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Understanding

UnderstandingEvolving
EvolvingEconomic
Economic
Systems
Systemsand
andCompetition
Competition
Chapter
2
THE
THEFUTURE
FUTUREOF
OFBUSINESS
BUSINESS
Gitman
Gitman&&McDaniel
McDaniel
55ththEdition
Edition

Prepared
Preparedby
by
Chapter 2

Deborah Baker
Deborah Baker
Texas
Texas ChristianUniversity
Christian University
Learning Goals
1 What is economics, and how are the three sectors of the
economy linked?
2 How do economic growth, full employment, and price
stability indicate a nations economic health?
3 What is inflation, how is it measured, and what causes it?
4 How does the government use monetary policy and fiscal
policy to achieve its macroeconomic goals?
5 What are the basic microeconomic concepts of demand
and supply, and how do they establish prices?
6 What are the four types of market structure?
7 Which trends are reshaping micro- and macroeconomic
environments?
Chapter 2

Copyright 2005 by South-Western, a division of 2


1 Learning Goal 1

What is economics,
and how are the three sectors
of the economy linked?
Chapter 2

Copyright 2005 by South-Western, a division of 3


1 HOW BUSINESS AND ECONOMIES WORK

Economics is the study of


how a society uses scarce
resources to produce and
distribute goods and services.

Macroeconomics
Macroeconomics is is the
the
study
study of
of the
the economy
economy
as
as aa whole.
whole.

Microeconomics
Microeconomics focuses
focuses
on
on individual
individual parts
parts of
of
Chapter 2

the
the economy.
economy.
Copyright 2005 by South-Western, a division of 4
1 HOW BUSINESS AND ECONOMIES WORK

What
What is
is produced?
produced?

Economic
Economic How
How much
much is
is produced?
produced?
Concerns
Concerns
How
How is
is itit produced?
produced?

For
For whom
whom is
is itit produced?
produced?

Decisions
Decisions made
made by:
by:
Marketplace
Marketplace
Government
Government
Chapter 2

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1 HOW BUSINESS AND ECONOMIES WORK

What
What products
products to
to produce
produce

How
How to
to price
price them
them
Economic
Economic
Decisions
Decisions How
How many
many people
people
of
of to
to employ
employ
Businesses
Businesses
How
How much
much to
to pay
pay
employees
employees

How
How much
much to
to expand
expand
the
the business
business
Chapter 2

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1 HOW BUSINESS AND ECONOMIES WORK

Economics
Economics asas aa
Circular
Circular Flow
Flow
Chapter 2

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2 Learning Goal 2

How do economic growth,


full employment, and price stability
indicate a nations economic health?
Chapter 2

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2 MACROECONOMICS: THE BIG PICTURE

Main
Main
Macroeconomic
Macroeconomic
Goals
Goals

Economic Growth

Full Employment

Price Stability
Chapter 2

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2 Economic Growth
An increase in a nations
output of goods and services
is economic growth. The
more a nation produces, the
higher its standard of living.

Drawbacks
Drawbacks of
of Economic
Economic Growth
Growth

Pollution
Pollution GDP: The total
Strain
Strain on
on public
public facilities
facilities market value of final
goods and services
produced within a
Chapter 2

nations border.

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2 Gross Domestic Product
Chapter 2

Source: Bureau of Economic Analysis, July 2003.

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2 Business Cycles

An increase in Recession:
business activity A decline in GDP over
results in a rise in: two consecutive
quarters

Output
Output

Income
Income

Employment
Employment

Prices
Prices
Chapter 2

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2 Keeping People on the Job

Frictional
Frictional

Structural
Structural

Cyclical
Cyclical
Types
Types of
of
Unemployment
Unemployment
Seasonal
Seasonal
Chapter 2

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2 Unemployment Rates in the U.S.
Chapter 2

Source: U.S. Department of Labor Bureau of Vital Statistics

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3 Learning Goal 3

What is inflation,
how is it measured,
and what causes it?
Chapter 2

Copyright 2005 by South-Western, a division of 15


3 Keeping Prices Steady
The
Theaverage
averageof ofall
allprices
prices
Inflation
Inflation of
of goods
goodsandandservices
services
is
isrising.
rising.

Demand-Pull
Demand-Pull Demand
Demandforforgoods
goods
Inflation
Inflation and
andservices
servicesis
isgreater
greater
than
thanthe
thesupply
supply

Cost-Push
Cost-Push Increases
Increases in
inproduction
production
Inflation
Inflation costs
costspush
pushup upprices
prices
Chapter 2

Copyright 2005 by South-Western, a division of 16


3 How Inflation is Measured

Index
Indexof
of prices
pricesof
of aa
Consumer
ConsumerPrice
Price Index
Index market
marketbasket
basketofof
(CPI)
(CPI) goods/services
goods/services
purchased
purchasedby byconsumers
consumers

