1. 1 1-1 MUSOLINO How Economics Affects Business: The Creation and Distribution of Wealth 2 CHAPTER

2. 2 Economics: Create Wealth Study of how society chooses to employ resources to produce goods & services and distribute them among competing groups/individuals Micro v. Macro Resource Development

3. 3 Four “What’s” of an Economic System $What is produced? $What amount is produced? $What is the method of output distribution? $What is the rate of economic growth? Adapted from: Adapted from: Edwin Mansfield Economics (New York: W.W. Norton, 1976), p.8

4. 4 Economic Theories Thomas Malthus (Early 1800s) “Dismal Science” “Dismal Science” Too many people Too many people Adam Smith (1776) Freedom is vital Freedom is vital “Invisible Hand” “Invisible Hand”

5. 5 Circular Flow Model

6. 6 Three Economic Systems Communism Socialism Capitalism (Highly Controlled ) (Little Control ) Mixed

7. 7 Free-Market Capitalism Private Property Business Ownership/ Profits Freedom of Competition Freedom of Choice

8. 8 Supply Curve Quantity(S) High High Low Price(P) S

9. 9 Demand Curve Price(P) Quantity(D) High Low D

10. 10 Quantity High Low Price Equilibrium Point Market Equilibrium SD Surplus Shortage

11. 11 Free-Market Competition Sellers OneMany Monopoly Oligopoly MonopolisticCompetition Perfect Competition

12. 12 Perfect Competition Buyer Sellers

13. 13 Monopolistic Competition: Many Sellers With Perceived Differences Fast Food Colleges

14. 14 Oligopoly: Few Sellers Automobiles Tobacco Tobacco

15. 15 Monopoly: One Seller Utilities Microsoft? Microsoft?

16. 16 Limits of Free-Markets Inequality of Wealth- Causes National & World Tension Greed Compromises Ethics Limitations Push Country towards Socialism = Government Regulation

17. 17 Number of Workers per Social Security Recipient Source: Investors.com

18. 18 Industrialized Nations’ Top Individual Tax Rate Source: www.worldwide-tax.com, May 9, 2006

19. 19 Socialism Private & Public Ownership Some Choices are Limited Creates Social Equality Creates Social Equality Reduces Individual Incentive Reduces Individual Incentive - Brain Drain

20. 20 Communism Public Ownership Almost all major factors of production Almost all major factors of production Central Planning/Controlled Economy Shortages of food and other products Shortages of food and other products may develop may develop Lack of motivation to work hard for Lack of motivation to work hard for business people business people

21. 21 Mixed Economies Free-Market Economy = Capitalism Command Economy Socialism Socialism Communism Communism Trend Results in Blend/Mix Capitalism > Socialism Capitalism > Socialism Socialism > Capitalism Socialism > Capitalism

22. 22 Why is the U.S. an Economic Success? Major Reason Percent* Major Reason Percent* Constitution85 Free Elections84 Free Enterprise System81 Abundant Resources78 Cultural Diversity71 * Respondents could choose more than one. Source: Investors Business Daily Survey

23. 23 U.S. Economy Key Economic Indicators Productivity in the U.S. Productivity in the Service Sector Business Cycles Recession Recession Depression Depression Recovery RecoveryStabilization Fiscal Policy Fiscal Policy National Debt National Debt Economic Growth through Monetary Policy

24. 24 Key Economic Indicators Gross Domestic Product (GDP) Unemployment Rate Price Indexes Consumer Price Index (CPI) Consumer Price Index (CPI) Producer Price Index (PPI) Producer Price Index (PPI)

25. 25 U.S. Gross Domestic Product In Billions of U.S. $ Source: U.S. Dept. of Commerce, Bureau of Economic Analysis

26. ****** 1975 2004 1975 2004 G-8 Countries55 44 U.S. only22 21 China 5 13 India 3 6 Latin America 7 6 Africa 33 Share of World GDP(%) Source: www.dlc.org/ppi, July 6, 2005 2-26

27. 27 U.S. Unemployment (%) Source: U.S. Bureau of Labor Statistics Source: Source: U.S. Bureau of Labor Statistics

28. 28 What Makes Up The Consumer Price Index? Source: Source: U.S. Bureau of Labor Statistics

29. 29 Consumer Price Index 1982-84 = 100 Source: U.S. Dept. of Labor, Bureau of Labor Statistics

30. 30 Percent Change in Labor Productivity- U.S. Source: U.S. Dept. of Commerce, Bureau of Labor Statistics

31. 31 Where Does the Government Get Its Money? Source: Office of Management & Budget, 2002

32. 32 Federal Spending Source: Congressional Budget Office

33. 33 Biggest Economic Challenges Over the Next 3-5 years the U.S. can be expected to face these challenges: Pension & Health care costs Pension & Health care costs The Federal Deficit The Federal Deficit High Energy and Commodity Costs High Energy and Commodity Costs Balance of payments Balance of payments Terrorism Terrorism Source: Investors Business Daily January 9, 2006

34. 34 Healthcare Expenditure Projections (Percent of National GDP) Source: FORTUNE May 3, 2004

35. 35 Rising U.S. Trade Deficit Source: US Dept of Commerce, Bureau of Economic Analysis

36. 36 Where are the Homeland Security Dollars Spent? Source: Business Week June 14, 2004

37. 37 The debt has reached $8.36 trillion+ (May 2006) 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 560.1 miles in $1,000 bills National Debt Clock- http://www.brillig.com/debt_clock/ http://www.brillig.com/debt_clock/ What is the National Debt?