2. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
2 Economics: The Framework for Business
Define economics and discuss the
evolving global economic crisis
Analyze the impact of fiscal and
monetary policy on the economy
Explain and evaluate the free market
system and supply and demand
2
2-1
2-2
2-3

3. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
2 Economics: The Framework for Business
Explain and evaluate planned market
systems
Describe the trend toward mixed
market systems
Discuss key terms and tools to
evaluate economic performance
3
2-4
2-5
2-6

4. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Economics
￭ Study of the choices that people,
companies, and governments make in
allocating society’s resources
 Guide decision-making
 Help understand broad forces that affect
business and personal life
￭ Economy: Financial and social system
of how resources flow through society
4

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Macro and Micro Economics
5
￭ Macroeconomics: Study of a country’s
overall economic dynamics
 Employment rate, gross domestic product,
and taxation policies
￭ Microeconomics: Study of smaller
economic units
 Individual consumers, families, and
individual businesses

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Global Economic Crisis
￭ Started with slump in dot-com business
followed by the 9/11 terrorist attacks
Stock market dropped
 Unemployment rose
 Economic experts feared that the U.S. was
on the edge of a full-blown recession
6

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Global Economic Crisis
￭ Subprime mortgage loans - Loans to
borrowers with:
 Low credit scores
 High debt-to-income ratios
 Other signs of a reduced ability to repay the
money they borrow
￭ Financial institutions suffered when
mortgage-backed funds lost value
7

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Steps Taken by the Federal Government and the
Federal Reserve
￭ Troubled Assets Relief Program (TARP) -
$700 billion economic bailout plan
￭ American Recovery and Reinvestment
Act
 Designed to turn the economy around over
the next two years
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Managing the Economy: Fiscal & Monetary Policy
￭ Help achieve the goal of controlled
sustained economic growth
￭ Fiscal policy: Government efforts to
influence the economy through taxation
and spending
￭ Monetary policy: Federal reserve
decisions that shape the economy by
influencing interest rates and supply of
money
9

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Debt Ceiling and Fiscal Cliff
￭ Debt Ceiling - Maximum amount Congress
lets the government borrow
 Limits amount that government can borrow
￭ Fiscal cliff - Package of across-the-board
spending cuts and sharp tax hikes
 Aimed to decrease the U.S. budget deficit
 Not beneficial if the U.S. economy goes over the
fiscal cliff
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Budget
Outlines expected revenue from taxes and fees,
and expected spending
•Revenue is higher than expenses over a given period
Budget surplus
•Expenses are higher than revenue over a given period
Budget deficit
•Sum of all the money borrowed and not yet repaid by they federal
government
Federal debt
11

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Federal Reserve Banks
￭ Execute Fed policies
￭ Perform banking services for commercial
banks in their districts
 Commercial banks: Privately owned
financial institutions
• Accept demand deposits
• Make loans
• Provide other services for the public
12

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Money Supply
￭ Total amount of money within the overall
economy
￭ Money: Medium of exchange, a
measure of value, or a means of
payment
￭ Commonly used definitions
 M1: All currency plus checking accounts and
traveler’s checks
13

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Money Supply
 M2: M1 money supply plus most savings
accounts, money market accounts, and
certificates of deposit
￭ When economy contracts, Fed increases
the money supply
￭ When prices rise, Fed reduces the
money supply
14

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Open Market Operations
￭ Federal Reserve function of buying and
selling government securities
 Includes treasury bonds, notes, and bills
￭ Federal Deposit Insurance
Corporation (FDIC): Federal agency
that insures deposits in banks and thrift
institutions for up to $250,000 per
customer, per bank
15

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Discount Rate and Reserve Requirement
￭ Discount rate: Rate of interest that the
Federal Reserve charges when it loans
funds to banks
￭ Reserve requirement: Rule set by the
Fed which specifies minimum amount of
reserves a bank must hold
 Expressed as a percentage of the bank’s
deposits
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Capitalism: Free Market System
￭ Economic system based on private
ownership, economic freedom, and fair
competition
 Known as the private enterprise or free
market system
 Economic system: Structure for allocating
limited resources
17

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Fundamental Rights of Capitalism
18

