1. Economic Concepts
“It is in this manner that money has become in all civilized nations the universal instrument of commerce, by the intervention of which goods of all kinds are bought and sold, or exchanged for one another.”
Adam Smith, The Wealth of Nations

2. Objectives To identify economic resources.
To analyze how supply and demand impact price.
To investigate influences on a nation’s ability to trade.
To understand the concept of productivity.
To explore factors affecting business risk and profit.

3. What is Economics?
Economics is how humans allocate scarce resources to produce various commodities and how those commodities are distributed for societal consumption

4. Economic Resources
Are scarce and cannot meet all human wants and needs
human necessities
include goods and services we cannot live without
human wants
include every other type of goods and services we may want but do not need
examples:
need: open heart surgery
want: liposuction

5. Economic Resources
Resources are anything used to make goods or services, also called factors of production
Distributing and managing these resources efficiently and equitably are part of the basic question to be answered by economists

6. Factors of Production Land Labor Capital Entrepreneurship
natural resources found on earth
includes everything contained in the earth or the seas
Labor
human resources
includes all people who work within an economy
Capital
monetary resources needed to start and operate a business or goods used in the production process
Entrepreneurship
involves human skills required to start and run a business
organize the other three factors to create economic goods and services

7. Economic Utilities
Are the role of marketing adding value to a product; this added value is called utility
time utility
is having a product available to consumers during a certain time of year or day
example:
retailers often keep stores open later than 5:00 p.m. to accommodate those who work during the day
place utility
places products in easily accessible locations for consumers
form utility
creates more useful products out of raw materials or separate parts
possession utility
exchanges a product for some monetary form
information utility
gains from and supplies information to the consumer

8. Basic Economic Questions
Are answered by economic systems in different ways including:
What goods and services do we produce?
How do we produce those goods and services?
Who should benefit from the goods and services produced?
Are answered through a nation’s market or command system
no economy on the planet is purely market or command; elements of both systems are found in every economy, making them mixed economies

9. Types of Economic Systems
Market Economies
consumers decide what is produced by the purchases they make
businesses make production decisions
consumers earning more money purchase more goods and services
consumers are motivated to work in order to earn more money

10. Types of Economic Systems
Command Economies
one person or group of persons make production decisions
one person or group of persons owns all businesses and runs all businesses
one person or group of persons decides who will receive goods and services produced

11. Types of Economic Systems
Mixed Economies
All present-day global economies have a mixture of the market and command economic systems
History shows need for some government involvement in a free market
United States depression in 1930s

12. Economic Systems: A Continuum
What Do You Think?
Where on this continuum would you place the United States? Canada? Russia? China? North Korea?
On a economic continuum, with command economic systems far left and market economic systems far right, most countries fall somewhere in between
Economic Systems: A Continuum
Communism is the farthest left system
Left of center but still right of communism
Capitalism is the farthest right system
Socialism
Command Economy
Market Economy

13. Capitalism China's Jiang Zemin Is an economic system where:
businesses are privately owned
product development is proportionate to the accumulation and reinvestment of profits gained in a free market
government is usually democratic and maintains fewer social services than in a socialist country
example:
Japan versus the United States
China's Jiang Zemin
China has been a communist country since Since then, many of the country’s corporations have become government owned; resulting in almost 90% ownership in the 1990s and sagging profits. However, China’s leader in 1997, Jiang Zemin, has taken steps to privatize Chinese industries. Haier, a Chinese appliance maker, has opened plants in the United States to increase its international competition.

