Economic Challenges Facing Contemporary Business

Chapter 3

Discuss microeconomics and explain the forces of demand and supply.

Describe macroeconomics and the issues for the entire economy.

Identify how to evaluate economic performance.

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Learning Objectives

Discuss managing the economy’s performance.

Describe the global economic challenges of the 21st century.

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Analysis of the choices people and governments make

in allocating resources.

Includes microeconomics and macroeconomics

Economics

Microeconomics

The study of small economic units, such as individual

consumers, families, and businesses.

Supply: Amount of goods and services for sale at

different prices.

Demand: Willingness and ability of consumers to

purchase goods and services at different prices.

Factors Driving Demand

Demand curve - shows the amount of a product buyers will

purchase at different prices.

Driven by variety of factors such as competition, price, larger

economic events, and consumer preferences.

Demand Curve

A change in overall demand shifts to a new demand curve.

Factors Driving Supply

Production plays a central role in determining the overall supply.

Supply curve - shows the relationship between different

prices and the quantities that sellers will offer for sale,

regardless of demand.

of goods and services.

Supply Curve Example

How Demand and Supply Interact

Supply and demand curves meet at the equilibrium price.

Buyers and sellers make choices that restore the equilibrium price.

Changes affect both supply and demand.

Macroeconomics

Issues for the Entire Society

Political, social, and legal environments differ

in every country.

Economies generally classified in one of three

categories:

Private enterprise system: capitalism or market

economy

Planned economies: socialism, communism

Mixed economies (combinations of the two)

Capitalism

The Private Enterprise System and

Competition

Businesses meet needs of consumers and are

rewarded through profit.

Government favors a hands-off approach.

Marketplace competition regulates economic life.

Four degrees of competition:

Pure competition

Monopolistic competition

Oligopoly

Monopoly

Types of Competition

Planned Economies

Communism

Property owned and

shared by the community

under a strong central

government.

Adopted in early 20th

century by many nations,

but government-owned

monopolies often suffered

from inefficiency.

Socialism

Government ownership

and operation of major

industries, such as health

care or communications.

Some private ownership of

industry allowed.

Government controls determine business ownership, profits, and resource allocation.

Mixed Market Economies

Economic systems that combine features of

private enterprise and planned economies.

Mixture of public and private enterprise can vary

widely from country to country.

Process of converting a publicly owned company

to a private one is called privatization.

Comparing Economic Systems

Evaluating Economic Performance

Economic system should provide stable business

environment and sustained growth.

Business decisions and consumer behavior differ

at various stages of the business cycle:

Prosperity—High consumer confidence,

businesses expanding

Recession—Cyclical economic contraction lasting

for six months or longer

Depression—Extended recession

Recovery—Declining unemployment, increasing

business activity

Productivity and GDP

Productivity: Relationships between the goods

and services produced and the inputs needed to

produce them.

Gross Domestic Product (GDP): Sum of all

goods and services produced within a nation’s

boundaries; a measure of national productivity.

GDP is tracked in the United States by the Bureau

of Economic Analysis, a division of the U.S.

Department of Commerce.

Price-Level Changes

Inflation is rising prices caused by a combination of

excessive consumer demand and increases in the

costs of raw materials.

Core inflation rate measures inflation minus energy

and food prices.

Demand-pull inflation - Excessive consumer demand.

Cost-push inflation - Rises in costs of the factors of

production.

Hyperinflation - Soaring consumer prices.

Inflation devalues money. People can purchase less

with what they have (decreased purchasing power).

Deflation is when prices continue to fall. Deflation can

cause a weakened economy.

Measuring Price-Level Changes

Changing prices are tracked by the Consumer

Price Index (CPI).

The monthly average change in prices of goods

and services.

A multitude of items is priced to compile the data

included in the “CPI Market Basket.”

The Bureau of Labor Statistics calculates the

CPI monthly along with other economic

measures.

CPI Market Basket

Employment Levels

The unemployment rate is the percentage of total workforce actively seeking work but currently unemployed.

Bureau of Labor Statistics

Unemployment “game show”

Managing the Economy’s Performance

Monetary Policy - government actions to increase or

decrease the money supply and change banking

policy and interest rates to influence consumer

spending.

Expansionary monetary policy: Efforts to increase the money

supply to reduce costs of borrowing and encourage new

investment.

Restrictive monetary policy: Efforts to decrease the monetary

supply to curb rising prices and overexpansion.

The Federal Reserve System formulates and

implements monetary policy.

Government uses monetary and fiscal policy to fight unemployment, Government uses monetary and fiscal policy to fight unemployment, increase

spending, and reduce the duration and severity of economic recession.

Fiscal Policy

Fiscal Policy - Government actions to influence economic

activity through decisions about taxes and spending.

The Federal Budget - Annual plan for how the government

will raise and spend money in the coming year. The primary

sources of government funds:

taxes, borrowing, fees

When the government spends more than the amount of

money it raised, there is a budget deficit. When we borrow

money to cover the deficit, the national debt is increased.

(Debt clock)

If the government has more money than it spends, there is a

budget surplus.

National debt is tracked by the Government Accountability

Office.

Global Economic Challenges