1. *Chapter Two
*
Understanding
How
Economics
Affects
Business
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

2. 1. Why some countries are relatively poor than
other countries?
2. Why is South Korea relatively wealthy and
North Korea suffering economically?
3.
Why is China’s annual income per person
($944) much less than Taiwan’s ($13010)

3. The MAJOR BRANCHES of
ECONOMICS
*
What Is
Economics?
LG1
*
• Economics -- The study of how society employs
resources to produce goods and services for
consumption among various groups and individuals.
• Macroeconomics -- Concentrates on the
operation of a nation’s economy as a whole. Ex:
GDP, Unemployment rate, Price Index.
• Microeconomics -- Concentrates on the
behavior of people and organizations in markets for
particular products or services. Ex: Pricing, supply
and demand.
2-3

4. *
RESOURCE DEVELOPMENT
What Is
Economics?
LG1
• Some economists define economics as the
study of scarce resources. Resources need to
be carefully divided among people by the
government
• Resource Development -- The study of how
*
to increase resources and create conditions that will
make better use of them.
•Recycling
•New ways of growing food
•Discover new energy sources
•New way of creating needed goods and services.
2-4

5. THOMAS MALTHUS and
the DISMAL SCIENCE
*The Secret to
Creating a
Wealthy
Economy
LG1
*
• Malthus believed that if the rich had most of the
wealth and the poor had most of the population,
resources would run out.
• This belief led the writer Thomas Carlyle to call
economics “The Dismal Science.”
• Neo-Malthusians believe there are too many
people in the world and believe the answer is
radical birth control. (education)
2-5

6. THOMAS MALTHUS and
the DISMAL SCIENCE
*The Secret to
Creating a
Wealthy
Economy
LG1
*
“Give a man a fish and you feed him for a day,
but teach a man to fish and you feed him for a
life time”
“Teach a person to start a fish farm, and he or
she will be able to feed a village for a life time”
(Business)
2-6

7. ADAM SMITH the
FATHER of ECONOMICS
*
Adam Smith &
the Creation of
Wealth
LG1
*
• Book titled ‘An inquiry into the nature and
causes of the wealth of nations’ in 1776.
• The main theme of the book: creating more
resources so that everyone could become
wealthier. And when people see economic
reward for their efforts, they would work for
long hours and work hard.
• Result: economy would prosper with plenty of
food and all kinds of products available to
everyone.
2-7

8. ADAM SMITH the
FATHER of ECONOMICS
Smith believed that:
*
Adam Smith &
the Creation of
Wealth
LG1
*
• Freedom was vital to any
economy’s survival.
• Freedom to own land or property
and the right to keep the profits
of a business is essential.
• One way to be really wealthy was
to start a successful business of
your own.
• People will work hard if they
believe they will be rewarded.
2-8

9. ADAM SMITH the
FATHER of ECONOMICS
• Smith said that as people try to improve their
life, their efforts serve as an Invisible Hand
that helps the economy to grow and prosper .
• Invisible hand – the process that turns self
directed gain into social and economic
benefits for all.
• Example:
British
American
Tobacco,
Bangladesh (BATB) is engaged in tree
plantation

10. CAPITALISM
*Understanding
Free-Market
Capitalism
LG2
• Capitalism -- All or most of the land, factories
*
and stores are owned by individuals, not the
government, and operated for profit.
• Countries with capitalist foundations:
-
United States
England
Australia
Canada
2-10

11. Foundations of Capitalism
• The right to own private property
• The right to own a business and keep all the
business’s profits.
• The right to freedom of competition
• The right to freedom of choice-People are free
to choose what they want to do

12. Free-Market Capitalism
• How Free markets work?
A free market is one in which decisions about what to
produce and in what quantities are made in the
market by buyers and sellers negotiating prices for
goods and services.
Price tells producers how much to produce
• How Prices are determined?
In a free market, prices are determined through
negotiations between buyers and sellers in the
market.

