Slide show Madura, Introduction to business Chapter 3

1. Introduction to Business 5thed Jeff Madura 8/20/2011 1 SEF Comm&Fin - Introduction to Business - Ch3, HGreijmans

2. Chapter 3 Assessing Economic Conditions Learning Objectives: Impact of Economic Growth on Business Performance Impact of Inflation Impact of Interest Rates How Market Prices Are Determined Government Influence on Economic Conditions 8/20/2011 2 SEF Comm&Fin - Introduction to Business - Ch3, HGreijmans

3. Assessing Economic Conditions 8/20/2011 3 SEF Comm&Fin - Introduction to Business - Ch3, HGreijmans

4. 1: Impact of Economic Growth on Business Performance 66 1.1 Strong Economic Growth 66 1.2 Weak Economic Growth 66 1.3 Indicators of Economic Growth 68 8/20/2011 4 SEF Comm&Fin - Introduction to Business - Ch3, HGreijmans

5. 1.1 Strong Economic Growth 66 Economic growth can spread amongst businesses: Increase spending  Hire more employees  Expand operations  Increase demand in supplies, construction services, materials etc.  Increase spending for other firms Investors receive a higher return Increase spending 8/20/2011 5 SEF Comm&Fin - Introduction to Business - Ch3, HGreijmans

6. 1.1 Strong Economic Growth 66 8/20/2011 6 SEF Comm&Fin - Introduction to Business - Ch3, HGreijmans

7. 1.2 Weak Economic Growth 66 Decreasing growth Stagnating growth (no growth) Negative growth Recession: two consecutive quarters with a negative growth 8/20/2011 7 SEF Comm&Fin - Introduction to Business - Ch3, HGreijmans

8. 1.2 Weak Economic Growth 66 http://www.youtube.com/watch?v=5e1BuKBdi84 FEAR! http://www.google.com/finance?q=INDEXDJX:.DJI 8/20/2011 8 SEF Comm&Fin - Introduction to Business - Ch3, HGreijmans

9. 1.3 Indicators of Economic Growth 68 DEMAND side of the economy Aggregate expenditures: Total amount of spending in the country (not only consumers!). SUPPLY side of the economy Total production level: Total market value of all final products and services produced. GDP: Gross domestic product 8/20/2011 9 SEF Comm&Fin - Introduction to Business - Ch3, HGreijmans

10. 1.3 Indicators of Economic Growth 68 http://research.stlouisfed.org/fred2/graph/?id=GDP,GDPC1,FGEXPND, 8/20/2011 10 SEF Comm&Fin - Introduction to Business - Ch3, HGreijmans

11. 1.3 Indicators of Economic Growth 68 Nominal Increase in GDP Actual increase in GDP Inflation adjusted GDP 8/20/2011 11 SEF Comm&Fin - Introduction to Business - Ch3, HGreijmans

12. 1.3 Indicators of Economic Growth 68 UNEMPLOYMENT Frictional unemployment: Caused by imperfections in the labor market Seasonal unemployment: People who are not needed during certain seasons CYCLICAL UNEMPLOYMENT: Persons who are unemployed because of poor economic conditions Structural unemployment: People who are unemployed because of a missing labor skills, or due to changes in the production process. Cyclical unemployment, best indicator of weak economic growth 8/20/2011 12 SEF Comm&Fin - Introduction to Business - Ch3, HGreijmans

13. 1.3 Indicators of Economic Growth 68 Sensitivity to Economic Growth High Low 8/20/2011 13 SEF Comm&Fin - Introduction to Business - Ch3, HGreijmans

14. 2: Impact of Inflation 69 2.1 Types of inflation 70 Cost Push inflation: When higher prices charged by firms are caused by higher costs/purchase prices. Demand pull Inflation: When prices of product and services are pulled up by because of strong consumer demand. 8/20/2011 14 SEF Comm&Fin - Introduction to Business - Ch3, HGreijmans

15. 3: Impact of Interest Rates 72 3.1 Impact on a Firm's Expenses 72 Term of a long term loan is not the same as the interest term of the loan. 3.2 Impact on a Firm's Expansion 73 3.3 Impact on a Firm's Revenue 73 Revenues  Consumers 8/20/2011 15 SEF Comm&Fin - Introduction to Business - Ch3, HGreijmans

