market & equilibrium price are self- correcting

  18. Types of Competition in theCapitalist System • Pure competition • Monopolistic competition • Oligopoly • Monopoly

  19. Pure Competition • Products identical • Perfect information • No entity large enough to influence prices • E.g., markets for agricultural commodities

  20. Monopolistic Competition • Products not identical • Product differentiation possible • Use of branding, etc. • Many buyers & sellers • Imperfect information • Some government regulation • E.g., consumer goods markets

  21. Oligopoly • Products: similar or different • Few, large sellers; many small buyers • Sellers match rivals’ prices • Market entry expensive • Government watches closely • E.g., steel, automobile markets

  22. Monopoly • One seller; many small buyers • Seller controls products & prices--no competition • Seller keeps other firms from competing • True monopolies illegal • E.g., utilities (legal; regulated)

  23. Other Economic Systems: Command/Planned & Mixed • Socialism • Communism • “Mixed” economies

  24. Socialism • High degree government planning • Government owns some of land & capital • Government involvement limited • Private ownership permitted

  25. Communism • Allows least degree economic freedom • Public ownership of factors of production • Planned resource allocation

  26. Mixed Economies • Many communist & socialist economies have capitalist elements • Some relaxing of central control • Increased privatization • Capitalist economies often have socialist elements

  27. Business Cycle • Pattern of expansion and contraction through which our economy flows • Characterized by: • Prosperity • Inflation: Recession • Depression • Recovery

  28. Employment Act of 1946 • First formal statement of economic goals & federal government’s responsibility for economic progress • Brought about by concerns following depression and WWII • Effort to “flatten” the effects of the business cycle

  29. Federal Economic Responsibilities • Promote maximum employment • Promote maximum production • Promote maximum purchasing power

  30. Maximum Employment • Goal:full employment of able, willing, & seeking • Full employment does not equal 0% unemployment • Worker mobility • Worker layoffs & retraining • Unrealistic worker hopes

  31. Four Categories Of Unemployment • Frictional • Seasonal • Cyclical • Structural

  32. Maximum Production (Economic Growth) • Generally understood to be 4% production growth per year • Increased efficiency • Increased production • Conservation of input resources

  33. Maximum Purchasing Power (Stable Prices) • Control of inflation • Demand-pull • Cost-push • Hyperinflation • Goal historically considered attained when prices rise at 2-3% per year

  34. Monetary Policy • Increase/decrease money supply • Expansionary • Restrictive • Controlled by “The Fed” • Adjusts % deposits of member banks • Adjusts interest rates

  35. Fiscal Policy • Government influences economic activity through • Taxation • Spending • Policy manifested in federal budget

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