Chapter 3Economic Challenges Facing Global and

Domestic BusinessLearning Goals

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.

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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 an 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

• 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 shift in the demand curve.

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.

• Three types of economies

• Private enterprise systems

• Planned economies

• Mixed market systems

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 resources, and other factors of production.

• 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 and investments

• Consumers can purchase more products, particularly major purchases.

• 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.

Fiscal Policy

Fiscal Policy Government actions to influence economic activity through decisions about taxes and spending.

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, and 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.

• 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