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Economics/Business/Free Enterprise
PERIODS 3, HON
Mr. Dunn
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10
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30
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90
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
East
West
North
A FRAMEWORK FOR ECONOMIC ANALYSIS
• People choose.
• People’s choices involve costs.
• People respond to incentives in predictable ways.
• People create economic systems that influence individual choices and incentives.
• People gain when they trade voluntarily.
• People’s choices have consequences that lie in the future.
ENTREPRENEURSHIP
• HUMAN RESOURCE WHICH INNOVATES, DEVELOPS, MOTIVATES, DESIGNS, FINANCES, IMPLEMENTS AND/OR ORGANIZES PRODUCTION ELEMENTS AND PROCESSES TO BEGIN OR ENABLE PRODUCTION OF GOODS AND SERVICES.
• ENTREPRENEURS TAKE THE RISK AND BEAR THE BURDEN OF THE ENTERPRISE, EITHER EARNING A PROFIT IF SUCCESSFUL OR TAKING THE LOSS IF ENTERPRISE FAILS
FACTOR PAYMENT$
• CAPITAL INTEREST
• ENTREPRENEURSHIP PROFIT/LOSS
• LAND RENT
• LABOR WAGES/SALARIES
PRODUCTION POSSIBILITIES
• TWO PRODUCTS TO BE PRODUCED
• FIXED (LIMITED) SET OF RESOURCES
• MORE OF ONE—LESS OF THE OTHER
• WHAT IS LOST IS OPPORTUNITY COST
• ON THE FRONTIER-MOST EFFICIENT
• INSIDE THE FRONTIER-INEFFICIENT
• BEYOND THE FRONTIER-IMPOSSIBLE
• PPF SHOWS ALL POSSIBLE PRODUCTION COMBINATIONS WITH CURRENT RESOURCE MIX
• PPF IS ALSO REFERRED TO AS PPC
“GUNS OR BUTTER”
PRODUCING MORE BUTTER MEANS PRODUCING LESS GUNS—TO INCREASE QUANTITY OF X WE MUST DECREASE QUANTITY OF Y.
PPF/PPC SHAPES
BOWED—(CONCAVE FROM
THE ORIGIN) DUE TO THE
LAW OF INCREASING
OPPORTUNITY COSTS
STRAIGHT LINE—DUE TO
CONSTANT OPPORTUNITY
COSTS OR EQUAL AMOUNT
GAINED FROM WHAT IS LOST
EXPANSION/CONTRACTION OF PPF/PPC ONLY POSSIBLE WITH
• CHANGE IN RESOURCES
• CHANGE IN RESOURCE QUALITY
• CHANGE IN TECHNOLOGY
BASIC ECONOMIC QUESTIONS
•What goods and services are to be produced and in what quantities?
•How are these goods and services to be produced?
•Who receives / consumes these goods and services?
BROAD SOCIAL GOALS
• ECONOMIC EFFICIENCY
• ECONOMIC EQUITY
• ECONOMIC FREEDOM
• ECONOMIC GROWTH
• ECONOMIC SECURITY
• ECONOMIC STABILITY
ECONOMIC FUNCTIONS OF GOVERNMENT
• Maintaining Legal and Social Framework
• Providing Public Goods and Services
• Ensuring Competition
• Redistributing Income
• Correcting for Externalities
• Stabilizing the Economy
MICROECONOMICS
THE STUDY OF THE INTERACTION BETWEEN INDIVIDUAL COMPONENTS OF AN ECONOMY
• INDIVIDUALS (RESOURCE OWNERS)
• HOUSEHOLDS (CONSUMERS)
• BUSINESSES (FIRMS) (PRODUCERS)
• INSTITUTIONS (BANKS, LABOR, PACS, C of C, ORGS, etc)
COMPONENTS OF SIMPLE CIRCULAR FLOW
SECTORS
HOUSEHOLDS-RESOURCE SUPPLIERS-CONSUMER
BUSINESSES-RESOURCE DEMANDERS-PRODUCER
MARKETS
FACTOR—EXCHANGE RESOURCES FOR PAYMENTS
PRODUCT—PAYMENTS FOR GOODS/SERVICES
DEMAND
The quantities of a good or service consumers are willing and able to buy at different possible prices at a particular time
SHIFTING DEMAND
• PRICE EFFECT/SUBSTITUTION EFFECT
=MOVEMENT ALONG THE CURVE
• CHANGES IN DEMAND
INCOME
CONSUMER EXPECTATIONS
POPULATION
CONSUMER TASTES AND ADVERTISING
=SHIFT OF ENTIRE DEMAND CURVE
SHIFT RIGHT—INCREASED DEMAND
SHIFT LEFT—DECREASED DEMAND
SUPPLY The various amounts of something a producer is willing and able to sell at different possible prices at a particular time
SHIFTING SUPPLY
CAUSES FOR SHIFTS IN SUPPLY
INPUT COSTS
CHANGES IN TECHNOLOGY
REGULATORY POLICY
NUMBER OF SUPPLIERS
PRODUCER EXPECTATIONS
PRICE SYSTEM
•COMPETITION
