INTRODUCTION TO BUSINESS
Yavuz Karazeybek
Resource: Jeff Madura-Introduction to Business (2006)
PART 1
Business Environment
CHAPTER 3 Assessing Economic Conditions
How Market Prices Are Determined
How Market Prices Are Determined
Performance of firms affected by changes in the prices
-products (revenue) Demand
-supplies (expense) Supply
Demand Schedule for a Product
A schedule that indicates the quantity of a product that would be
demanded at each possible price.
CHAPTER 3 Assessing Economic Conditions
How Market Prices Are Determined
Supply Schedule for a Product
A schedule that indicates the quantity of a product that would be supplied (produced) by firms at
each possible price
CHAPTER 3 Assessing Economic Conditions
CHAPTER 3 Assessing Economic Conditions
How Market Prices Are Determined
Supply Schedule for a Product
CHAPTER 3 Assessing Economic Conditions
How Market Prices Are Determined
How the Equilibrium Price Is Determined by Demand and Supply
CHAPTER 3 Assessing Economic Conditions
How Market Prices Are Determined
Interaction of Demand and Supply
Surplus: the situation when the quantity supplied by firms exceeds the quantity demanded by customers.
Shortage: the situation when the quantity supplied by firms is less than the quantity
demanded by customers
Equilibrium price: the price at which the quantity of a product supplied by firms equals the quantity of the product demanded by customers.
CHAPTER 3 Assessing Economic Conditions
How Market Prices Are Determined
Effect of a Change in the Demand Schedule
Changes in conditions: change in demand
change in supply
popularity of the product
How the Equilibrium Price Is Affected by a Change in Demand
CHAPTER 3 Assessing Economic Conditions
Change in Demand
CHAPTER 3 Assessing Economic Conditions
How Market Prices Are Determined
Effect of a Change in the Supply Schedule
technological improvements (lower costs)
How the Equilibrium Price Is Affected by a Change in Supply
CHAPTER 3 Assessing Economic Conditions
How Market Prices Are Determined
Effect of a Change in the Supply Schedule
How the Equilibrium Price Is Affected by a Change in Supply
CHAPTER 3 Assessing Economic Conditions
How Market Prices Are Determined
Effect of Demand and Supply on the General Price Level
The general price level is an average of prices of all existing products and services. If the total (aggregate) demand by consumers for all or most products suddenly increases, the general level of prices could rise. The general price level may also be affected by shifts in the supply schedules for all goods and services. If the supply schedule of all or most products suddenly decreases, the general level of prices should rise.
inflation (cost or demand caused)
deflation (decrease in the general price level of goods and services)
Reading (p.88)
Using Supply and Demand to Monitor Market Prices
CHAPTER 3 Assessing Economic Conditions
Factors That Influence Market Prices
Consumer Income
Consumer income determines the amount of products and services that individuals can purchase. A high level of economic growth results in more income for consumers. When consumers’ income rises, they may demand a larger quantity of specific products and services. That is, the demand schedules for various products and services may shift out in response to higher income, which could result in higher prices.
strong or weak economic growth
CHAPTER 3 Assessing Economic Conditions
Factors That Influence Market Prices
Consumer Preferences
As consumer preferences (or tastes) for a particular product change, the quantity of that product demanded by consumers may change. There are numerous examples of products whose prices rose in response to increased demand.
airfryers
face masks, thermometers
or
cameras
telephones
CHAPTER 3 Assessing Economic Conditions
Factors That Influence Market Prices
Production Expenses
Another factor that can affect equilibrium prices is a change in production expenses. When firms experience lower expenses, they are willing to supply (produce) more at any given price. This results in a surplus of the product, forcing firms to lower their price to sell all that they have produced.
electric vehicles
foldable screens
Reading (p.90)
Assessing the Potential Change in Market Prices
CHAPTER 3 Assessing Economic Conditions
Government Influence on Economic Conditions
Monetary Policy
Money Supply: demand deposits (checking accounts), currency held by the public, and traveler’s checks .
Federal Reserve System: the central bank
Monetary Policy: decisions on the money supply level
interest rates: cost and demand
CHAPTER 3 Assessing Economic Conditions
Government Influence on Economic Conditions
Monetary Policy
A Typical FOMC Meeting
The Fed’s monetary policy is decided by the Federal Open Market Committee (FOMC), which has 12 voting members. This committee meets about every six weeks to determine whether interest rates should be adjusted.
In Turkey, every month
CHAPTER 3 Assessing Economic Conditions
Government Influence on Economic Conditions
Monetary Policy
A Typical FOMC Meeting
Each FOMC meeting begins with an assessment of several measures of
aggregate production levels, inventory levels, and price levels.
The objective of this assessment is to predict U.S. economic growth and
inflation, assuming that the Fed does not adjust its monetary policy.
