1. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 2-1 CHAPTER THREE Economic Challenges Facing Global and Domestic Business

2. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 2-2 Economics: Use of scarce resources to produce goods/services, distribute them among competing groups/individuals

3. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 2-3 Economics: Creates Wealth Micro v. Macro Micro v. Macro

4. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 2-4 Economic Theory ADAM SMITH Freedom is vital Freedom is vital “Invisible Hand” of competition “Invisible Hand” of competition

5. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 2-5 Three Economic Systems Communism Socialism Capitalism (Highly Controlled ) (Little Control ) Mixed

6. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 2-6 Capitalism Private Property Private Property Profit/Ownership Profit/Ownership Freedom of Competition Freedom of Competition Freedom of Choice Freedom of Choice

7. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 2-7 Communism Public Ownership Public Ownership Productive Capacity Productive Capacity Capital Capital Central Planning/Controlled Economy Central Planning/Controlled Economy Managers = Mandatory Party Membership Managers = Mandatory Party Membership

8. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 2-8 Socialism Private & Public Ownership Private & Public Ownership Some Choices are Limited Some Choices are Limited Creates Social Equality & Equality of Results Creates Social Equality & Equality of Results Reduces Individual Incentive Reduces Individual Incentive

9. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 2-9 Mixed Economies Free-Market Economy = Capitalism Free-Market Economy = Capitalism Command Economy Command Economy Socialism Socialism Communism Communism Trend Results in Blend Trend Results in Blend Capitalism > Socialism Capitalism > Socialism Socialism > Capitalism Socialism > Capitalism

10. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 2-10 Supply Curve Quantity(S) High High Low Price(P) S

11. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 2-11 Demand Curve Price(P) Quantity(D) High HighLow D

12. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 2-12 Quantity High HighLow Price EQUILIBRIUM POINT Market Equilibrium SD Surplus Shortage

13. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 2-13 Degrees of Competition Sellers OneMany Monopoly Oligopoly MonopolisticCompetition Pure Competition

14. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 2-14 Monopoly = One Seller Diamonds Diamonds Utilities Utilities

15. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 2-15 Oligopoly = Few Sellers Tobacco Tobacco Automobiles Automobiles Cereal Cereal

16. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 2-16 Monopolistic Competition = Many Sellers With Perceived Differences Fast Food Fast Food Clothing Clothing Colleges Colleges

17. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 2-17 Pure Competition Buyer Sellers Sellers

18. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 2-18 Government’s Role in Economics Enforces Rules/Regulations Enforces Rules/Regulations Provides Public Goods Provides Public Goods Transfers Payments Transfers Payments Fosters Competition Fosters Competition Contributes to Economic Stability Contributes to Economic Stability

19. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 2-19 Egg McMuffin and large coffee for President Bush & 2,000 Secret Service Agents every morning for 575 years. Egg McMuffin and large coffee for President Bush & 2,000 Secret Service Agents every morning for 575 years. Average annual grocery bill for 250,000 families of 4. Average annual grocery bill for 250,000 families of 4. One year’s food for 5 million cats & dogs. One year’s food for 5 million cats & dogs. Tuition, room and board for freshman classes at Brown, Cornell, Harvard, Pennsylvania & Yale with $50M leftover for books. Tuition, room and board for freshman classes at Brown, Cornell, Harvard, Pennsylvania & Yale with $50M leftover for books. What $1 Billion Can Buy

20. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 2-20 Key Economic Indicators Gross Domestic Product (GDP) Gross Domestic Product (GDP) www.bea.doc.gov/bea www.bea.doc.gov/bea Unemployment Rate Unemployment Rate Price Indexes Price Indexes Consumer Price Index(CPI) Consumer Price Index(CPI) www.stats.bis.gov/cpihome.htm www.stats.bis.gov/cpihome.htm

21. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 2-21 What Makes Up the Consumer Price Index SOURCE: SOURCE: U.S. Bureau of Labor Statistics

22. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 2-22 Economic Scenarios Inflation vs. Deflation = #Dollars Chasing Amount of Goods/Services Inflation vs. Deflation = #Dollars Chasing Amount of Goods/Services Recession & Depression = Degrees of Severity Recession & Depression = Degrees of Severity Federal Reserve Attempts to Control Federal Reserve Attempts to Control

23. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 2-23 U.S. Government Economic Tools Monetary Policy- management of money supply Monetary Policy- management of money supply Fiscal Policy- management of taxes and government expenditures Fiscal Policy- management of taxes and government expenditures National Debt National Debt $455 Billion in 2003 (4.6% of GDP) $455 Billion in 2003 (4.6% of GDP)

24. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 2-24 How Much is the Federal Debt? The debt has reached $5.6 trillion The debt has reached $5.6 trillion If $1,000 bills were stacked: If $1,000 bills were stacked: $1 Million = 4.29 Inches $1 Million = 4.29 Inches $1 Billion = 357.5 Feet $1 Billion = 357.5 Feet $1 Trillion = 67 Miles $1 Trillion = 67 Miles The debt is equal to 375.2 miles in $1,000 bills The debt is equal to 375.2 miles in $1,000 bills