14. Socialism Is an economic system where:
there is increased government involvement
the goal is to keep prices low and provide jobs for everyone through government-owned businesses
such countries include:
Germany
Canada
Great Britain
Australia
Sweden

15. Socialism
Includes additional social services in order to secure a certain standard of living such as:
providing free or low-cost medical care
providing free education from elementary to college
providing pensions and free care for the elderly
forcing companies and individuals to pay much higher taxes

16. Communism Is a totalitarian economic system where:
the government runs and controls most aspects of daily life
there is little or no economic freedom
Theoretically every working –age citizen is assigned a job or continues getting paid, even if he/she stops going to
the government decides the type of schooling each citizen receives
Examples include:
China
North Korea

17. The Free Enterprise System
Is an economic system which:
using the capitalist approach
encouraging people to start and run businesses without government involvement
encouraging competition
a struggle between companies
an essential component of a free enterprise system

18. Types of Competition Price competition Non-price competition
focuses on the sale price of a product
assumes other factors are equal and customers will choose by price
Non-price competition
focuses on factors other than price
includes:
product quality
reputation
customer service
business location

19. Degrees of Competition
Monopolies
Refer to cone company controlling a product market
have no competition
are harmful to free enterprise
are regulated by the U.S. government
Oligopolies
are a few companies controlling a product’s market
can affect price and competition
What Do You Think?
What are some of the product markets with a monopoly or an oligopoly?

20. Risk
Includes the possibility of loss or failure in relation to the possibility of increased profit in a free enterprise system
Is a factor affecting business
new product development
close to 90% of new products fail
competition
once a product is on the market, other companies scramble for a piece of the “market pie”
Increases when profits increase

21. Profit
Motivates entrepreneurs to take risks involved in owning their own business
Is the income of a business after all costs and expenses have been deducted:
example:
5% of sales go to profits
95% of sales go to pay costs, expenses, taxes, etc.
Increases with lower costs and higher sales volume

22. Profitable versus Unprofitable Firms
positively affect and benefit:
employees
increased job market
increased salaries and benefits
an improved economy
investors
higher dividend returns
the government
increased salaries
increased business profits
increased money from taxes
consumers
increased competition creates lower profits, higher quality and better services for consumers

23. Profitable vs. Unprofitable Firms
negatively affect the economy with:
costs to employees
higher unemployment
salary cuts
costs to investors
loss on investment when stock price dips too low
selling stocks at a loss, creating an unstable stock market
costs to the government
decreasing taxes
decreasing funds available to social services
'90s Technology Bubble: Boom to Bust
The 1990s saw a huge profit growth for many technological companies, and the bull stock market kept climbing. But was there really profit growth? In 2001, whistleblowers uncovered nasty accounting cover-ups for major companies, such as Enron, Worldcom and their accounting firm, Arthur Andersen.

24. Governmental Role in Free Enterprise
Provides four functions:
basic social services, such as:
protection provided by the military, police and fire departments
public education
medical care for the poor and the elderly
transportation infrastructure
business support, such as:
relief in the event of disasters (i.e., droughts or hurricanes)
trade alliances with other countries
North American Free Trade Agreement (NAFTA) opened trade in North America by lifting tariffs and gradually reducing trade barriers within Canada, the United States and Mexico
NAFTA affected the trucking industry, as well as the agriculture industry. Do you think these affects were positive? Could the affects have been negative?
What Do You Think?

25. Governmental Role in Free Enterprise
Provides four functions:
3. business, individual and resource protection, through departmental regulation, such as:
Food and Drug Administration (FDA)
Occupational Safety and Health Administration (OSHA)
Equal Employment Opportunity Commission (EEOC)
Environmental Protection Agency (EPA)
4. competition, by running its own business operations, such as:
U.S. Postal Service
Amtrack
Tennessee Valley Authority (TVA)

26. Consumer Role in Free Enterprise
Two main functions :
attaching popularity to products
consumers ultimately decide what products (and businesses) survive by making purchases
determine the supply and demand for each products
by buying more or less of a product, consumers establish a supply and demand schedule for the given product
Con sum ers Go Crazy for Beanie Babies
Between 1993 and 1994, a toy swept the nation. At only $5, Tye Beanie Babies outsold higher-priced toys and started a craze with people elbowing others to get to new shipments. The draw to consumers, beside the toys’ lovable names and cute colors, was the hope of buying collector’s editions worth $100s or $1000s in the future. To heighten this perception, Tye would “retire” the toys after a short period on the market. This approach is a classical example of how a smaller supply of a popular product can increase demand.

