EMEN 5010 Intro to Engineering Management

Session 2 January 22

Chapter Two

*
Understanding How Economics Affects Business

McGraw-Hill/Irwin

Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

The Better Way Economic Systems U.S. Economic Activity Takeaways

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The Better Way Economic Systems U.S. Economic Activity Takeaways

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The better way

What is a better way than giving a man a fish?

What is a better way than teaching a man to fish?

The better way

High expectations? High empathy?

The better way

Todays needs? Tomorrows possibilities?

The better way

Individuals choice? Managements choice? Teams choice?

The Better Way Economic Systems U.S. Economic Activity Takeaways

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Three Economic Systems

Mixed
Socialism

(Highly Controlled)

(Little Control)

Communism/ Dictator/ Benevolent king/ Wise leader

Capitalism

Socialism Capitalism
Economic activity

Wise leader

Socialism Capitalism

Wise leader
Economic activity

Private Property

Business Ownership

Capitalism
Freedom of Competition Freedom of Choice

Private property rights

The rule of law

Douglas North, Nobel Prize winner in economics and economic historian

Competitive markets

Entrepreneurial behavior
Source

Private property rights

The rule of law

Capitalism
Competitive markets
Entrepreneurial behavior
Source

The ability of an individual or collection of individuals to possess, use, transfer or dispose of something that is owned
That thing is any item lawfully acquired through voluntary exchange

Property rights

Private property rights are THE RULE OF THE GAME in capitalism The necessary condition for all the benefits that subsequently flow from adopting the institutions of capitalism
Source

The ability of an individual or collection of individuals to possess, use, transfer or dispose of something that is owned
That thing is any item lawfully acquired through voluntary exchange

Property rights

Private property rights are THE RULE OF THE GAME in capitalism The necessary condition for all the benefits that subsequently flow from adopting the institutions of capitalism
Source

Private property rights

The rule of law

Capitalism
Competitive markets
Entrepreneurial behavior
Source

The Rule of Force

The enforcement of the rules of the game in a society have fallen into three broad categories

Social rules and enforcement are determined by the use of violence

The Rule of Men Where rules are enforced at the whim of the enforcer The Rule of Law Laws are clearly defined and the government is subject to the same laws as the governed
Source

Private property rights

The rule of law

Capitalism
Competitive markets
Entrepreneurial behavior
Source

Where goods and services are produced and exchanged

Competitive mean that individuals are free to enter and exit a market at will

Competitive markets

The rules of the game will influence the ability of individuals to enter and exit the marketplace The rules of the game will impact licensing , taxation, regulatory burdens, compliance issues, the availability of credit, etc.
Source

Private property rights

The rule of law

Capitalism
Competitive markets

Entrepreneurial behavior
Source

Entrepreneurial activity

An entrepreneur is someone that assumes risk in organizing land, labor, capital and technology to produce a new product, or to compete in a marketplace In order for a person to be willing to assume risk they must have the reasonable expectation that the potential profit associated with the risk offsets the potential costs
Source

What is an entrepreneur?
The entrepreneur is someone who creates something out of nothing They build a company that did not exist They identify a market that has not been exhausted They find new and innovative ways to solve problems
Image Source Quote Source

Weaker capitalism

Stronger capitalism

Protect private property rights Stronger rule of law

More competitive markets More entrepreneurial behavior

Who owns what

Economic System Issues

*Country

How are the rules set

How are the rules enforced

Income equality Individual incentives Safety nets Protection of the commons

Relationship between governments and the economic system

Who owns what

Economic System Issues *Company

How are the rules set

How are the rules enforced

Income equality Individual incentives Safety nets Protection of the commons

Relationship between governments and the economic system

Who owns what

Economic System Issues

*Family

How are the rules set

How are the rules enforced

Income equality Individual incentives Safety nets Protection of the commons

Relationship between governments and the economic system

Nation?

Capitalism is the best economic system for:

Family? Company?

By Dale Everett, AnarchyInyo urHEAD.com

By Dale Everett, AnarchyInyo urHEAD.com

By Dale Everett, AnarchyInyo urHEAD.com

By Dale Everett, AnarchyInyo urHEAD.com

Socialism Capitalism
Economic activity

Wise leader

Private & Public Ownership

Some Choices are Limited

Socialism
Creates Social Equality Reduces Individual Incentive

DESIRED SOCIALISM BENEFITS

Social equality Free education Free healthcare Free childcare Longer vacations Shorter work weeks Generous sick leave

Nation?

Socialism is the best economic system for:

Family? Company?

Source

Socialism Capitalism
Economic activity

Wise leader

Public Ownership of Most major factors of production

Central Planning/ Controlled Economy

Communism/Dictator/ Benevolent king/ Wise leader

Shortages of food and other products may develop

Lack of motivation to work hard

Nation?

Wise Leader is the best economic system for:

Family? Company?

The better way for a company

Capitalism? Wise leader? Socialism?

The better way for a company

Capitalism? Dictator? Socialism?

The Better Way Economic Systems U.S. Economic Activity Takeaways

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Gross Domestic Product (GDP) Key Economic Indicators Unemployment Rate Price Indexes

Consumer Price Index (CPI)

Producer Price Index (PPI)

Gross Domestic Product (GDP) Key Economic Indicators Unemployment Rate Price Indexes

Consumer Price Index (CPI)

Producer Price Index (PPI)

Source

*Individuals

*Companies *Government *Country

Source

Source

2012 GDP
70% personal consumption
Goods contributed 24% of total GDP Services contributed 46% of total GDP

13% Business investment

Purchases companies make to produce consumer goods If a purchase only replaces an existing item, then it doesn't add to GDP and so isn't counted

20% Government spending -3% Net export of goods and services

Source

Source

Monetary Policy

Money supply

Interest rates
Taxation

Fiscal Policy

Borrowing Spending

Government
Regulation

Bailout

Failures

Bankruptcy Takeover

Ownership

PLAYING CATCH UP
Countries Challenging the U.S. in GDP

Source: Fortune Magazine, www.fortune.com July21, 2008.

Global Size of GDP 2008

Source

The Better Way Economic Systems U.S. Economic Activity Takeaways

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Until Next Time