16. 3: Impact of Interest Rates 72 Global Business: Capitalizing on Global Economic conditions 75 Fishing out in the ocean instead of in the pond. 8/20/2011 16 SEF Comm&Fin - Introduction to Business - Ch3, HGreijmans

17. 3: Impact of Interest Rates 72 3.4 How Rising Interest Rates Affected the Housing Crisis 75 & Impact on the economy 8/20/2011 17 SEF Comm&Fin - Introduction to Business - Ch3, HGreijmans

18. 4: How Market Prices Are Determined 76 4.1 Demand Schedule for a Product 76  Relation between the price of a product and quantity demanded. 4.2 Supply Schedule for a Product 76  Relation between the price of a product and the quantity supplied. 8/20/2011 18 SEF Comm&Fin - Introduction to Business - Ch3, HGreijmans

19. 4: How Market Prices Are Determined 76 8/20/2011 19 SEF Comm&Fin - Introduction to Business - Ch3, HGreijmans

20. 4: How Market Prices Are Determined 76 4.3 Interaction of Demand and Supply 77 - surplus - shortage - equilibrium 8/20/2011 20 SEF Comm&Fin - Introduction to Business - Ch3, HGreijmans

21. 4: How Market Prices Are Determined 76 4.4 Effect of a Change in the Demand Schedule 78 8/20/2011 21 SEF Comm&Fin - Introduction to Business - Ch3, HGreijmans

22. 4: How Market Prices Are Determined 76 4.4 Effect of a Change in the Demand Schedule 78 Curacao North Sea Jazz Fest Snags Sting, Stevie Wonder Posted on Wednesday April 13, 2011 at 05:01 PM1 | The second annual Curacao North Sea Jazz Festival doesn’t happen until September but it has already nailed down some impressive headliners, including Sting and Stevie Wonder. http://www.pollstar.com/blogs/news/archive/2011/04/13/763575.aspx Beyonce's Concert sells out in 22 seconds! | Celebrities, Music ... terrellvanity.com/beyonces-concert-sells-22-seconds/music-news/ - 8/20/2011 22 SEF Comm&Fin - Introduction to Business - Ch3, HGreijmans

23. 4: How Market Prices Are Determined 76 4.5 Effect of a Change in the Supply Schedule 79 Foxconn Robots don’t complain Or demand higher wages, or kill themselves Aug 6th 2011 | HONG KONG | from the print edition 8/20/2011 23 SEF Comm&Fin - Introduction to Business - Ch3, HGreijmans

24. 4: How Market Prices Are Determined 76 4.6 Effect of Demand and Supply on the General Price Level 81 Effect on the average price in the economy 4.7 How Consumer Income Affects Market Prices 81 4.8 Consumer Preferences 81 4.9 Production Expenses 82 8/20/2011 24 SEF Comm&Fin - Introduction to Business - Ch3, HGreijmans

25. 5: Government Influence on Economic Conditions 82 5.1 Monetary Policy 82 5.2 Fiscal Policy 84 5.3 Summary of Government Influence on Economic Factors 85 5.4 Dilemma of the Federal Government 86 8/20/2011 25 SEF Comm&Fin - Introduction to Business - Ch3, HGreijmans

26. 5.1 Monetary Policy 82 Money Supply: Demand deposits (checking accounts), currency held by the public, and traveler’s checks.  Funds that financial institutes can lend to borrowers.  U.S. Money Supply is controlled by the Federal Reserve Bank  monetary policy influences the amount of money in the economy A bigger money supply means that financial institutes have more money to lend to the public, which results in lower interest rates in order to stimulate extra loans to the public. More loans to the public, results in a higher purchasing power, which can result in an risk for inflation. Inflation type. 8/20/2011 26 SEF Comm&Fin - Introduction to Business - Ch3, HGreijmans

27. 5.2 Fiscal Policy 84 Involves decision on how the federal government should set tax ratesand spend money. Warren Buffett Urges Congress to Increase Taxes on ‘Coddled’ Billionaires 15 Aug 2011 Billionaire Warren Buffett urged Congress to raise taxes on the nation's wealthiest individuals to help cut the U.S. budget deficit, saying it wo... 8/20/2011 27 SEF Comm&Fin - Introduction to Business - Ch3, HGreijmans

