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Chapter OverviewChapter Overview

Economics—social science that analyzes the choices made by people and governments in allocating scarce resources.

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EconomicsEconomics

Microeconomics—study of small economic units, such as individual consumers, families, and businesses.

Macroeconomics—study of a nation’s overall economic issues, such as how an economy maintains and allocates resources and how government policies affect the standards of living of its citizens.

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Microeconomics:Microeconomics:The Forces of Demand and SupplyThe Forces of Demand and Supply

Demand—willingness and ability of buyers to purchase goods and services.

Supply—willingness and ability of sellers to provide goods and services.

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Factors Driving DemandFactors Driving Demand

Each person must choose Between saving and spendingHow to allocate spending

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Factors Driving DemandFactors Driving Demand

Demand CurveGraph of the amount of a product that

buyers will purchase at different pricesDemand curves typically slope downward

and to the right, meaning that lower prices attract larger purchases

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Demand Curve for Gasoline

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Expected Shifts in Demand Curves

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Factors Driving SupplyFactors Driving Supply

Businesses must chose how to use their resources to obtain the best profits

Supply CurveShows the relationship between different

prices and the quantities that sellers will offer for sale, regardless of demand

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Supply Curve for Gasoline

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Factors Driving SupplyFactors Driving Supply

Central role in determining the overall supply of goods and services is played by factors of productionNatural resourcesHuman resourcesPhysical facilitiesEntrepreneurship

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Expected Shifts in Supply Curves

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How Demand and Supply InteractHow Demand and Supply Interact

Separate shifts in demand and supply have obvious effects on product price and availability

Equilibrium price

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Law of Supply and Demand

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Macroeconomics: Issues for theMacroeconomics: Issues for theEntire EconomyEntire Economy

Capitalism: The Private Enterprise System and Competition.Private enterprise system—economic

system in which business success or failure depends on how well firms match and counter the offerings of competitors; also known as capitalism.

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Macroeconomics: Issues for theMacroeconomics: Issues for theEntire EconomyEntire Economy

Capitalism: The Private Enterprise System and CompetitionPure competitionMonopolistic competitionOligopolyMonopolyDeregulation

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Types of Competition

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Planned Economies: Planned Economies: Communism and SocialismCommunism and Socialism

Communism: planned economic system in which private property is eliminated, goods are owned in common, and factors of production and production decisions are controlled by the state

Socialism: planned economic system characterized by government ownership and operation of all major industries

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Planned Economies: Planned Economies: Communism and SocialismCommunism and Socialism

What’s Ahead for Communism?Many formerly communist nations have

undergone dramatic changes in recent year after introducing private enterprise systems

Has not been smoothCommunism remains firmly entrenched in

just a few countries

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Mixed Market EconomiesMixed Market Economies

Economic system that combines characteristics of both planned and market economies in varying degrees, including the presence of both government ownership and private enterprisePrivatization

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Evaluating Economic PerformanceEvaluating Economic Performance

Flattening the Business CycleEconomies flow through various stages of

a business cycle

Recession—cyclical economic contraction that lasts for six months or longer.

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Four Stages of the Business Cycle

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Productivity and the Nation’s Gross Productivity and the Nation’s Gross Domestic ProductDomestic Product

Productivity—relationship between the goods and services produced in a nation each year and the inputs needed to produce them.

Gross domestic product—the sum of all goods and services produced within a nation’s boundaries each year.

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Price-Level ChangesPrice-Level Changes

Inflation—rising prices caused by a combination of excess consumer demand and increases in the costs of raw materials, human resources, and other factors of production.Hyperinflation—economic situation

characterized by soaring prices

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Price-Level ChangesPrice-Level Changes

Demand-pull inflationExcess consumer demand

Cost-push inflationGenerated by rises in costs of factors of production

Recent Fears about Deflation

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Measuring Price Level ChangesMeasuring Price Level Changes

Consumer Price Index (CPI)—measures the monthly average change in prices of goods and servicesMarket Basket—compilation of the goods

and services most commonly purchased by urban consumers

Producers Price Index (PPI)For Finished GoodsFor Intermediate Goods

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Contents of the CPI Market Basket

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Employment LevelsEmployment Levels

Unemployment rate— an indicator of a nation’s economic healthTop Job Losses by

Industry in the Recent Recession

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Four Types of Unemployment

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Managing the Economy’s PerformanceManaging the Economy’s Performance

Monetary Policy—government actions to increase or decrease the money supply and change banking requirements and interest rates to influence banker’s willingness to make loans.

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Managing the Economy’s PerformanceManaging the Economy’s Performance

Fiscal Policy—government spending and taxation decisions designed to control inflations, reduce unemployment, improve the general welfare of citizens, and encourage economic growth.

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Fiscal PolicyFiscal Policy

Budget—organization’s plan for how it will raise and spend money during a given period of time.

Budget deficit—funding shortfall that results when the government spends more than the amount of money it raises through taxes and fees

National debt Budget surplus Balanced budget

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Where Federal Tax Revenues Come from

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How Your Tax Dollars Are Spent

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The U.S. Economy: A Roller Coaster RideThe U.S. Economy: A Roller Coaster Ride

Economic recession, wars, and terrorism battered the U.S. economy.UnemploymentInflation and DeflationProductivityConsumer Spending

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Creating a Long-Term Global StrategyCreating a Long-Term Global Strategy

Global Economic ChallengesInternational terrorismShift to a global Information economyAging of the world’s populationsImproving quality and customer serviceEnhancing competitiveness of every

country’s workforce.

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