13. Free-Market Capitalism
• The Economic concept of Supply- Seller
supply refers to the quantity of product that manufacturers or
owners are willing to sell at different prices at a specific time;
the amount supplied will increase as price increases

14. Free-Market Capitalism
• The Economic concept of Demand- Buyer
demand refers to the quantity of products that people
are willing to buy at a different prices at a specific
time; the quantity demanded will increase as the price
decreases

15. Free-Market Capitalism
• The Equilibrium Point
intersecting point of the supply curve and demand curve is known
as the equilibrium point where the quantity supplied and demanded
are equal; this equilibrium point will become the market price in the
long run.
If quantity supplied exceeds quantity
demanded, the resulting Surplus
signals the sellers to lower the prices
If quantity supplied is less than
quantity demanded the resulting,
Shortage signals sellers to
Increase the price

16. Free-Market Capitalism
Competition within free market economy
• Perfect competition- many sellers and no seller
dominates, products identical (exampleagricultural products)
• Monopolistic competition- large number of
sellers but product differentiation by buyers
(example- creams, chicken broast)
• Oligopoly- few sellers dominates the market
(telecom, automobiles)
• Monopoly- only one seller (TITAS Gas, Desco)

17. Benefits and Limitations of Free Market
Benefits
• Allows open competition among companies
• Major factor in creating wealth
• Economic Miracle- poverty reduction
• Encourages business to be efficient
Limitations
• Inequality
• Criminal Activity

18. SOCIALISM
*
Understanding
Socialism
LG3
*
• Socialism -- An economic system based on the
premise that some basic businesses, like utilities,
steel mills, coal mines should be owned by the
government in order to more evenly distribute profits
among the people. (Sweden)
• Entrepreneurs run smaller businesses
• Citizens are highly taxed
• Government is more involved in protecting the
environment and the poor
• Takes away some of the business peoples incentives to
start work early and leave work late
2-18

19. *
COMMUNISM
Understanding
Communism
LG3
*
• Communism -- An economic and political system
in which the government makes almost all
economic decisions and owns almost all the major
factors of production. (North Korea, Cuba)
• Prices don’t reflect demand which may lead to
shortages of items, including food and clothing.
• Dose not inspire people to work hard.
• Most communist countries today suffer severe
economic depression and citizens fear the
government.
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20. MIXED ECONOMIES
*The Trend
Toward Mixed
Economies
LG4
*
• Mixed Economies -- Some allocation of
resources is made by the market and some by the
government.
• Neither free-market nor command economies
have created sound economic conditions so
countries use a mix of the two economic systems.
2-20

21. *
GROSS DOMESTIC PRODUCT Gross Domestic
Product
LG5
*
• Gross Domestic Product (GDP) -- Total
value of final goods and services produced in a
country in a given year. As long as a company is
within a country’s border, their numbers go into the
country’s GDP (even if they are foreign-owned).
• Unemployment Rate– The number of civilians
at least 16 years old who are unemployed and tried
to find a job within the prior four weeks.
• Price Index - Price indexes help gauge the health
of the economy by measuring the levels of inflation,
disinflation, deflation and stagflation.
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22. *
BUSINESS CYCLES
The Business
Cycle
LG5
*
• Business Cycles -- Periodic rises and falls that
occur in economies over time.
• Four Phases of Long-Term Business
Cycles:
1. Economic Boom
2. Recession – Two or more consecutive quarters
of decline in the GDP.
3. Depression – A severe recession.
4. Recovery – When the economy stabilizes and
starts to grow. This leads to an Economic Boom.
2-22

23. *
FISCAL POLICY
Stabilizing the
Economy Through
Fiscal Policy
LG6
*
• Fiscal Policy -- The federal government’s efforts
to keep the economy stable by increasing or
decreasing taxes or government spending.
• Tools of Fiscal Policy:
-
Taxation
Government Spending
2-23

24. MONETARY POLICY
*Using Monetary
Policy to Keep the
Economy Growing
LG6
*
• Monetary Policy -- The management of the
money supply and interest rates by the Federal
Reserve Bank (the Central Bank).
• The central bank’s most visible role is
increasing and lowering interest rates.
- When the economy is booming, the central bank
tends to increase interest rates.
- When the economy is in a recession, the central
bank tends to decrease the interest rates.
2-24