Prices
Pricespaidpaid by
byproducers
producers
Producer
ProducerPrice
PriceIndex
Index for
forraw
raw materials,
materials,
(PPI)
(PPI) partially
partiallyfinished
finishedgoods,
goods,
and
and finished
finished products
products
Chapter 2

Copyright 2005 by South-Western, a division of 17


4 Learning Goal 4

How does the government


use monetary policy and
fiscal policy to achieve its
macroeconomic goals?
Chapter 2

Copyright 2005 by South-Western, a division of 18


4 ACHIEVING MACROECONOMIC GOALS

Contractionary
Contractionary
Policy
Policy
Monetary
Monetary Policy
Policy
Expansionary
Expansionary
Policy
Policy

Spending
Spending
Fiscal
Fiscal Policy
Policy
Taxation
Taxation
Chapter 2

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4 Tax Revenues, by Country
Chapter 2

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4 Federal Budget Revenues and Expenses
Chapter 2

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5 Learning Goal 5

What
What are
are the
the basic
basic
microeconomic
microeconomic concepts
concepts
of
of demand
demand andand supply,
supply,
and
and how
how do
do they
they establish
establish prices?
prices?
Chapter 2

Copyright 2005 by South-Western, a division of 22


5 The Nature of Demand
The
Thequantity
quantityof
of aagood
goodoror
Demand
Demand service
servicethat
that people
peopleare
are
willing
willingto
tobuy
buyat
atvarious
variousprices
prices
Chapter 2

Copyright 2005 by South-Western, a division of 23


5 The Nature of Supply
The
Thequantity
quantityof
of aagood
goodor
or
Supply
Supply service
servicethat
thatbusinesses
businesseswill
will
make
makeavailable
availableat
atvarious
variousprices
prices
Chapter 2

Copyright 2005 by South-Western, a division of 24


5 Equilibrium
The
Thequantity
quantityof
of aagood
goodor
or
Equilibrium
Equilibrium service
servicedemanded
demanded equals
equals
the
thequantity
quantitysupplied
supplied
Chapter 2

Copyright 2005 by South-Western, a division of 25


5 Changes in Demand and Supply

Changes in Demand Changes in Supply

change in customer new technology


income change in price
changes in fashion of resources
or taste change in price of
change in price related products
of related products change in number
expectations about of producers
future prices change in taxes
change in number
of buyers
Chapter 2

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5 Shifts in Demand and Supply Curves
Chapter 2

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6 Learning Goal 6

What
What are
are the
the four
four types
types
of
of market
market structure?
structure?
Chapter 2

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6 Competing in a Free Market

Perfect
Perfect
Competition
Competition
Pure
Pure
Four
Four Types
Types Monopoly
Monopoly
of
of
Market
Market Monopolistic
Structures Monopolistic
Structures Competition
Competition

Oligopoly
Oligopoly
Chapter 2

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6 Perfect Competition

AAlarge
largenumber
number of
of small
smallfirms
firmsare
arein
in the
themarket
market

The
Thefirms
firmssell
sellsimilar
similarproducts
products

Buyers
Buyersand
andsellers
sellershave
havegood
goodinformation
information about
about
prices,
prices,supply
supplysources,
sources,etc.
etc.

ItIt is
iseasy
easytoto open
open aanew
new business
business or
or close
closean
an
existing
existingone one
Chapter 2

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6 Pure Monopoly

AAsingle
singlefirm
firmaccounts
accountsfor
forall
allindustry
industrysales
sales

AAfirm
firm is
isthe
theindustry
industry

Barriers
Barriersto
toentry
entryprevent
prevent new
new firms
firms
from
fromcompeting
competingwith
withthe
theexisting
existingfirm
firm
Chapter 2

Copyright 2005 by South-Western, a division of 31


6 Monopolistic Competition

Many
Manyfirms
firmsare
arein
in the
themarket
market

The
Thefirms
firmsoffer
offerproducts
products that
thatare
are
close
closesubstitutes
substitutesbut
butstill
still different
different

ItIt is
isrelatively
relativelyeasy
easyto
toenter
enter the
the market
market
Chapter 2

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6 Oligopoly

AAfew
few firms
firmsproduce
producemost
mostor
or all
allof
ofthe
theoutput
output

Large
Largecapital
capital requirements
requirementslimit
limitthe
the
number
numberofoffirms
firms
Chapter 2

Copyright 2005 by South-Western, a division of 33


7 Learning Goal 7

What
What trends
trends are
are reshaping
reshaping micro-
micro-
and
and macroeconomic
macroeconomic environments?
environments?
Chapter 2

Copyright 2005 by South-Western, a division of 34


7
TRENDS IN ECONOMIC SYSTEMS & COMPETITION

Long-Term
Long-Term Relationships
Relationships

Macroeconomic
Macroeconomic Competitive
Competitive Workforces
Workforces
and
and
Microeconomic
Microeconomic Entrepreneurial
Entrepreneurial Spirit
Spirit
Trends
Trends in
in Former
Former Command
Command Economies
Economies

Big
Big Government
Government Returns
Returns
Chapter 2

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