**

Understanding *

CHAPTER
How Economics
Affects
Business 2
Nickels
*
McHugh
*
McHugh

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ECONOMICS
 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.
WHAT IS ECONOMICS?
 Economics
usually work from two perspectives:
Macroeconomics & Microeconomics
 Macroeconomics: looks at the operation of a nation’s
economy as a whole – how many jobs exist in the whole
economy – includes gross domestic product,
unemployment rate and price indexes
 Microeconomics: looks at the behavior of people and
organizations in particular markets – how many people will
be hired in a particular industry or a particular region of the
country – issues include pricing, supply and demand

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THREE ECONOMIC SYSTEMS

Mixed

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Socialism

(Highly Controlled) (Little Control)

Communism Capitalism
 3 TYPES OF ECONOMIC
SYSTEMS

Capitalism: USA, Canada, UK etc.

Socialism: Bangladesh, Vietnam, Cuba, China

etc.

Communism: North Korea, Laos, China etc.

 PROS AND CONS OF
CAPITALISM
 Open competition to  Inequality in society in
provide high-quality
terms of wealth
products and services
 Greedy people and
 Creates wealthy
companies
economy
 Creates opportunity
for employment to
reduce poverty
BENEFITS AND NEGATIVES OF
SOCIALISM

 Social equality
 Free education, free health care, free child care

Negatives of Socialism:
 Brain Drain: The loss of the best and brightest people to
other countries.
 Fewer innovation
NEGATIVES OF COMMUNISM
 Government does not know what to produce
 Communism does not inspire businesspeople to work
hard because incentives are not there
FREE MARKET IN CAPITALIST
ECONOMY
 Free Market: A Free market is one in which decisions
about what and how much to produce are made by the
market- the buyers and sellers negotiating prices for
goods and services.
 Capitalistcountries have free market economy.
 Private Property
 Profit Ownership
 Freedom of Competition
 Freedom of Choice/Work
 Free-Market Competition
• Four different degrees of competition exist:

Monopolistic

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Oligopoly Competition

One Many

Monopoly Perfect
Competition

Sellers
COMPETITION WITHIN FREE MARKETS
 Perfect Competition:
• Many sellers in a market
• None is large enough to dictate the price of a product
• For example: potatoes, rice, corn etc.

 Monopolistic Competition:
• Large number of sellers
• Produce very similar products that buyers nevertheless
perceive as different.
• For example: Soft drinks, fast-food, t-shirt etc.
COMPETITION WITHIN FREE MARKETS
(CONT..)
 Oligopoly:
• Few sellers dominate the market.
• For example: Tobacco, automobile, aircraft etc.

 Monopoly:
• Only one seller controls the total supply of a product or
service
• Sets the price for the total market.
• For example, DESCO, WASA etc.
THE MAJOR ECONOMIC SYSTEMS
 Free-market Economy: It exists when the market
largely determines what goods and services get
produced, who gets them, and how the economy grows.
Capitalism is associated with this economic system.
 Command Economy: It exists when the government
largely decides what goods and services will be
produced, who gets them, and how the economy will
grow. Socialism and Communism are variations of this
economy.
THE MAJOR ECONOMIC SYSTEMS (CONT…)

 Mixed Economy: Economic systems in which some

allocation of resources is made by the market and some
by the government.
 Bangladesh, Iceland, Sweden, France, the U.S, the U.K, Cuba,
Russia, China are some of the countries with mixed economy .
KEY ECONOMIC INDICATORS

 Gross Domestic Products (GDP): The total value of

final goods and services produced in a country in a
given year.
 Unemployment Rate: The number of civilians who
are unemployed and trying to find a job.
 Inflation: A general rise in the prices of goods and
services over time.
 Disinflation: A situation in which price increases in a
slow manner .
KEY ECONOMIC INDICATORS
 Deflation: A situation in which prices are
declining.
 Stagflation: A situation when the economy is
slowing but prices are going up anyhow. (e.g.
Cyprus, Italy etc.)
 Consumer Price Index (CPI): Monthly
statistics that measure the pace of inflation or
deflation.
 Producer Price Index (PPI): An index that
measures prices at the wholesale level.
 THE BUSINESS CYCLE
• Business Cycles are periodic rises and falls that occur in economies
over time.
• Economists look at a number of types of cycles from seasonal cycles

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that occur within a year to cycles that occur every 48-60 years.
• Four phases of long term business cycles include:
 Economic Boom occurs when businesses are booming and the economy
is growing at a good pace.
 Recession occurs when there is two or more consecutive quarters of
decline in GDP. In a recession, prices fall, people purchase fewer products
and businesses fail. Negative consequences for recession are high
unemployment, increased business failures and drop in living standard.
 A depression is a severe recession accompanied by deflation.
 A recovery occurs when the economy stabilizes and starts to grow. This
eventually leads to economic boom starting the cycle all over again.
 STABILIZING THE ECONOMY
• Since dramatic swings in the economy causes all kinds of disruption
to businesses, the gov’t tries to minimize such changes. The gov’t
uses fiscal policy and monetary policy to try keep the economy from
slowing down too much or growing too rapidly.
– Fiscal Policy: Fiscal policy consist of government efforts to keep

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the economy stable by increasing or decreasing taxes or
government spending.
• Theoretically high tax rates tend to slow the economy, since high
tax rates draws money from businesspeople and workers, which
gives them less incentive to work and hence their effort decreases.
It also leaves less money to spend in the hands of consumers.
• Government spending refers to the spending by the government on
highways, social programs, education, defense and so on.
Optimum level of government spending helps an economy prosper.
• The search is for a good balance between taxes and spending so
that the economy can grow and the government can fund its
various programs.
STABILIZING THE ECONOMY
– Monetary Policy: Monetary policy is the management of the
money supply and interest rates
• When economy of a country is booming, interest rates are
raised.

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• When economy of a country is slow, unemployment gets too
high, the Federal Reserve System may put more money into
the economy and lower interest rates so that there is more
money available for people to borrow. This provides a boost to
the economy as businesses borrow and spend more money
and hire more people.