copyright © 2004 south-western. all rights reserved.4–1 learning goals identify macroeconomic...

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Copyright © 2004 South-Western. All rights reserved. 4–1 Learning Goals Learning Goals Identify macroeconomic factors that affect business performance. Explain how market prices are determined. Explain how the government influences economic conditions.

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Copyright © 2004 South-Western. All rights reserved. 4–1

Learning GoalsLearning Goals• Identify macroeconomic factors that affect business performance.

•Explain how market prices are determined.

•Explain how the government influences economic conditions.

Copyright © 2004 South-Western. All rights reserved. 4–2

Economic ConditionsEconomic Conditions– Macroeconomic conditions

Overall economic state of a country

– Microeconomic conditions Focus on conditions in a particular business

or industry

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Macroeconomic Effects Macroeconomic Effects •The performance of most firms depends on three macroeconomic factors:– Economic growth (employment rate)– Inflation– Interest rates

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Economic GrowthEconomic Growth•general level of economic activity is higher than normal:– Total income level is relatively high.– higher volume of spending – higher revenues– Recession: Occurs when economic growth is

negative for two consecutive quarters

Copyright © 2004 South-Western. All rights reserved. 4–5

Indicators of Economic Indicators of Economic GrowthGrowth

•Gross Domestic Product (GDP)•Aggregate Expenditures

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Trend of Gross Domestic Product Trend of Gross Domestic Product (GDP)(GDP)

Exhibit 4.1

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Indicators of Economic Indicators of Economic GrowthGrowth

• In the U.S., these indicators are closely related:– consumer spending – production level

•Alternative Indicators of Economic Growth– Unemployment level– Industrial production level– New housing starts– Personal income level

Copyright © 2004 South-Western. All rights reserved. 4–8

Unemployment LevelsUnemployment Levels• Frictional unemployment

• Seasonal unemployment

• Cyclical unemployment

• Structural unemployment

• Which is BEST??• How does Oregon Rank???

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Trend of U.S. UnemploymentTrend of U.S. Unemployment

Exhibit 4.2

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InflationInflation•An increase in the general level of prices of products and services over a specified period of time.– Estimated by the consumer price index

(CPI).– CPI is a market basket of prices

Copyright © 2004 South-Western. All rights reserved. 4–11

U.S. Inflation Rates over U.S. Inflation Rates over TimeTime

Exhibit 4.3

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Impact of InflationImpact of Inflation•Can affect a company’s operating expenses.

•Can affect a company’s revenues•Cost-Push Inflation•Demand-Pull Inflation

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Interest RatesInterest Rates•Cost of borrowing money •Firms may postpone expansion

Copyright © 2004 South-Western. All rights reserved. 4–14

Market Price Market Price DeterminationDetermination

•Market price of a product is influenced by: – The total demand for that product by all

customers– Supply of that product produced by firms

•The interaction between demand and supply determines the market price

•The “Invisible Hand” – Adam Smith

Copyright © 2004 South-Western. All rights reserved. 4–15

How the Equilibrium Price is How the Equilibrium Price is Determined by Supply and DemandDetermined by Supply and Demand

Exhibit 4.6a

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Factors Influencing Market Factors Influencing Market PricesPrices

•Consumer income•Changes in consumer tastes and preferences:

•Change in production expenses

Copyright © 2004 South-Western. All rights reserved. 4–17

Monetary Policy Monetary Policy Impacts Economic Impacts Economic

ConditionsConditions•Monetary policy

– Made by the Federal Reserve System “Fed” is the central bank of the U.S.

(Greenspan)

– Decisions by Fed about the money supply: Impact interest rates (expense and product

demand)

Copyright © 2004 South-Western. All rights reserved. 4–18

Fed’s Impact on Interest Fed’s Impact on Interest RatesRates

•Discount rate (loans to member banks)

•Purchases bonds on the open market

•Reserve Requirements

Copyright © 2004 South-Western. All rights reserved. 4–19

Fiscal PolicyFiscal Policy•How the federal government sets tax rates and spends money:– Personal income tax rates– Corporate taxes– Excise taxes

Copyright © 2004 South-Western. All rights reserved. 4–20

Chapter SummaryChapter Summary•Firm performance depends on three macroeconomic factors: economic growth, inflation, and interest rates.

•Demand and supply conditions determine market prices.

•Federal government uses monetary and fiscal policies to influence macroeconomic conditions.

Copyright © 2004 South-Western. All rights reserved. 4–21

Extra CreditExtra Credit•Go to https://implicit.harvard.edu/implicit/demo/selectatest.jsp

•You can get there from my web site•Take the age and one other test - do them quickly!

•Write a one page report on whether you found a bias and how you may be able to over come this bias when hiring -

•25 potential points – writing must be

Copyright © 2004 South-Western. All rights reserved. 4–22

NEXT TIMENEXT TIME•Meet with your group•Chapter 5 – Microeconomics• In text study guide•Library visit (take notes)