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Copyright © 2004 South-Western. All rights reserved.4–1 Learning Goals Identify macroeconomic factors that affect business performance. Explain how market prices are determined. Explain how the government influences economic conditions.
Copyright © 2004 South-Western. All rights reserved.4–2 Economic Conditions –Macroeconomic conditions Overall economic state of a country –Microeconomic conditions Focus on conditions in a particular business or industry
Copyright © 2004 South-Western. All rights reserved.4–3 Macroeconomic Effects The performance of most firms depends on three macroeconomic factors: –Economic growth (employment rate) –Inflation –Interest rates
Copyright © 2004 South-Western. All rights reserved.4–4 Economic Growth general level of economic activity is higher than normal: –Total income level is relatively high. –higher volume of spending –higher revenues –Recession: Occurs when economic growth is negative for two consecutive quarters
Copyright © 2004 South-Western. All rights reserved.4–5 Indicators of Economic Growth Gross Domestic Product (GDP) Aggregate Expenditures
Copyright © 2004 South-Western. All rights reserved.4–6 Trend of Gross Domestic Product (GDP) Exhibit 4.1
Copyright © 2004 South-Western. All rights reserved.4–7 Indicators of Economic Growth In the U.S., these indicators are closely related: –consumer spending –production level Alternative Indicators of Economic Growth –Unemployment level –Industrial production level –New housing starts –Personal income level
Copyright © 2004 South-Western. All rights reserved.4–8 Unemployment Levels Frictional unemployment Seasonal unemployment Cyclical unemployment Structural unemployment Which is BEST?? How does Oregon Rank???
Copyright © 2004 South-Western. All rights reserved.4–9 Trend of U.S. Unemployment Exhibit 4.2
Copyright © 2004 South-Western. All rights reserved.4–10 Inflation An increase in the general level of prices of products and services over a specified period of time. –Estimated by the consumer price index (CPI). –CPI is a market basket of prices
Copyright © 2004 South-Western. All rights reserved.4–11 U.S. Inflation Rates over Time Exhibit 4.3
Copyright © 2004 South-Western. All rights reserved.4–12 Impact of Inflation Can affect a company’s operating expenses. Can affect a company’s revenues Cost-Push Inflation Demand-Pull Inflation
Copyright © 2004 South-Western. All rights reserved.4–13 Interest Rates Cost of borrowing money Firms may postpone expansion
Copyright © 2004 South-Western. All rights reserved.4–14 Market Price Determination Market price of a product is influenced by: –The total demand for that product by all customers –Supply of that product produced by firms The interaction between demand and supply determines the market price The “Invisible Hand” – Adam Smith
Copyright © 2004 South-Western. All rights reserved.4–15 How the Equilibrium Price is Determined by Supply and Demand Exhibit 4.6a
Copyright © 2004 South-Western. All rights reserved.4–16 Factors Influencing Market Prices Consumer income Changes in consumer tastes and preferences: Change in production expenses
Copyright © 2004 South-Western. All rights reserved.4–17 Monetary Policy Impacts Economic Conditions Monetary policy –Made by the Federal Reserve System “Fed” is the central bank of the U.S. (Greenspan) –Decisions by Fed about the money supply: Impact interest rates (expense and product demand)
Copyright © 2004 South-Western. All rights reserved.4–18 Fed’s Impact on Interest Rates Discount rate (loans to member banks) Purchases bonds on the open market Reserve Requirements
Copyright © 2004 South-Western. All rights reserved.4–19 Fiscal Policy How the federal government sets tax rates and spends money: –Personal income tax rates –Corporate taxes –Excise taxes
Copyright © 2004 South-Western. All rights reserved.4–20 Chapter Summary Firm performance depends on three macroeconomic factors: economic growth, inflation, and interest rates. Demand and supply conditions determine market prices. Federal government uses monetary and fiscal policies to influence macroeconomic conditions.
Copyright © 2004 South-Western. All rights reserved.4–21 Extra Credit Go to https://implicit.harvard.edu/implicit/demo /selectatest.jsp https://implicit.harvard.edu/implicit/demo /selectatest.jsp You can get there from my web site Take the age and one other test - do them quickly! Write a one page report on whether you found a bias and how you may be able to over come this bias when hiring - 25 potential points – writing must be
Copyright © 2004 South-Western. All rights reserved.4–22 NEXT TIME Meet with your group Chapter 5 – Microeconomics In text study guide Library visit (take notes)
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