Government Influence on Economic Conditions
Monetary Policy
A Typical FOMC Meeting
For example, a recent reduction in business inventories may suggest that economic growth is increasing and that firms will need to boost production to replenish their inventories. Conversely, an increase in inventories may indicate that firms will have to lower production and possibly reduce their workforces.
inflation ?
oil prices: cost of production, transportation
CHAPTER 3 Assessing Economic Conditions
CHAPTER 3 Assessing Economic Conditions
Government Influence on Economic Conditions
Monetary Policy
How the Fed Can Reduce Interest Rates
The Fed maintains some funds outside the banking system, which are not loanable funds. These funds are not available to firms or individuals who need to borrow. The Fed can use these funds to purchase Treasury securities held by individuals and firms.
treasury bills
treasury notes
treasury bonds
CHAPTER 3 Assessing Economic Conditions
Government Influence on Economic Conditions
Monetary Policy
How the Fed Can Reduce Interest Rates
These purchases provide individuals and firms with new funds, which they deposit in their commercial banks. Consequently, the money supply increases because the commercial banks and other financial institutions can loan out these funds. In other words, the Fed’s action increases the supply of loanable funds.
CHAPTER 3 Assessing Economic Conditions
Government Influence on Economic Conditions
Monetary Policy
How the Fed Can Reduce Interest Rates
Assuming that the demand for loanable funds remains unchanged, the increase in the supply of loanable funds should cause interest rates to decrease.
CHAPTER 3 Assessing Economic Conditions
Government Influence on Economic Conditions
Monetary Policy
How the Fed Can Increase Interest Rates
When the Fed reduces the U.S. money supply, it pulls funds out of commercial banks and other financial institutions. This reduces the supply of funds that these financial institutions can lend to borrowers.
CHAPTER 3 Assessing Economic Conditions
Government Influence on Economic Conditions
Monetary Policy
How the Fed Can Increase Interest Rates
Assuming that the demand for loanable funds remains unchanged, the decline in the supply of loanable funds should cause interest rates to rise. The higher interest rates increase the cost of borrowing and thus tend to discourage consumers and firms from borrowing.
CHAPTER 3 Assessing Economic Conditions
Government Influence on Economic Conditions
Monetary Policy
How the Fed Can Increase Interest Rates
The Fed raises interest rates when it wants to reduce the degree of spending in the United States.
CHAPTER 3 Assessing Economic Conditions
Government Influence on Economic Conditions
Fiscal Policy
Fiscal Policy involves decisions on how the federal government should set tax rates and spend money. These decisions are relevant to businesses because they affect economic growth and therefore can affect the demand for a firm’s products or services.
Government Influence on Economic Conditions
CHAPTER 3 Assessing Economic Conditions
Fiscal Policy
Revision of Personal Income Tax Rates
Consider a fiscal policy that reduces personal income taxes. With this policy, people would have higher after-tax incomes, which might encourage them to spend more money. Such behavior reflects an increase in the aggregate demand for products and services produced by businesses, which would improve the performance of businesses.
CHAPTER 3 Assessing Economic Conditions
Government Influence on Economic Conditions
Fiscal Policy
Revision of Corporate Taxes
Fiscal policy can also affect a firm’s after-tax earnings directly.
For example, assume the corporate tax rate is reduced from 30 percent to 25 percent. If a specific corporation’s before-tax earnings are $10 million, its taxes would have been $3 million (computed as 30% $10,000,000) at the old tax rate. Now, however, at a corporate tax rate of 25 percent, its taxes are $2.5 million (computed as 25% $10,000,000). Therefore, the corporation’s after-tax earnings are now $500,000 higher, simply because the corporate taxes are $500,000 lower.
CHAPTER 3 Assessing Economic Conditions
CHAPTER 3 Assessing Economic Conditions
Government Influence on Economic Conditions
Fiscal Policy
Revision of Excise Taxes
Excise taxes are taxes imposed by the federal government on particular products.
These taxes raise the cost of producing these goods. Consequently, manufacturers tend to incorporate the tax into the price they charge for the products. Thus, consumers indirectly incur the tax. The tax may also discourage consumption of these goods by indirectly affecting the price. Excise taxes are imposed on various products, including alcohol and tobacco.
CHAPTER 3 Assessing Economic Conditions
Government Influence on Economic Conditions
Fiscal Policy
Revision in the Budget Deficit
The fiscal policy set by the federal government dictates the amount of tax revenue generated by the federal government and the amount of federal spending. If federal government spending exceeds the amount of federal taxes, a federal budget deficit results.
additional funds—high demand on loanable funds—higher interest rates
Government Influence on Economic Conditions
Government Influence on Economic Conditions
CHAPTER 3 Assessing Economic Conditions
Fiscal Policy
Revision in the Budget Deficit
Example of How a Budget Deficit Occurs
CHAPTER 3 Assessing Economic Conditions
Government Influence on Economic Conditions
Summary of Government Influence on Economic Factors
Fiscal policy can affect personal tax rates and therefore influence consumer spending behavior. It can also affect corporate tax rates, which influence the earnings of firms. Monetary policy can affect interest rates, which may influence the demand for a firm’s product. By influencing interest rates, monetary policy also affects the interest expenses that firms incur.
CHAPTER 3 Assessing Economic Conditions
Government Influence on Economic Conditions
Summary of Government Influence on Economic Factors
CASE STUDY!
CHAPTER 3 Assessing Economic Conditions
Government Influence on Economic Conditions
Reading (p.96) Responding to Changes in Monetary Policy