Download Chapter 3: Economic Challenges Facing Contemporary Business.

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Chapter 3
Economic Challenges
Facing Global and Domestic
Business
1
Distinguish between microeconomics and macroeconomics.
5
2
Explain the factors that drive
supply and demand.
6 stability of a nation’s economy.
3
Describe the four types of market
structures in a private enterprise
system.
4
Compare the three major types of
economic systems.
Identify and describe the four
stages of the business cycle.
Explain the factors that affect the
7
Discuss how monetary and fiscal
policy are used to manage an
economy’s performance.
8
Describe the major global
economic challenges of
the 21st century.
Analysis of the choices people and
governments make in allocating resources.
– 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.
The study of small
economic units, such
as individual
consumers, families,
and businesses.
• Demand curve - shows the amount of a product buyers will
purchase at different prices.
• Driven by variety of factors like competition, price, larger economic
events, and consumer preferences.
A change in overall demand, shifts to a new demand curve.
• Supply curve - shows the relationship between different prices
and the quantities that sellers will offer for sale, regardless of
demand.
Production plays a central role in determining the overall
supply of goods and services.
• 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.
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)
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
Government controls determine business ownership, profits,
and resource allocation.
Communism
Socialism
• Property owned and shared by
the community under a strong
central government.
• Government ownership and
operation of major industries,
such as healthcare or
communications.
• Adopted in early 20th century
by many nations, but
government-owned
monopolies often suffered from
inefficiency.
• Some private ownership of
industry allowed.
• 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.
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: 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.
• 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.
• Deflation is when prices continue to fall. Deflation can cause a
weakened economy.
• Changing prices are tracked by the Consumer Price
Index (CPI).
– The monthly average change in prices of goods and
services.
– A multitude of items are 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.
The unemployment rate is the percentage of total workforce actively
seeking work but currently unemployed.
• 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,
increase spending, and reduce the duration and severity of economic
recession.
• Fiscal Policy - Government actions to influence economic activity
through decision 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.
• If the government has more money than it spends, there is a
budget surplus.
• National debt is tracked by the Government Accountability Office.
 International Terrorism
 Shift to a global information economy
 Aging of the world’s population
 Growth of India and China straining commodity
prices
 Enhancing competitiveness of every country’s
workforce