Copyright © 2004 South-Western. All rights reserved.4–1 Learning Goals Identify macroeconomic factors that affect business performance. Explain how market

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.


Economic ConditionsEconomic Conditions– Macroeconomic conditions

Overall economic state of a country

– Microeconomic conditions Focus on conditions in a particular business

or industry


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


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


Indicators of Economic Indicators of Economic GrowthGrowth

•Gross Domestic Product (GDP)•Aggregate Expenditures


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

Exhibit 4.1


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


Unemployment LevelsUnemployment Levels• Frictional unemployment

• Seasonal unemployment

• Cyclical unemployment

• Structural unemployment

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


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

Exhibit 4.2


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


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

Exhibit 4.3


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

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


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


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


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

Exhibit 4.6a


Factors Influencing Market Factors Influencing Market PricesPrices

•Consumer income•Changes in consumer tastes and preferences:

•Change in production expenses


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)


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


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


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.


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


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

Documents

Copyright © 2004 South-Western. All rights reserved.4–1 Learning Goals Identify macroeconomic factors that affect business performance. Explain how market