Units 1 & 2Economic Decisions and Systems

PRINCIPLES OF BUSINESS, FINANCE

AND MARKETING

Satisfying Wants & Needs

Economic Choices

Economic Systems

Supply and Demand

UNIT 1.01

WantsNot necessary for survival, but add comfort and pleasure to our lives

i.e. video games, designer clothes, Needs

Things that are necessary for survival i.e. food, clothing, shelter

Question: Is a car a want or a need?

SATISFYING WANTS AND NEEDS

Unlimited wants and needs, limited economic resources

ScarcityNot having enough resources to satisfy every need

Limited supplies of goods and servicesSomeone’s going to go without

BASIC ECONOMIC PROBLEM

Opportunity CostValue of the next best alternative that you were not able to chose

Trade Off – what you make when you give something up to have something else

College vs. Work

ECONOMIC CHOICES

  Job   College

Year

Annual Income/ Expense Cumulative  

Annual Income/ Expense Cumulative

1 $ 20,000    

$ (20,000)  

2 $ 20,000

$ 40,000  

$ (20,000)

$ (40,000)

3 $ 20,000

$ 60,000  

$ (20,000)

$ (60,000)

4 $ 20,000

$ 80,000  

$ (20,000)

$ (80,000)

5 $ 20,000

$ 100,000  

$ (20,000)

$ (100,000)

6 $ 20,000

$ 120,000  

$ 50,000

$ (50,000)

7 $ 20,000

$ 140,000  

$ 50,000

$ -

10 $ 20,000

$ 200,000  

$ 50,000

$ 150,000

15 $ 20,000

$ 300,000  

$ 50,000

$ 400,000

20 $ 20,000

$ 400,000  

$ 50,000

$ 650,000

25 $ 20,000

$ 500,000  

$ 50,000

$ 900,000

6 StepsDefine the problem Identify the alternatives

List all pros and cons

Choose among alternatives

Act on your choiceEvaluate your decision

Example Can’t get to workWalk, bike, car, mooch ride

Lazy, embarrassing, cool

CAR!

Spend $20K on used car

Can’t afford gas

DECISION MAKING PROCESS

ValuesThings that are important to you in life

GoalsThings a person wants to accomplish i.e. college degree, starting a business

Freedom of Choice – the freedom to make decisions independently while accepting the consequences of those decisions

FACTORS THAT AFFECT DECISION-MAKING

Factors of ProductionNatural Resources: raw materials (water, oil, trees)

Renewable resources can be replaced Non-renewable resources cannot be replaced

Human Resources: people who contribute physical or mental energy

Capital Resources: tools, equipment, buildings, money, etc. used to produce goods and services

ECONOMIC RESOURCES

Initiative to combine natural, human and capital resources to produce goods or services

The 3 economic questions1. What to produce?2. How to produce?3. What needs and wants to satisfy?

Who decides this determines a countries economic system

ENTREPRENEURIAL RESOURCES

Traditionalism or Traditional EconomyDo things the way they’ve always been done

Pros: everyone has a role in the economy; economic life is stable

Cons: discourages new ideas; growth is limited

Examples: parts of Africa, Latin American rain forest

ECONOMIC SYSTEMS

Communism or Command EconomyGovernment owns/controls all resources

Pros: everyone has a job and benefits; can make a dramatic change in a short time on production of goods

Cons: consumer goods rank low on priority list, few consumer wants are met; lack of incentive to work hard

Examples: North Korea, China, Cuba

ECONOMIC SYSTEMS

Capitalism or Market EconomyPeople owns/controls all resources

Pros: produce goods & services people want and need; freedom of choice; income: input ratio; competition keeps prices lower

Cons: wealth of economy not equally distributed

Examples: US, Japan, Canada, Great Britian

ECONOMIC SYSTEMS

Socialism or Mixed EconomyGovernment owns major industries; allows for private ownership of other businesses Pros: gov’t and private business work together;

insurance/social security benefits provided

Cons: high tax rates; smaller spendable income; discourages private business

Examples: Sweden, France

ECONOMIC SYSTEMS

Private PropertyBusiness or individual owns their own property, not the government

