Understanding How Economics Affects Business: Nickels Mchugh Mchugh

**
Understanding *
CHAPTER
How Economics
Affects
Business 2
Nickels McHugh McHugh
* *
1-1
1-1
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.
 Macroeconomics
 Microeconomics
 Resource Development
ECONOMIC THEORIES
• Thomas Malthus (Early 1800s)
• “Dismal Science”
• Too many people in one family
• Adam Smith (1776)

• Freedom is vital
• “Invisible Hand”
3 TYPES OF ECONOMIC SYSTEMS
 Capitalism: USA, Canada, UK etc.
 Socialism: Bangladesh, Vietnam, Cuba,

China etc.
 Communism: North Korea, Laos, China

etc.
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.
 Capitalist countries have free market economy.
 Private Property
 Profit Ownership
 Freedom of Competition
 Freedom of Choice/Work
HOW PRICES ARE DETERMINED IN FREE MARKET
(BY SUPPLY AND DEMAND)
 Supply: The quantity of products that manufacturers or
owners are willing to sell at different prices at a specific
time.
 Demand: The quantity of products that people are
willing to buy at different prices at a specific time.
SUPPLY CURVE
DEMAND CURVE
THE EQUILIBRIUM POINT OR MARKET PRICE
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.
PROS AND CONS OF CAPITALISM
 Open competition
 Inequality in society in
to provide high-
terms of wealth
quality products
and services  Greedy people and
companies
 Creates wealthy
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
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 the periodic rises and
falls that occur in economies over time.
 Boom
 Recession
 Depression
 Recovery
STABILIZING ECONOMY THROUGH FISCAL
POLICY
 Fiscal Policy: The governments effort to keep
the economy stable by increasing or decreasing
taxes or government spending.
 National Debt: The sum of government deficits

over time. If the government takes in more
revenue than it spends, there is a national
surplus.

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**

• Adam Smith (1776)

 Capitalism: USA, Canada, UK etc.

 Socialism: Bangladesh, Vietnam, Cuba,

 Communism: North Korea, Laos, China

 Mixed Economy: Economic systems in which

 Gross Domestic Products (GDP): The total

 National Debt: The sum of government deficits

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