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