Economic Challenges Facing Contemporary Business

Chapter

3

LO 3.1 Distinguish between microeconomics and macroeconomics. Explain the factors that drive demand and supply.

LO 3.2 Describe the four types of market structures in a private enterprise system, and compare the three major types of economic systems.

LO 3.3 Identify and describe the four stages of the business cycle. Explain how productivity, price level changes, and employment levels affect the stability of a nation’s economy.

Learning Objectives

LO 3.4 Discuss how monetary policy and fiscal policy are used to manage an economy’s performance.

LO 3.5 Describe the major global economic challenges of the 21st century.

The social science that studies the choices people and governments make when dividing up their scarce resources

Demand: The willingness and ability of buyers to purchase goods and services

Supply: The willingness and ability of sellers to provide goods and services

Economics

Test Your Knowledge

Economics is the study of

a. the choices people and governments make when allocating scarce resources.b. profit and loss at companies.c. tax and interest policies.d. demand and supply.

Test Your Knowledge

Economics is the study of

a. the choices people and governments make when allocating scarce resources.b. profit and loss at companies.c. tax and interest policies.d. supply and demand.

Answer: A

Microeconomics

The Forces of Demand and Supply

The study of small economic units, such as individual

consumers, families, and businesses

Factors Driving Demand

Demand curve: A graph of the amount of a product that buyers will

purchase at different prices

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

economic events, and consumer preferences

Demand Curve

A graph of the amount of a product that buyers will

purchase at different prices

Factors Driving Supply

Factors of production play a central role in the overall

supply of goods and services

A change in the cost or availability of any of these inputs

can shift the entire supply curves and services.

Supply Curve

A graph that shows the relationship between different prices

and the amount of goods that sellers will offer for sale,

regardless of demand

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 demand and supply.

Macroeconomics

Issues for the Entire Society Political, social, and legal conditions

differ in every country. Economies generally classified in one of

three categories: Private enterprise system (capitalism or

market economy) Planned economies: socialism, communism Mixed market economies (combinations of the

two)

Capitalism

The Private Enterprise System and CompetitionBusinesses meet needs and demands of consumers and are rewarded through profit.Government favours a hands-off approach.Marketplace competition regulates economic life.Four degrees of competition:

Pure competition Monopolistic competition Oligopoly Monopoly

Types of Competition

Test Your KnowledgeThe market structure that is most likely to be regulated is

a. pure competition.b. monopolistic competition.c. oligopoly.d. monopoly.

Test Your Knowledge

The market structure that is most likely to be regulated is

a. pure competition.b. monopolistic competition.c. oligopoly.d. monopoly.

Answer: D

Planned Economies

Communism An economic system where all property is shared equally by the people in a community under the direction of a strong central government Adopted in early 20th century by many nations, but government-owned monopolies often suffered from inefficiency

Socialism An economic system where the government owns and operates the major industries, such as communications Some private ownership of industry allowed, such as retail and some manufacturing

Planned economy: An economic system where business ownership, profits,

and resource allocation are shaped by a plan to meet government goals

Mixed Market Economies

Mixed market economy: an economic system that draws from both private enterprise economies and planned economies, to different degrees

The mixture of public and private enterprise can vary widely from country to country.

Privatization: The conversion of government-owned and -operated companies to privately-held businesses

Comparison of Alternative Economic Systems

Evaluating Economic Performance

An economic system should provide a stable business environment and sustained growth as benefits for its citizens.Business decisions and consumer behaviour differ at various stages of the business cycle:

Prosperity—Unemployment low, consumer confidence/purchasing high, businesses expanding Recession—A cycle of economic contraction that lasts for six months or longer; consumers careful about purchases, businesses slow production/expansion

Depression—Extended recession Recovery—Declining unemployment, increasing

business activity, renewed consumer confidence

Productivity and the Nation’s Gross Domestic Product Productivity: The relationship between the

number of units produced and the number of human and other production inputs needed to produce them

Gross domestic product (GDP): The sum of all goods and services produced within a country during a specific time period, such as a year

The Canadian GDP is tracked by Statistics Canada

Test Your Knowledge

If labour hours increase, the use of natural resources remains the same, and output remains the same, productivity

a. will increase.b. will remain the same.c. will decrease.d. cannot be determined.

Test Your Knowledge

If labour hours increase, the use of natural resources remains the same, and output remains the same, productivity

a. will increase.b. will remain the same.c. will decrease.d. cannot be determined.

Answer: C

Price-Level Changes Inflation: Rising prices caused by a combination of

excessive consumer demand and higher costs of raw materials, component parts, human resources, and other factors of production

Core inflation rate: The inflation rate after energy prices and food prices are removed

Demand-pull inflation: Excessive consumer demand

Cost-push inflation: Increases in costs of the factors of production

Hyperinflation: An economic situation marked by soaring prices

Inflation devalues money. People can purchase less with what they have (decreased purchasing power).

Deflation: The opposite of inflation, occurs when prices continue to fall

Can cause a weakened economy

Measuring Price-Level Changes Changing prices are tracked by the

Consumer Price Index (CPI). A measurement of the monthly average

change in prices of goods and services Commonly purchased goods and services are

priced to compile the data included in the CPI “market basket”

See the Bank of Canada site for the CPI from 2000 to present.

Contents of the CPI Market Basket

Employment Levels

Unemployment rate: The percentage of total

workforce actively seeking work but currently

unemployed

Four types of unemployment:

Statistics Canada Labour

Force Survey

Managing the Economy’s Performance Monetary policy: A government plan to

increase or decrease the money supply and to change banking requirements and interest rates to affect bankers’ willingness to make loans Expansionary monetary policy: A plan to increase

the money supply to try to decrease the costs of borrowing

Lower interest rates encourage new investments and increases employment and economic growth.

Restrictive monetary policy: A plan to decrease the money supply to control rising prices, overexpansion, and concerns about overly rapid economic growth

The Bank of Canada formulates and implements monetary policy.

Government uses monetary and fiscal policy to fight unemployment,

Fiscal Policy Fiscal policy: A plan of government spending and

taxation decisions designed to control inflation, reduce unemployment, improve the general welfare of citizens, and encourage economic growth

The federal budget is an annual plan for how the government will raise and spend money in the coming year. The primary sources of government funds are taxes, fees, and borrowing.

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.

Global Economic Challenges