27. Supply and Demand Supply Demand
is the amount of a product available to the market; stock
according to the law of supply, maintains as product price increases, the product quantity increases; causing a positive slope
as quantity rises, price rises
as quantity falls, price falls
Demand
is the consumer’s willingness to buy a product
according to the law of demand maintains as product price increases, the demand for the product decreases; causing a negative slope

28. Supply and Demand Schedules
Supply Schedule for Leather Jackets
Price per Jacket
$300
$250
$215
$175
$140
$115
$95
Number Supplied
7,400
4,780
4,330
3,400
2,860
2,300
1,890
As price increases, supply increases

29. Supply and Demand Schedules
Demand Schedule for Leather Jackets
Price per Jacket
$300
$250
$215
$175
$140
$115
$95
Number Demanded
1,650
2,100
3,880
4,900
5,725
6,780
7,600
As price increases, demand decreases

30. Supply and Demand Curves
Supply and Demand Curves for Leather Jackets
300
Price per jacket
200
100
Equilibrium point
Key
Supply Curve
1000
2000
3000
4000
5000
6000
7000
8000
Demand Curve
Number of jackets supplied/demanded

31. Supply and Demand
Interactions in the marketplace result in either surpluses, shortages or equilibriums
surpluses happen when a product is produced in larger quantities than it is demanded
shortages happen when a product is demanded and there are not enough quantities
equilibrium is met when the quantity of a product matches the demand of the product
can be found at the point where the demand curve meets the supply curve
at this point, the producer and the consumer are satisfied with the price of the product and the amount to produce

32. Economic Success Can be measured in several ways:
employee productivity
measures the output per hour of individual employees for a defined time period
multiple ways of increasing productivity:
furnishing new equipment or facilities to support better efficiency
arrange for more training or financial incentives
decrease employee ratio and give more responsibilities to remaining employees

33. Economic Success Q1 '98 Q1 '99 Q1 '00 Q1 '01 Q1 '02
Can be measured in several ways:
Gross Domestic Product (GDP)
total output of goods and services produced in a country
Q1 '98
Q1 '99
Q1 '00
Q1 '01
Q1 '02
GDP for U.S. from 1998 to 2002
Percentage (%)
What does this graph say about the GDP trend in the United States for the last five years?
Source: Bureau of Economic Analysis of the U.S. Department of Commerce, 2002

34. Economic Success Can be measured in several ways:
by the rate of inflation
the rate of rising prices in a country
low inflation rates signify a stable economy
high inflation rates signify an unstable economy
governmental goal to control inflation rates
combating rising inflation by raising interest rates to keep people from borrowing money
higher interest rates slow economic growth, thus slow down the rise of inflation

35. Economic Success Can be measured in several ways:
the Consumer Price Index (CPI) is used to measure inflation
measures about 400 goods and services used by average household
is also called cost-of-living index
the Producer Price Index (PPI) is used to measure inflation
measures wholesale price levels
is considered the trendsetter of the two since consumer prices generally follow producer prices

36. Economic Success Consumer Price Index (CPI) from 1972 to 2001
Percentage of change (%)
Source: Bureau of Labor Statistics of the U.S. Department of Labor, 2002
'72
'82
'92
'01
How would you describe the inflation rates from 1972 to 2001?