Freedom of ChoiceFreedom to make decisions independently while accepting the consequences of those decisions

ProfitAmount of money available to a business after all costs and expenses have been paid

CompetitionRivalry among businesses to sell their goods and services

THE US ECONOMIC SYSTEM

The process of choosing which needs and wants will be satisfi ed

Consumer – person who buys and uses goods & services

Producer – business that makes the goods & services

Demand – the quantity of a good or service that consumers are willing to buy The cheaper an item is, the more people will want/be able to afford it

(and visa versa)

Supply – the quantity of a good or service that businesses are willing and able to provide The more expensive it is to produce, fewer businesses are willing to

make it (and visa versa)

Consumers set demand, producers establish supply

ECONOMIC DECISION-MAKING

SUPPLY AND DEMAND

Price

of 3

-day Pa

ss

Number of Passes Sold

100000 150000 200000 250000 300000 350000 400000 450000 500000 5500000

100

200

300

400

500

600

700

800

900

1000

ACL

Demand

SUPPLY AND DEMAND

Price

of 3

-day Pa

ss

Number of Passes Sold

100000 150000 200000 250000 300000 350000 400000 450000 500000 5500000

100

200

300

400

500

600

700

800

900

1000

ACL

Supply

SUPPLY AND DEMAND

Price

of 3

-day Pa

ss

Number of Passes Sold

100000 150000 200000 250000 300000 350000 400000 450000 500000 5500000

100

200

300

400

500

600

700

800

900

1000

ACL

Demand

Supply

MarketPrice

Private Enterprise System

Role of the Individual as a Producer

Role of the Individual as a Consumer

Role of the Individual as a Citizen

UNIT 1.02KEY CHARACTERISTICS OF THE PRIVATE ENTERPRISE SYSTEM

An economic system that rewards firms for their ability to perceive the needs and demands of consumers

Capitalism20 million US businesses in operation3 main types of business

1. Sole Proprietors2. Partnerships3. Corporations

Fortune 500

PRIVATE ENTERPRISE SYSTEM

Role of the Individual as a Producer

Role of the Individual as a Consumer

Role of the Individual as a Citizen

HOW DO BUSINESSES AND CONSUMERS INTERACT?

Contribution to Economy Goals – Things a person wants to accomplish, such as

getting a college education, buying a car, or starting a business

Values – Things that are important to you in life

Standard of Living Measure of how well people in a country live Quality and quantity of wants and needs that are satisfied Often determined by your choice of career

Career Choices www.careercruising.com

INDIVIDUAL AS A PRODUCER

Someone who takes a risk in starting a business to earn a profit

The bad news: Over 1 million businesses start up in America each

year Over 500,000 close each year Most start ups close within 16 months

The good news: Average income for small business owner is $233,600

ENTREPRENEUR

The amount of money available to the business after all costs and expenses have been paid

How to increase profits? Increase sales Increase priceDecrease costs

PROFIT

Consumes goods and services Vitale role in economic system Buy/Not-Buy decision effects what goods and

services are produced Heavily targeted by businesses

Pay for Needs First Food Clothing Shelter

Consumer Wants are a Huge Market!

INDIVIDUAL AS A CONSUMER

GALLUP DAILY: U.S. CONSUMER SPENDING

HOUSEHOLD SPENDING BY CATEGORY

Customer Service Key 70% of Americans are willing to spend 13% more

with companies they believe provide excellent customer service

78% of consumers have bailed on a transaction because of poor customer service

Advocacy Groups Protect people from corporate abuse (unsafe

products, predatory lending, false advertising, etc.) Prevention & Awareness (anti-smoking groups,

parental advisory labels, etc.)

STRENGTH OF THE CONSUMER

Bill of Rights1. Freedom of religion, speech, press, assembly, and petition.2. Right to keep and bear arms in order to maintain a well

regulated militia.3. No quartering of soldiers.4. Freedom from unreasonable searches and seizures.5. Right to due process of law, freedom from self-

incrimination, double jeopardy.6. Rights of accused persons, e.g., right to a speedy and

public trial.7. Right of trial by jury in civil cases. 8. Freedom from excessive bail, cruel and unusual

punishments.9. Other rights of the people. 10.Powers reserved to the states.