29. Revision in Corporate Taxes

30. Revision in Excise Taxes

31. Revision in the Budget Deficit8/20/2011 28 SEF Comm&Fin - Introduction to Business - Ch3, HGreijmans

32. Obama Signs Debt Plan to Avoid Default Q By Laura Litvan and Catherine Dodge - Aug 2, 2011 5:59 PM GMT-0400 President Barack Obama signed a debt- limit compromise that prevents a U.S. default on the day the Treasury had warned the nation’s borrowing authority would expire, ending a months-long debate that reinforced partisan divisions over federal spending. The Senate voted 74-26 for the measure, which raises the nation’s debt ceiling until 2013 and threatens automatic spending cuts to enforce $2.4 trillion in spending reductions over the next 10 years. It won backing from 45 Democrats, 28 Republicans and one independent. The House passed the plan yesterday. Link to article 8/20/2011 29 SEF Comm&Fin - Introduction to Business - Ch3, HGreijmans

33. U.S. Loses AAA Credit Rating as S&P Slams Debt Levels, Political Process Q By John Detrixhe - Aug 6, 2011 1:17 PM GMT-0400 Standard & Poor’s downgraded the U.S.’s AAA credit rating for the first time, slamming the nation’s political process and criticizing lawmakers for failing to cut spending or raise revenue enough to reduce record budget deficits. S&P lowered the U.S. one level to AA+ while keeping the outlook at “negative” as it becomes less confident Congress will end Bush-era tax cuts or tackle entitlements. The rating may be cut to AA within two years if spending reductions are lower than agreed to, interest rates rise or “new fiscal pressures” result in higher general government debt, the New York-based firm said yesterday. “The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics,” S&P said in a statement late yesterday after markets closed. Lawmakers agreed on Aug. 2 to raise the nation’s $14.3 trillion debt ceiling and put in place a plan to enforce $2.4 trillion in spending reductions over the next 10 years, less than the $4 trillion S&P had said it preferred. Even with the specter of a downgrade, demand for Treasuries surged as investors saw few alternatives amid concern global growth is slowing and Europe’s sovereign debt crisis is spreading. Link to article 8/20/2011 30 SEF Comm&Fin - Introduction to Business - Ch3, HGreijmans

34. 5.3 Summary of Government Influence on Economic Factors 85 8/20/2011 31 SEF Comm&Fin - Introduction to Business - Ch3, HGreijmans

35. 5.4 Dilemma of the Federal Government 86 The federal government faces a dilemma when attempting to influence economic growth. If it can maintain a low rate of economic growth, it can prevent inflationary pressure caused by an excessive demand for products. A restrictive monetary or fiscal policy may be used for this purpose. A restrictive monetary policy leads to low growth in the money supply over time, which tends to place upward pressure on interest rates. This discourages borrowing and therefore can reduce total spending in the economy. A restrictive fiscal policy results in high taxes and low government spending. Although restrictive monetary and fiscal policies may keep inflation low, a critical tradeoff is involved. The unemployment rate may be higher When the economy is stagnant. The federal government can use a more stimulative policy (such as low tax rates or a monetary policy designed to reduce interest rates) to boost economic growth. Although these policies increase economic growth, they may also cause higher inflation. Rarely is a consensus reached on whether the government should use a stimulative or restrictive policy at a given point in time. During the late 1990s, the federal government used stimulative monetary policies because inflation was very low and was not expected to be a serious problem. This monetary policy helped to increase economic growth during that period. As the economy weakened in 2008, stimulative monetary policies were used in an effort to increase economic growth. 8/20/2011 32 SEF Comm&Fin - Introduction to Business - Ch3, HGreijmans

36. 8/20/2011 SEF Comm&Fin - Introduction to Business - Ch3, HGreijmans 33 Inflation May Embolden Foes of Fed Stimulus By Shobhana Chandra, Alex Kowalski and David J. Lynch - Aug 19, 2011 12:00 AM GMT-0400

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38. For Q&A Summary of Learning objectives 88 Self-Test of Key Concepts 89 Self-Test of Key Terms 91 Class Concept Review Questions 92 Class Communication Questions 92 Small Business Case 93 Web Insight 8/20/2011 35 SEF Comm&Fin - Introduction to Business - Ch3, HGreijmans