37. Economic Success Can be measured in several ways: unemployment rate
tracked by all countries
is then amount of people without jobs
higher unemployment rates can mean economic slowdowns
lower unemployment rates can mean economic expansions
with more people working, there are more people spending money and paying taxes

38. The Business Cycle
Constitutes economic production rising then falling in a long cycle of expansion and contraction
Cycles occur everywhere in nature and in human behavior
weather patterns often show cycles of drought followed by cycles of precipitation
cycles are used by the Old Farmer’s Almanac to predict everything from snowfall depth to fruit productivity

39. What Is a Business Cycle?
Ever heard a news anchor say the economy is in an upswing or a downswing? What does this mean?
when the GDP increases from one quarter (three-month period) to the next, it indicates the economy is growing (or in an upswing)
when the GDP rises less than in other quarters, or decreases, it indicates the economy is slowing down (or in a downswing)

40. What Is a Business Cycle?
The business cycle is a series of periods of growing and shrinking economic activity measured by increases or decreases in the real GDP
The business cycle consists of four phases:
expansion
peak
contraction
trough

41. What Is a Business Cycle?
Trough
Period of lowest economic activity
Expansion
A period of increasing economic activity–GDP increases, unemployment decreases
Business Cycle
Contraction
A period of decreasing economic activity– GDP decreases, unemployment increases
Peak
Period of highest economic activity

42. What Is a Business Cycle?
Business cycles do not always rise and fall in neat, predictable patterns
in the 1930s, the United States experienced a severe depression
a phase of the business cycle characterized by drastic unemployment increases and severe decreases in economic activity for long periods of time
Black Tuesday
What caused the great depression of the 1930s? Several factors led to the collapse of the economy but none are so memorable as “Black Tuesday.” The day was October 29, 1929, and businesses began the day with a hesitant optimism– the week before, on Thursday, October 24, the stock market had crashed but was saved by J.P Morgan and others. On Tuesday, however, the stock market plummeted again. This second crash proved to be the catalyst to a devastating period in American history.

43. Recession & Expansion What Do You Think?
Recession– two or more consecutive fiscal quarters of decreasing GDP
during a recession, plans for new projects decrease, prices increase and unemployment rates increase
Expansion– two or more consecutive fiscal quarters of increasing GDP
during an expansion, spending and production increase, prices increase and unemployment rates decrease
How would you describe the current U.S. economy? Is it in an expansion or recession? What factors led you to your decision?
What Do You Think?

44. International Trade What Do You Think? Is economic interdependence
where most countries depend, in some part, on other countries for certain goods or services
each country possesses unique resources
the Middle East possesses oil
Asia possesses an inexpensive labor force
Imports
are goods and services purchased from other countries
example:
silk
Exports
are goods and services sold to other countries
computers
grain
Do you think international trade is good or bad for the United States?
What Do You Think?

45. International Trade Theory
Seeks to answer questions such as:
“Why do nations trade?”
besides cultural and political reasons, the main reason is price
countries can buy some goods cheaper than they can make them
“What goods should be traded?”
most countries understand complete self-sufficiency is more expensive than global interdependence
How do you think countries decide what goods to purchase from other countries and what goods to produce on their own?
What Do You Think?

46. Advantages of International Trade
Absolute advantage:
is when a country possesses unique resources or capabilities to allow the lowest costs of production for a product
Comparative advantage:
is when a country is able to produce a product more efficiently and at lower costs than other countries
Wealth of Nations: Adam Smith
The original absent-minded professor, Adam Smith, is famous for being a forward-thinking economist, who, in the 18th century, wrote many books, including Wealth of Nations and influenced persons like Thomas Jefferson, Karl Marx and eminent economists of the 20th century, like John Maynard Keynes, John Kenneth Galbraith and Milton Friedman. He also introduced many concepts, such as laissez-faire, which are becoming major components of most economics courses.

47. Government Involvement in Trade
Laissez-faire
French word for “leave alone”
an economic concept opposing governmental involvement in commerce beyond what is necessary to keep an economic system running on its own laws
usually associated with a free enterprise system
Most countries have some form of governmental involvement, which usually includes:
trade barriers
trade alliances and agreements
How much involvement do you think a government should have in a nation’s economic system?
What Do You Think?

