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Chapter 3 Economic Challenges Facing Global and Domestic Business. Learning Goals. Identify and describe the four stages of the business cycle. Explain the factors that affect the stability of a nation’s economy.
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Chapter 3 Economic Challenges Facing Global and Domestic Business Learning Goals 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. 5 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. 6 1 7 2 3 8 4
EconomicsAnalysis of the choices people and governments make in allocating scarce resources. • MicroeconomicsThe study of small economic units, such as individual consumers, families, and businesses. • MacroeconomicsThe study of a country’s overall economic issues, such as how 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. • SupplyAmount of goods and services for sale at different prices.
Factors Driving Demand • • Driven by variety of factors, including competition, price, larger economic events, and consumer preferences. • • 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 change in demand.
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. • • Economies generally classified in one of three categories: • • Private enterprise systems • • Planned economies • • Mixed economies (combinations of the two)
Capitalism: The Private Enterprise System and Competition • • Also called capitalism or a market economy. • • Government favors a hands-off approach toward controlling business ownership, profits, and resource allocation. • • Marketplace competition regulates economic life. • • Four degrees of competition: • • Pure competition • • Monopolistic competition • • Oligopoly • • Monopoly
Planned Economies: Socialism and Communism • • Government controls determine business ownership, profits, and resource allocation. • • Two forms: • • Communism • • Theoretical basis developed by Karl Marx in mid-1800s. • • Property owned and shared by the community under a strong central government; benefits shared according to need. • • 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.
Mixed Market Economies • • Economic systems that combine features of private enterprise and planned economies. • • Mixture of public and private enterprise can very widely from country to country. • • Process of converting a publicly owned company to a private one is called privatization.
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 • ProductivityRelationships 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 • InflationRising prices caused by a combination of excessive consumer demand and increases in the costs of raw materials, component parts, human resurces, and other factors of production. • • The core inflation rate measures the inflation rate energy and food prices are removed. • • Demand-pull inflation Excessive consumer demand • • Cost-push inflation Rises in costs of the factors of production • • Hyperinflation Soaring consumer prices • • 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 • • Low interest rates encourage business investment in research and development, capital improvements. • • Consumers can purchase more. • • Low interest rates encourage major consumers purchases, such as cars. • • 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 PolicyGovernment 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. • • Implemented in the U.S. by the Federal Reserve System.
Fiscal Policy • Fiscal PolicyGovernment actions to influence economic activity through decision about taxes and spending. • International Fiscal Policy Western nations disagree over whether debt forgiveness for developing nations should be tied to certain requirements, such as increase private property rights, lower taxes, and other policies. • The Federal Budget • BudgetAnnual plan for how the government will raise and spend money in the coming year. • • Primary sources of government funds • • Taxes • • Borrowing • • 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. • • National debt is tracked by the Government Accountability Office. • • 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.