•COSTS OF PRODUCTION FIXED-(RENT, MANAGEMENT,
INTEREST, OBLIGATIONS)
VARIABLE-(PRODUCTION-BASED, LABOR COSTS, SHIPPING COSTS)
•SUPPLYAND DEMAND • CONSUMER DRIVEN--MARKET FORCES
THE ROLE OF PRICE • INCENTIVE TO CONSUME/PRODUCE
• INFORMATION FOR BUYERS/SELLERS
• SIGNAL TO CONSUME/PRODUCE
• RATIONS GOODS AND SERVICES
• VOLUNTARY EXCHANGE
PROFIT: BUSINESS INCENTIVE
BUSINESS INCOME IS REVENUE
BUSINESS SPENDING IS COSTS
INCOME
TR = P x Q (PRICE X QUANTITY=TOTAL REVENUE)
COSTS (EXPENDITURES)
TC = FC + VC (FIXED COSTS + VARIABLE COSTS = TOTAL
COSTS)
P = TR – TC (PROFIT = TOTAL REVENUE – TOTAL COSTS)
BOTTOM LINE IN BLACK OR IN RED
PROFIT (+) OR LOSS (-)
BREAK-EVEN POINT MR = MC NO PROFIT/LOSS
TYPES OF BUSINESS ORGANIZATIONS
• SOLE PROPRIETORSHIP (75%/20% $) --OWNER KEEPS PROFIT/MAKES ALL DECISIONS --PERSONAL TAX RETURN/NO LEGAL PAPERWORK --UNLIMITED LIABILITY—LIMITED LIFE
• PARTNERSHIP (7%/10% $) --GENERAL—UNLIMITED LIABILITY FOR PARTNERS --LIMITED—(SILENT PARTNER(S) CONTRIBUTE(S) $) --LIMITED LIABILITY (LLP) ALL PARTNERS --SPECIALIZATION/DIVISION OF LABOR
--PROVIDES LARGER POOL OF CAPITAL
• CORPORATION (18%/70% $) -LIMITED LIABILITY/UNLIMITED LIFE AND $ --DOUBLE TAXATION/CORPORATE TAX RETURN --BOARD OF DIRECTORS/LEGAL PAPERWORK
BUSINESS FINANCING
•SHORT-TERM LOANS LESS THAN ONE YEAR
•MEDIUM-TERM LOANS 1-10 YEARS
•LONG-TERM LOANS MORE THAN TEN YEARS
MARKET STRUCTURE
• PERFECT COMPETITION --PRICE TAKER-(NO CONTROL OVER PRICE) --FEW IF ANY BARRIERS TO ENTRY
• IMPERFECT COMPETITION
– MONOPOLISTIC COMPETITION
– OLIGOPOLY
--DIFFERENTIATED PRODUCTS --PRICE LEADERSHIP – MONOPOLY
--PRICE MAKER-(TOTAL CONTROL OVER PRICE) --SINGLE PRODUCT --SIGNIFICANT BARRIERS TO ENTRY
MACROECONOMIC MEASURES
• GROSS DOMESTIC PRODUCT-GDP MEASURES ECONOMIC GROWTH
• CONSUMER PRICE INDEX-CPI MEASURES PRICE STABILITY—MARKET BASKET
• UNEMPLOYMENT RATE-UR MEASURES FULL EMPLOYMENT
GROSS DOMESTIC PRODUCT(GDP)
TOTAL MARKET VALUE OF ALL FINAL GOODS AND SERVICES PRODUCED WITHIN NATIONAL BOUNDARIES ANNUALLY
REAL GDP = GDP INFLATION ADJUSTED
PER CAPITA REAL GDP = REAL GDP DIVIDED BY THE NATIONAL POPULATION: INDICATES STANDARD OF LIVING
INFLATION • GRADUAL INCREASE IN PRICES
--DEMAND PULL (CONSUMPTION) “TOO MANY DOLLARS CHASING TOO FEW GOODS”
--COST PUSH (PRODUCTION) INCREASED COSTS DUE TO HIGHER INPUT COSTS
• ANTICIPATED(TIME TO REACT)
• UNANTICIPATED(UNFORESEEN)
-HURTS SAVERS/FIXED INCOMES
-HELPS BORROWERS/GOVTS
UNEMPLOYMENT
• FRICTIONAL: BETWEEN JOBS
• STRUCTURAL: MISMATCHED
SKILL SET
• CYCLICAL: BASED ON ECONOMY
UNEMPLOYMENT RATE (UR) LABOR FORCE = EMPLOYED + UNEMPLOYED
EMPLOYED
• OVER 16 YEARS OF AGE
• FULL OR PART-TIME
UNEMPLOYED
• OVER 16 YEARS OF AGE
• LOOKING FOR WORK/LAID OFF
UR = UNEMPLOYED/LABOR FORCE
PHASES OF BUSINESS CYCLE
• EXPANSION (GROWTH) DANGER OF OVERHEATED ECONOMY-INFLATION
• PEAK (BOOM) FULL EMPLOYMENT/POSSIBLE HIGH INFLATION
• CONTRACTION (RECESSION) RECESSION: SIX MONTHS NEGATIVE REAL GDP
• TROUGH (DEPRESSION) LAST DEPRESSION:GREAT DEPRESSION 1930-44
FISCAL POLICY
ACTIONS/DECISIONS BY GOVERNMENT
• INCREASING OR LOWERING TAXES
• INCREASING OR DECREASING SPENDING
• DECISIONS ON WHO AND WHAT TO TAX
• TRANSFER /REDISTRIBUTING INCOME
MONETARY POLICY
ACTIONS/DECISIONS BY THE FEDERAL RESERVE TO REGULATE GROWTH AND INFLATION BY CONTROL OF MONEY SUPPLY
THREE MONETARY TOOLS
• INCREASE/DECREASE DISCOUNT RATE • INCREASE/DECREASE BANK RESERVE
REQUIREMENTS • BUY OR SELL BONDS/SECURITIES
THE MONEY SUPPLY
• M1= COIN, CURRENCY, CHECKS (LIQUID MONEY)
• M2 = M1 + “NEAR MONIES” (SAVING DEPOSITS(< 100k) + CDS + MONEY MARKET ACCOUNTS + OTHER ASSETS)
• M3 = M2 + > 100K SAVINGS ACCOUNTS