48. Trade Barriers Tariffs Quotas Embargos are a tax on imports
can either be protective or revenue-producing
protective tariffs– increases price on imports to protect domestic products
revenue-producing tariffs– supply revenue for a country
Quotas
limit the quantity or monetary value of an import
control the level of imports
Embargos
are a complete ban on certain products coming in or leaving the country
usually for political reasons
U.N. embargo against Iraq during Persian Gulf War
U.S. embargo against Cuba imposed in 1960
U.S. embargo against Vietnam lifted in 1994

49. Trade Alliances and Agreements
Are when governments establish agreements in order to establish international trade guidelines
World Trade Organization (WTO)
is a global coalition between 153 countries located in Geneva, Switzerland
performs functions, such as:
providing technical assistance and training for developing countries
handling trade disputes and administering trade agreements
cooperating with other international trade organizations
providing a forum for trade negotiations

50. Trade Alliances and Agreements
North American Free Trade Agreement (NAFTA)
became effective in 1994
was implemented to increase trade with Mexico
has a mission to diminish all trade barriers and investment restrictions between Canada, the United States and Mexico
immediately dropped tariffs from more than half of the goods traded between Mexico and the United States

51. Trade Alliances and Agreements
European Union (EU)
union established in 1993 between independent European countries
member countries:
Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, United Kingdom
encourage free trade among members and promotes work as a single market
uses the Euro, the single currency for the EU
in 2002, 11 member states made complete transition to the Euro currency

52. Impact of Economics
The welfare of a nation’s economy can directly correlate to an individual’s daily life
in a stable and expansive economy, individuals will increase spending and have more jobs opportunities
in an unstable and slow economy, unemployment rates will be high and jobs will be harder to find
How might economics affect your career?

53. Assessment What type of utility refers to using raw materials?
possession utility
time utility
form utility
information utility
Why is competition an important element in the free enterprise system?
3. Economic resources also are called “factors of production.”
a. true
b. false C
Without competition, monopolies would control product quality, price and variety. No competition essentially takes away consumers’ control.
True

54. Assessment Describe the term “economics.”
A market economy usually has one person or a group of persons making production decisions.
a. true
b. false
Which of the following is not a role of government in the U.S. economy?
provide services
support businesses
regulate by making laws
determine prices
4. Economics is how humans allocate scarce resources to produce various commodities and how those commodities are distributed for societal consumption
5. False
6. D

55. Assessment Conditions of supply and demand interaction include:
surpluses
shortages
equilibriums
all of the above
Employee productivity measures the total goods and services produced in a country.
true
false
What is a tariff?
What is meant by absolute advantage in international trade?
7. D
8. B
9. A tariff is a tax on imports.
10. Absolute advantage is when a country possesses unique resources or capabilities to allow lowest costs of production for a product.

56. Assessment What is a tariff?
What is meant by absolute advantage in international trade?
7. D
8. B
9. A tariff is a tax on imports.
10. Absolute advantage is when a country possesses unique resources or capabilities to allow lowest costs of production for a product.

57. Internet Links World Trade Organization http://www.wto.org/index.htm
Provides information and facts on the World Trade Organization and its members
U.S. Department of Labor
Provides data for unemployment rates and CPIs
U.S. Bureau of Economic Analysis
Provides GDP data and data on international trade

58. Acknowledgements
Farese, Lois S., Grady Kimbrell, and Carl A. Woloszyk. Marketing Essentials. New York: Glencoe McGraw-Hill, 2002.
Heilbroner, Robert L. The Worldly Philosophers: The Lives, Times & Ideas of the Great Economic Thinkers. New York: Simon and Schuster, 1961.
Perreault, William D. and E.Jerome McCarthy. Basic Marketing: A Global-Managerial Approach. Boston: Irwin McGraw-Hill, 1999.
Terpstra, Vern, Ravi Sarathy and Debra Laverie. International Marketing. New York: Harcourt College Publishers, 2000.
“The Corporate Scandal Sheet.” Forbes.com, accessed on the web on January 13,
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