INDIVIDUAL AS A CITIZEN

Vote

Pay Taxes

Obey the Law

CITIZEN’S ECONOMIC RESPONSIBILITY

WHAT HAPPENS IF ECONOMIC RESPONSIBILITY IGNORED?

Different Types of Businesses

Forms of Business Ownership

Determining Type of Business Ownership

Other Considerations

UNIT 1.03

Sole Proprietor

Partnership

Corporation

TYPES OF BUSINESS

A business owned by one person

Most common legal form of ownership for new businesses

15-20 Million sole proprietors in United States

Accounts for 75% of businesses in US

SOLE PROPRIETOR

Pros:Control the entire businessKeep all of the profits Make decisions quicklyEasy to establishPay fewer taxes

ConsUnlimited liability

SOLE PROPRIETOR

A business owned by 2 or more persons who share responsibilities and profi ts/losses

Partnership Agreement (not fi led with the government) Name of the new business Amount each person is to invest in the business Amount each partner is to draw in salary/profit How profits/losses after salaries are paid will be shared in

proportion to each partner’s investment Responsibilities of the partners in the entity What will happen in the event of death of a partner(s)

3 Million business partnerships in United States

PARTNERSHIP

Pros:Combine talents and financial resourcesShare in responsibility of running the business and making decisions

Relatively easy to establishPays less taxes than a corporation

Cons:Unlimited liabilityPotential for disagreementsLoss of partner could mean end of business

PARTNERSHIP

A business organization that operates as a legal entity separate from its owners

Recognized as a person under the law

Articles of Incorporation

Sell Stock

Most revenue generated from this type of business

CORPORATION

Key Terms Stockholders/Shareholders: People who own stock in

a corporation

Board of Directors: A group of people elected by shareholders to guide a corporation

Corporate Offi cers: are the directors and senior level management of a corporation

Charter: a license to operate from that state

Proxy: ability of a shareholder to vote on the affairs of a company

CORPORATION

Pros:Limited liabilityShare of the profitsNo management responsibilityCan raise money by selling stockEasier to get credit

Cons:Legal red tape Increased tax burden

CORPORATION

BUSINESS OWNERSHIP DISTRIBUTION

the potential risks and liabilities of your business

the formalities and expenses involved in establishing and maintaining the various business structures

your income tax situation

your investment needs

DETERMINING TYPE OF BUSINESS OWNERSHIP

Franchise

Extractor

Producer

Processor

Manufacturer

Distribution

Service Firms

OTHER TYPES OF BUSINESSES

FRANCHISE

A contractual agreement to sell a company’s products or services in a designated geographic area

Franchisee: the person or group of people who have received permission from a parent company to sell its products or services

Franchisor: the parent company that grants permission to a person or group to sell its products or services

McDonald’s 75% of restaurants worldwide are owned by franchisees Minimum $500,000 non-borrowed funds (25% cash) Monthly Service Fee – 4% of sales

FRANCHISE

Pros: Name brand recognition Established method of doing business Access to centralized advertising Professional help in startup/training

Cons: High startup costs in purchasing rights to use the

business name Must follow corporate standards

FRANCHISE

Extractors: A business that grows products or takes raw materials from nature

Producers: A business that gathers raw products in their natural state

Processors: Businesses that change natural materials (raw goods) into a more finished form for manufacturers to process further i.e. paper mills, oil refineries, steel mills, etc.

OTHER TYPES OF BUSINESSES

Manufacturers: A business that takes an extractor’s products or raw materials and changes them into a form that consumers can use Industrial production i.e. General Motors, GE, Dell, Intel

Service Firms: A business that does things for you instead of making products Intangible goods i.e. hospitality, banking, legal

OTHER TYPES OF BUSINESSES

Distribution: Wholesale: A middle firm that assists with distribution

activities between businesses i.e. Sams, CostCo

Retail: A business that sells directly to the consumer i.e. Gap, Target,

OTHER TYPES OF BUSINESSES

The Business Cycle

Measuring Economic Activity

UNIT 1.04

Recurrent periods during which the nation’s economy moves in and out of recession and

recovery phases

Major ups and downs of economy

Short Term (2-3 years)

Long Term (50-60 years)

THE BUSINESS CYCLE

Peaks

Growing economy

Increasing investor confidence

Anticipation of future price increases

BULL MARKET

Troughs

General decline in the stock market over a period of time

Transition from high investor optimism to widespread investor fear and pessimism price decline of 20% or more over at least a two-month

period sometimes referred to as "The Heifer Market"

BEAR MARKET

A phase of the business cycle where most people who want to work are working and businesses produce

goods & services in record numbers.

