Chapter 8 The Impact of Economic Forces

Macroeconomic Forces Macroeconomics: Key Macroeconomic Variables: The study of the entire economy of a nation. Key Macroeconomic Variables: Economic Growth Inflation Unemployment Interest Rates McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Gross Domestic Product (GDP) The market value of all final goods and services produced in a country in a given year. The 4 Components of GDP: Personal Expenditures Gross Private Domestic Investment Government Consumption Expenditures and Gross Investment Net Exports of Goods and Services (the value of exports minus the value of imports) McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Key Economic Factors Economic Growth: Per Capita Economic Growth: An increase in total spending in the economy. Per Capita Economic Growth: Calculated by dividing the GDP in each year by the population in that year. Per capita growth rate is then determined by comparing the GDP per person in the preceding year with the GDP per person in the current year. McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Key Economic Factors Inflation: Deflation: A general increase in prices or an increase in the prices of most goods and services. Deflation: A general decrease in prices or the prices of most goods and services. McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Unemployment Unemployment Rate: Types of Unemployment: The ratio of the number of people classified as unemployed to the total labor force. Types of Unemployment: Frictional Unemployment Structural Unemployment Seasonal Unemployment Cyclical Unemployment McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Interest Rates Interest: Effects of Interest Rates on Business: The price that individuals or businesses pay to borrow money. Effects of Interest Rates on Business: Rising interest rates increase the total price customers pay who use credit for products and services. Higher interest rates mean higher costs of doing business. Interest rates impact on the rate of expansion of a business. McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Monetary and Fiscal Policy Raising or lowering taxes of government spending in order to influence growth. Monetary Policy: Changing the money supply to change interest rates directly, thus influencing inflation, growth, and unemployment. McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved.

The Business Cycle The Business Cycle A somewhat regular pattern of ups and downs in aggregate production, as measured by the fluctuations in real GDP. Peak GDP Peak Expansion Expansion Recession Trough Year McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Industry Cycles Industry Cycles: Some industries are subject to their own cyclical fluctuations in sales and profits. Most likely to occur in industries where a high percentage of the cost of production is incurred at the time production capacity is created. Telephone industry Airline industry Electricity generation industry McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Microeconomic Forces Microeconomics: Market: The study of the behavior of individuals and firms. Market: The place where buyers and sellers meet and bargain over goods and services. McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Supply, Demand, and Market Price Revenue is determined by 2 factors: The prices customers pay. The total amount of goods and services customers purchase. P x Q = TR P = price, Q = quantity sold, and TR = total revenue McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Supply, Demand, and Market Price Demand Curve: A line on a graph that shows how much of a good or service buyers will purchase at each possible price. Supply Curve: A line on a graph that shows the amount of a good or service a business will offer at each possible price. Equilibrium Point: The point on a graph where the demand curve intersects the supply curve. McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved.

The Basic Supply and Demand Model Price Supply Curve Equilibrium Point Demand Curve Quantity McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Direct Competition Market Models Pure Competition: A market situation where many firms sell nearly identical products and no one firm can raise its price without losing most of its customers. Monopolistic Competition: A market situation where there are many firms but each firm has a slightly different product. McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Direct Competition Market Models Oligopoly: A situation where a few firms, with or without differentiated products, dominate the market. Pure Monopoly: A market situation where only one firm sells a product of service. McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Indirect Competition Different products or services that are perceived by customers as acceptable alternatives or substitute products or services. Southwest Airlines as a substitute for the car between Dallas, Houston, and San Antonio The Internet as a substitute for the U. S. Postal Service McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved.

The Role of Economics in Management Decision Making Managers must observe and predict what will happen in the overall economy to ensure that their decisions match their best guesses of the future. Large publicly held companies in particular must look at the economy because they know their performance and stock price will be affected by forces beyond their control. McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved.

The Role of Economics in Management Decision Making Stockholders will want to see continually rising stock prices or at least valid reasoning if stock prices do not meet expectations. Top managers in these large companies may make acquisitions, sell divisions, or even sell the company itself depending on their assessment of the economy and how their firm can compete. McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved.