Download Chapter 3 - Economic Challenges Facing Global and Domestic

Chapter 3
Economic Challenges Facing Global and
Domestic Business
5 Identify and describe the four
stages of the business cycle.
1
Distinguish between microeconomics and macroeconomics.
6 Explain the factors that affect the
2
Explain the factors that drive
supply and demand.
7 Discuss how monetary and fiscal
3 Describe the four types of market
structures in a private enterprise
system.
4 Compare the three major types of
economic systems.
stability of a nation’s economy.
policy are used to manage an
economy’s performance.
8 Describe the major global
economic challenges of
the 21st century.
Economics Analysis of the choices people and governments make in allocating
scarce resources.
Microeconomics The study of small economic units, such as individual
consumers, families, and businesses.
Macroeconomics The study of a country’s overall economic issues, such as how
economy uses its resources and the effects of government policies on
individuals’ standard of living.
Microeconomics: The Forces of
Demand and Supply
Demand Willingness and ability of consumers to purchase goods and services at
different prices.
Supply Amount of goods and services for sale at different prices.
Factors Driving Demand
• Driven by variety of factors, including competition, price, larger economic
events, and consumer preferences.
• Demand curve shows the amount of a product buyers will purchase at different
prices. Quantity increases as price decreases.
• Economists distinguish between changes in the quantity demanded at various
prices and a true change in demand.
Factors Driving Supply
• A supply curve shows the relationship between different prices and the
quantities that sellers will offer for sale, regardless of demand.
• Movement along the
supply curve is the
opposite of
movement along
the demand curve.
• The factors of production play a central role in determining the overall supply of
goods and services.
How Demand and Supply Interact
• Changes in the real world often affect both supply and demand, and often
multiple factors cause contradictory pressures.
• Supply and demand curves meet at the equilibrium price.
• Buyers and
sellers tend to
make choices
that restore the
equilibrium
price.
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 systems
• Planned economies
• Mixed economies (combinations of the two)
Capitalism: The Private Enterprise System and
Competition
• Also called capitalism or a market economy.
• Government favors a hands-off approach toward controlling business
ownership, profits, and resource allocation.
• Marketplace competition regulates economic life.
• Four degrees of competition:
• Pure competition
• Monopolistic competition
• Oligopoly
• Monopoly
Planned Economies: Socialism and Communism
• Government controls determine business ownership, profits, and resource
allocation.
• Two forms:
• Communism
• Theoretical basis developed by Karl Marx in mid-1800s.
• Property owned and shared by the community under a strong central
government; benefits shared according to need.
• 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 healthcare or communications.
• Some private ownership of industry allowed.
Mixed Market Economies
• Economic systems that combine features of private enterprise and planned
economies.
• Mixture of public and private enterprise can very widely from country to country.
• Process of converting a publicly owned company to a private one is called
privatization.
EVALUATING ECONOMIC
PERFORMANCE
• Economic system should provide stable business environment and sustained
growth.
Flattening the Business Cycle
• 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 the Nation’s Gross Domestic
Product
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 Rising prices caused by a combination of excessive consumer demand
and increases in the costs of raw materials, component parts, human resurces,
and other factors of production.
• The core inflation rate measures the inflation rate energy and food prices are
removed.
• Demand-pull inflation Excessive consumer demand
• Cost-push inflation Rises in costs of the factors of production
• Hyperinflation Soaring consumer prices
• Devalues money
• Hurts people with fixed or slowly rising incomes, income from fixed interest
rate
• Benefits people with rising incomes, debts with fixed interest rate
• Steady prices benefit the overall economy
• Businesses can make long-range plans
• Low interest rates encourage business investment in
research and development, capital improvements.
• Consumers can purchase more.
• Low interest rates encourage major consumers
purchases, such as cars.
• Deflation Falling prices, which can weaken the overall economy.
Measuring Price Level Changes The U.S. government tracks price changes
through the Consumer Price Index, which measures the monthly average
change in prices of goods and services.
Employment Levels
• The unemployment rate is the percentage of total workforce actively seeking
work but currently unemployed.
MANAGING THE ECONOMY’S
PERFORMANCE
• Government uses monetary and fiscal policy to fight unemployment, increase
spending, and reduce the duration and severity of economic recession.
Monetary Policy
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.
• Implemented in the U.S. by the Federal Reserve System.
Fiscal Policy
Fiscal Policy Government actions to influence economic activity through
decision about taxes and spending.
International Fiscal Policy Western nations disagree over whether debt
forgiveness for developing nations should be tied to certain requirements, such
as increase private property rights, lower taxes, and other policies.
The Federal Budget
Budget Annual plan for how the government will raise and spend money in
the coming year.
• Primary sources of government funds
• Taxes
• Borrowing
• Fees
• Government spending in excess of tax revenue produces a budget deficit.
• Government covers the deficit by borrowing money by selling
Treasury bills, notes, and bonds to investors.
• These obligations are added to the national debt, $43 trillion at the
writing of this text.
• National debt is tracked by the Government Accountability Office.
• Government revenue in excess of spending results in a budget surplus.
• Equal spending and revenue results in a balanced budget.
• How fast to pay off the national debt is the subject of national debate.
GLOBAL ECONOMIC CHALLENGES
OF THE 21ST CENTURY
GLOBAL ECONOMIC CHALLENGES
OF THE 21ST CENTURY