How Economics Affects Business: The Creation and Distribution of Wealth

Introduction To Business MBA IQRA University

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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
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Economics defined
ECONOMICS is the study of how society chooses to employ resources to produce goods and services and distribute them for consumption among various competing groups and individuals.

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* * How does Economics effect business * I. HOW ECONOMIC CONDITIONS AFFECT BUSINESSES
A. What Is Economics? B. Why Economics Was Known as the Dismal Science C. Growth Economics and Adam Smith D. How Businesses Benefit the Community.

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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?
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WHY ECONOMICS WAS KNOWN AS THE DISMAL SCIENCE

The English economist Thomas Malthus believed that population growth would outstrip resources. In response, Thomas Carlyle called economics THE DISMAL SCIENCE. Many still believe, like Malthus, that the solution to poverty is birth control. WORLD POPULATION is currently growing more slowly than expected. But population in the developing world will continue to climb quickly.
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Economic Theories
Adam Smith (1776)
Wrote one of the most important works on Capitalism Economics The Wealth of Nations Freedom is vital Invisible Hand

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Economic Theories
Thomas Malthus (Early 1800s)
Studied the impact of population growth Dismal Science Too many people

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* * How does Economics effect business * II. UNDERSTANDING FREE-MARKET CAPITALISM

A. The Foundations of Capitalism B. How Free Markets Work C. How Prices Are Determined D. The Economic Concept of Supply E. The Economic Concept of Demand F. The Equilibrium Point, or Market Price G. Competition within Free Markets H. Benefits and Limitations of Free Markets

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Circular Flow Model

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Supply Curve
High

Price(P)

S
Low

Quantity(S)
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High

Demand Curve
High

Price(P)

D
Low

Quantity(D)
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High

Equilibrium Point
High
Surplus

Price

Market Equilibrium

S
Low

Shortage

D
High

Quantity
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Understanding Competition
Economies describe competition as Perfect Monopoly Oligoply Monpolistic

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Adam Smith
Wrote the Wealth of Nations Adam Smith (1776)
Freedom is vital Invisible Hand

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Free-Market Competition
Monopolistic Oligopoly Competition

One
Monopoly

Many
Perfect Competition

Sellers
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Competitive market conditions

How many Buyers? How many Sellers? What power or influence does the seller have over the market ? How similar are the products?

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Perfect Competition

Sellers

Buyer
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Perfect Competition
Unlimited number of buyers and sellers no one can influence the market

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Many Sellers With Perceived Differences

Monopolistic Competition:

Fast Food Colleges

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Oligopoly: Few Sellers Automobiles Tobacco

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Monopoly: One Seller

Utilities

Microsoft?

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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
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Understanding Market Structures

Economies are identified classified as Capitalism Communism Socialism Mixed

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Three Economic Systems

Mixed Socialism

(Highly Controlled)

(Little Control)

Communism

Capitalism

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Capitalism Private Property Business Ownership/ Profits Freedom of Competition Freedom of Choice
These are referred to as the Rights of Capitalism
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* * How does Economics effect business *

III. UNDERSTANDING SOCIALISM A. The Benefits of Socialism B. The Negative Consequences of Socialism

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Socialism
Private & Public Ownership Some Choices are Limited

Creates Social Equality Reduces Individual Incentive - Brain Drain

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Industrialized Nations Top Individual Tax Rate

U.S. Japan Germany Italy Spain France Austria Denmark 0% 10% 20% 30%
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40%

50%

60%

70%

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

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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 2-30

* * What is the major difference between * free markets and controlled markets To what extent does government control or regulate the economic activity Minimum Wage Taxes Right to compete Right to open a new business
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* * How does Economics effect business *

V. THE TREND TOWARD MIXED ECONOMIES

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Mixed Economies
Free-Market Economy = Capitalism Command Economy

Socialism Communism

Trend Results in Blend/Mix

Capitalism > Socialism Socialism > Capitalism
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* How does Economics effect business * * VI. UNDERSTANDING THE ECONOMIC SYSTEM OF THE UNITED
STATES A. Key Economic Indicators 1. Gross Domestic Product 2. The Unemployment Rate 3. The Price Indexes B. Productivity in the United States C. Productivity in the Service Sector D. The Business Cycle E. Stabilizing the Economy through Fiscal Policy

F. Using Monetary Policy to Keep the Economy Growing

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Why is the U.S. an Economic Success? Major Reason

Constitution Free Elections Free Enterprise System Abundant Resources Cultural Diversity
* Respondents could choose more than one.
Source: Investors Business Daily Survey

Percent*
85 84 81 78 71

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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

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Key Economic Indicators

Gross Domestic Product (GDP)
The sum of all goods and service produced in a given period Does not include used goods Financial products (sale or purchase of securities Or the value of domestic work performed by housewives or house dads

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Key Economic Indicators

Unemployment Rate
Made up of a couple of statistics Labor force participation rate Types of Unemployment Structural, Cyclical Discouraged worker effect Full employment unemployment
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Key Economic Indicators

Price Indexes
Consumer Price Index (CPI)

Producer Price Index (PPI)

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14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 1940

U.S. Gross Domestic Product

In Billions of U.S. $

1950

1960

1970

1980

1990

2000

2002

2005

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

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Share of World GDP(%)

1975 2004

G-8 Countries 44 U.S. only China India

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

55 22 5 3 7 21 13 6

Latin America

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16 14 12 10 8 6 4 2 0

U.S. Unemployment (%)

1940

1950

1960

1970

1980

1990

2000

2002

2005

Source: U.S. Bureau of Labor Statistics

Source: U.S. Bureau of Labor Statistics

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What Makes Up The Consumer Price Index?

Recreatio n Ap parel 5% 6% M ed ical Care/ Insu ran ce 7% M edical Care 6% F o od & Beverage 16%
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Other 5%

Hou sing & Util. 39%

Transpo rtatio n 18%

Source: U.S. Bureau of Labor Statistics

Where Does the Government Get Its Money?

4% 9% 43% 4% Individual Income Taxes Social Security & Payroll Taxes Corporate Taxes Excise Taxes 40% Other

Source: Office of Management & Budget, 2002

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50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

Federal Spending

1966 2006

Medicare & Medicaid

Source: Congressional Budget Office

Social Security

Interest

Defense

Other

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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

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Health Expenditure Projections

(Percent of National GDP)
18.00% 17.50% 17.00% 16.50% 16.00% 15.50% 15.00% 14.50% 14.00%

2004

2006

2008

2010

2012

% of GDP

Source: FORTUNE May 3, 2004

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Rising US Trade Deficit

0 -100000 -200000 -300000

Deficit in Millions

-400000 -500000 -600000 -700000 -800000 1980 1985 1990 1995 1999 2001 2003 2005

Source: US Dept of Commerce, Bureau of Economic Analysis

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14 12 10 8 6 4 2 0
Border & Port Security

Where are the Homeland Security Dollars Spent?

Aviation Security

Immigration Enforcement

BioDefense

Infrastructure Protection

Source: Business Week June 14, 2004

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What is the National Debt?

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Thank You Rehana Afzal

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