Economic Growth1945-1973

$200B in war bonds matured GI Bill financed well-educated work force Middle class swelled Increase in GDP and Productivity

PROSPERITY

A period where demand begins to decline, businesses lower production of goods & services, unemployment

begins to rise, and GDP growth slows for several quarters

Reduced Economic Activity GDP negative for 2 or more quarters 1.5% rise in Unemployment in 12 months

Late 2000s Collapse of the housing market Bank failures High Unemployment Low Consumer Confidence Escalating Debt Inflation Rising gas and food prices

RECESSION

A phase marked by high unemployment, weak sales of goods & services, and business failures

Sustained, long-term economic downturnLarge increases in UnemploymentReduced credit availabilityLarge number of bankruptciesDeflationBank failures

DEPRESSION

1929 – late 1930sStock Market Crash October 29 th

“Black Tuesday”Massive Bank FailuresMillions lost jobsGlobal in scale

THE GREAT DEPRESSION

Economic Indicators United States

Great Britain

France

Germany

Industrial Production -46% -23% -24% -41%

Wholesale Prices -32% -33% -34% -29%

Foreign Trade -70% -60% -54% -61%

Unemployment +607% +129% +214%

+232%

1930s1. Overproduction in

agriculture

2. US banks recalling international loans

3. Large stockpiles of agricultural commodities released in to market

4. Gold standard

5. Defl ationary policies reduced government spending

2008

1. 8 th year in a row world’s 6B people consumed more food than produced

2. US owes world between $4-$5T

3. World’s stockpiles at lowest in 37 years

4. No currency is redeemable in gold

5. Increased government spending

DEPRESSION OR RECESSION?

A phase of the business cycle in which unemployment begins to decrease, demand for goods & services

increases, and GDP begins to rise again

High levels of growth following a RecessionGovernment stimulus packages

Are we in a Recovery now? Timeline of late 2000 global recession

RECOVERY

Gross Domestic Product (GDP)

Inflation

Consumer Price Index (CPI)

Productivity

Unemployment

Debt

Consumer Confidence

ECONOMIC INDICATORS

The total value of all final goods & services produced in a country in one year

GDP = private consumption + gross investment + government spending +(exports – imports)

Often reflects a country’s Standard of living

GROSS DOMESTIC PRODUCT

An increase in the general price level

When prices increase, each unit of currency buys fewer goods & services

Caused by excessive growth of the money supply

INFLATION

Shows change in the average prices of goods & services bought by consumers over a period of time

Related to inflationShows how much your money can buy

CONSUMER PRICE INDEX

The quantity of a good an average worker produces in an hour

Measure of output from a production processGDP per hour worked

PRODUCTIVITY

State of being without paid work, though willing and able to work and actively seeking work

Proportion of labor force that is without paid work

UNEMPLOYMENT

money borrowed by the federal government of the US at any one time through the issue of securities by the

Treasury and other federal government agencies

Deficit – the diff erence between the total amount spent by Congress and the amount received by the IRS Was $14.7T last year, this year it’s $16.0 TRILLION US National Debt Clock

Surplus – revenues exceed spendingBalanced Budget – revenues = spending

President Clinton, 1998-2001 ?

DEBT

Top 10 largest world economies

Trading Economics

STRENGTH OF US ECONOMY TO OTHER COUNTRIES

Gross domestic product in $ trillion

World Rank Country GDP

1 United States 14.7

2 China 5.75

3 Japan 5.4

4 Germany 3.31

5 France 2.56

6 United Kingdom 2.26

7 Italy 2.04

8 Brazil 2.02

9 Canada 1.56

10 Russia 1.47