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Economic Challenges Facing Global and Domestic

Business

Chapter 3

Distinguish between micro-economics and macroeconomics.

Explain the factors that drive supply and demand.

Describe the four types of market structures in a private enterprise system.

Compare the three major types of economic systems.

Identify and describe the four stages of the business cycle.

Explain the factors that affect the stability of a nation’s economy.

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

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

Learning Goals

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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.

Economics

The study of small economic units, such

as individual consumers, families,

and businesses.

Microeconomics

• 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.

Factors Driving

Demand

Demand Curve

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.

Supply Curve

Factors Driving

Supply

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.

How Supply and

Demand Interact

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)

Macroeconomics

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

Capitalism

Types of Competition

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

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 healthcare or communications.

• 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.

Mixed Market

Economies

Comparing

Economic

Systems

Evaluating

Economic

Performance

• 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

Economic system should provide stable business environment and sustained growth.

• 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.

Productivity and

GDP

• 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.

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 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.

Measuring Price

Level Changes

CPI Market

Basket

Employment

LevelsThe 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.

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.

• 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.

Fiscal Policy

Global Economic

Challenges

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