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Degrees of Competition
• Market structure with many competitors selling virtually identical products
• Barriers to entry are quite low
Pure competition
• Market structure with many competitors selling differentiated products
• Barriers to entry are low
Monopolistic competition
• Market structure with only a handful of competitors selling products that can
be similar or different
• Barriers to entry are typically high
Oligopoly
19

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Monopoly
20
One producer completely dominates the industry,
leaving no room for any significant competitors
•Barriers to entry tend to be virtually insurmountable
Natural monopoly: Market structure with one
company as the supplier of a product
•Reason - Nature of that product makes a single supplier
more efficient
•Government sanctioned and regulated

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Capitalism: Supply & Demand
Explains the dynamic interaction between buyers and
sellers that directly affects:
• Range of products
• Prices
Supply
• Quantity of products that producers are willing to offer for sale at
different market price
Demand
• Quantity of products that consumers are willing to buy at different
market prices
21

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Supply
￭ To make profits, businesses produce:
 More of a product that commands a higher
market price
 Less of a product that commands a lower
price
￭ Supply curve: Graphed relationship
between price and quantity from a
supplier standpoint
22

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Exhibit 2.3 - Supply Curve
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Demand
￭ To get the products at the lowest
possible prices consumers buy:
 More products with lower prices
 Fewer products with higher prices
￭ Demand curve: Graphed relationship
between price and quantity from a
demand standpoint
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Exhibit 2.4 - Demand Curve
25

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Equilibrium Price
￭ Associated with the point at which the
quantity demanded equals the quantity
supplied
￭ Constant interaction between supply and
demand determines the market price
26

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Exhibit 2.5 - Equilibrium
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Socialism
￭ Economic system based on the principle
that the government owns and operates
key enterprises that directly affect public
welfare
￭ Has higher taxes, designed to distribute
wealth more evenly through society
￭ Cause of slump in socialist economies
 High taxes and lavish social programs
28

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Communism
29
￭ System that calls for public ownership of
all enterprises, under a strong central
government
￭ Did not thrive due to following reasons
 Authoritarian governments suspended
individual rights and choices
 Developed crippling shortages and surpluses
 Corruption at every level of government

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Mixed Economies
￭ Embody elements of both planned and
market-based economic systems
￭ Federal government partly owns number
of financial institutions
￭ Government intervenes in the free
market by creating regulations
￭ Privatization: Converting government-
owned businesses to private ownership
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Evaluating Economic Performance
31

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Gross Domestic Product (GDP)
￭ Total value of all final goods and services
produced within a nation’s physical
boundaries over a given period of time
￭ Used to:
 Measure the economic performance of
individual nations
 Compare the growth among nations
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Employment Level
￭ Tracked through unemployment rate
 Unemployment rate: Percentage of people in
the labor force over age 16 who do not have
jobs and are actively seeking
￭ Categories of unemployment
 Frictional - Temporary unemployment
 Structural - Long term unemployment
 Cyclical - Layoffs during recessions
 Seasonal - Job loss related to the time of year
33

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Business Cycle
Periodic contraction and expansion that occur over
time in every economy
•Recession: Decrease in the GDP for two consecutive quarters
•Depression: Long and deep recession
Contraction: Period of brief economic downturn
Recovery: Period of rising economic growth and
employment
Expansion: Period of robust economic growth
and high employment
34

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Price Levels
￭ Inflation: Period of rising average
prices across the economy
￭ Hyperinflation: Average monthly
inflation rate of more than 50 percent
35

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Price Levels
￭ Disinflation: Period of slowing average
price increases across the economy
￭ Deflation: Period of falling average
prices across the economy
36

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Price Indexes to Evaluate Inflation
￭ Consumer price index (CPI):
Evaluates the change in the weighted-
average price of goods and services that
the average consumer buys each month
￭ Producer price index (PPI):
Evaluates the change over time in the
weighted-average wholesale prices
37

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Productivity
￭ Relationship between:
 Output - Production of goods or services
 Input - Resources required to produce goods
or services
38
Productivity = Output/Input

39. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Define economics and discuss the
evolving global economic crisis
Analyze the impact of fiscal and
monetary policy on the economy
Explain and evaluate the free market
system and supply and demand
39
2-1
2-2
2-3

40. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Explain and evaluate planned market
systems
Describe the trend toward mixed
market systems
Discuss key terms and tools to
evaluate economic performance
40
2-4
2-5
2-6