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UnderstandingEvolving
EvolvingEconomic
Economic
Systems
Systemsand
andCompetition
Competition
Chapter
2
THE
THEFUTURE
FUTUREOF
OFBUSINESS
BUSINESS
Gitman
Gitman&&McDaniel
McDaniel
55ththEdition
Edition
Prepared
Preparedby
by
Chapter 2
Deborah Baker
Deborah Baker
Texas
Texas ChristianUniversity
Christian University
Learning Goals
1 What is economics, and how are the three sectors of the
economy linked?
2 How do economic growth, full employment, and price
stability indicate a nations economic health?
3 What is inflation, how is it measured, and what causes it?
4 How does the government use monetary policy and fiscal
policy to achieve its macroeconomic goals?
5 What are the basic microeconomic concepts of demand
and supply, and how do they establish prices?
6 What are the four types of market structure?
7 Which trends are reshaping micro- and macroeconomic
environments?
Chapter 2
What is economics,
and how are the three sectors
of the economy linked?
Chapter 2
Macroeconomics
Macroeconomics is is the
the
study
study of
of the
the economy
economy
as
as aa whole.
whole.
Microeconomics
Microeconomics focuses
focuses
on
on individual
individual parts
parts of
of
Chapter 2
the
the economy.
economy.
Copyright 2005 by South-Western, a division of 4
1 HOW BUSINESS AND ECONOMIES WORK
What
What is
is produced?
produced?
Economic
Economic How
How much
much is
is produced?
produced?
Concerns
Concerns
How
How is
is itit produced?
produced?
For
For whom
whom is
is itit produced?
produced?
Decisions
Decisions made
made by:
by:
Marketplace
Marketplace
Government
Government
Chapter 2
What
What products
products to
to produce
produce
How
How to
to price
price them
them
Economic
Economic
Decisions
Decisions How
How many
many people
people
of
of to
to employ
employ
Businesses
Businesses
How
How much
much to
to pay
pay
employees
employees
How
How much
much to
to expand
expand
the
the business
business
Chapter 2
Economics
Economics asas aa
Circular
Circular Flow
Flow
Chapter 2
Main
Main
Macroeconomic
Macroeconomic
Goals
Goals
Economic Growth
Full Employment
Price Stability
Chapter 2
Drawbacks
Drawbacks of
of Economic
Economic Growth
Growth
Pollution
Pollution GDP: The total
Strain
Strain on
on public
public facilities
facilities market value of final
goods and services
produced within a
Chapter 2
nations border.
An increase in Recession:
business activity A decline in GDP over
results in a rise in: two consecutive
quarters
Output
Output
Income
Income
Employment
Employment
Prices
Prices
Chapter 2
Frictional
Frictional
Structural
Structural
Cyclical
Cyclical
Types
Types of
of
Unemployment
Unemployment
Seasonal
Seasonal
Chapter 2
What is inflation,
how is it measured,
and what causes it?
Chapter 2
Demand-Pull
Demand-Pull Demand
Demandforforgoods
goods
Inflation
Inflation and
andservices
servicesis
isgreater
greater
than
thanthe
thesupply
supply
Cost-Push
Cost-Push Increases
Increases in
inproduction
production
Inflation
Inflation costs
costspush
pushup upprices
prices
Chapter 2
Index
Indexof
of prices
pricesof
of aa
Consumer
ConsumerPrice
Price Index
Index market
marketbasket
basketofof
(CPI)
(CPI) goods/services
goods/services
purchased
purchasedby byconsumers
consumers
Prices
Pricespaidpaid by
byproducers
producers
Producer
ProducerPrice
PriceIndex
Index for
forraw
raw materials,
materials,
(PPI)
(PPI) partially
partiallyfinished
finishedgoods,
goods,
and
and finished
finished products
products
Chapter 2
Contractionary
Contractionary
Policy
Policy
Monetary
Monetary Policy
Policy
Expansionary
Expansionary
Policy
Policy
Spending
Spending
Fiscal
Fiscal Policy
Policy
Taxation
Taxation
Chapter 2
What
What are
are the
the basic
basic
microeconomic
microeconomic concepts
concepts
of
of demand
demand andand supply,
supply,
and
and how
how do
do they
they establish
establish prices?
prices?
Chapter 2
What
What are
are the
the four
four types
types
of
of market
market structure?
structure?
Chapter 2
Perfect
Perfect
Competition
Competition
Pure
Pure
Four
Four Types
Types Monopoly
Monopoly
of
of
Market
Market Monopolistic
Structures Monopolistic
Structures Competition
Competition
Oligopoly
Oligopoly
Chapter 2
AAlarge
largenumber
number of
of small
smallfirms
firmsare
arein
in the
themarket
market
The
Thefirms
firmssell
sellsimilar
similarproducts
products
Buyers
Buyersand
andsellers
sellershave
havegood
goodinformation
information about
about
prices,
prices,supply
supplysources,
sources,etc.
etc.
ItIt is
iseasy
easytoto open
open aanew
new business
business or
or close
closean
an
existing
existingone one
Chapter 2
AAsingle
singlefirm
firmaccounts
accountsfor
forall
allindustry
industrysales
sales
AAfirm
firm is
isthe
theindustry
industry
Barriers
Barriersto
toentry
entryprevent
prevent new
new firms
firms
from
fromcompeting
competingwith
withthe
theexisting
existingfirm
firm
Chapter 2
Many
Manyfirms
firmsare
arein
in the
themarket
market
The
Thefirms
firmsoffer
offerproducts
products that
thatare
are
close
closesubstitutes
substitutesbut
butstill
still different
different
ItIt is
isrelatively
relativelyeasy
easyto
toenter
enter the
the market
market
Chapter 2
AAfew
few firms
firmsproduce
producemost
mostor
or all
allof
ofthe
theoutput
output
Large
Largecapital
capital requirements
requirementslimit
limitthe
the
number
numberofoffirms
firms
Chapter 2
What
What trends
trends are
are reshaping
reshaping micro-
micro-
and
and macroeconomic
macroeconomic environments?
environments?
Chapter 2
Long-Term
Long-Term Relationships
Relationships
Macroeconomic
Macroeconomic Competitive
Competitive Workforces
Workforces
and
and
Microeconomic
Microeconomic Entrepreneurial
Entrepreneurial Spirit
Spirit
Trends
Trends in
in Former
Former Command
Command Economies
Economies
Big
Big Government
Government Returns
Returns
Chapter 2