Issues in Contemporary Business Chapter 3 The Most Challenging Economy in Decades

1. The Most Challenging Economy
in Decades
Chapter 3

2. Distinguish between microeconomics and
macroeconomics. Explain the factors that
drive supply and demand.
Describe the four types of market
structures in a private enterprise system
and compare the three major types of
economic systems.
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.
1
Learning Goals
Discuss how monetary policy and
fiscal policy are used to manage an
economy’s performance.
Describe the major global economic
challenges of the 21st century.
2
3
4
5

3. 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

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

5. Factors Driving Demand
Demand curve - shows the amount of a product buyers will purchase at
different prices.
Driven by variety of factors such as competition, price, larger economic events,
and consumer preferences.

6. Demand Curve
A change in overall demand shifts to a new demand curve.

7. Supply Curve
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 the movement
along the demand curve.

8. Factors Driving Supply
Production plays a central role in determining the overall supply. of goods
and services.

9. How Supply and Demand Interact
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.

10. Macroeconomics
Study of a nation’s overall economic issues for the
Entire Society, such as how an economy maintains
and allocates resources and how a government’s
policies affects the standards of living of its citizens.
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)

11. Capitalism
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

12. Types of Competition

13. Planned Economies
Communism
All Property owned and
shared equally by the
people of community under
the direction of strong
central government.
Adopted in early 20th
century by many nations,
but government-owned
monopolies often suffered
from inefficiency. In this
system, less freedom to
choice in regard of jobs.
Socialism
Government ownership
and operation of major
industries, such as health
care or communications.
Some private ownership of
industry allowed such as
retail shops, restaurants,
and certain type of
manufacturing facilities.
Government controls determine business ownership, profits, and resource allocation.

14. Mixed Market Economies
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.

15. Comparing Economic Systems

16. Evaluating Economic Performance
Economic system should provide stable business
environment and sustained growth.
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

17. Productivity and GDP
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.

18. Price-Level Changes
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 (decreased purchasing power).
Deflation is when prices continue to fall. Deflation can
cause a weakened economy.

19. Measuring 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 is 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.

20. CPI Market Basket

21. Employment Levels
The unemployment rate is the percentage of total workforce actively seeking work
but currently unemployed.
Bureau of Labor Statistics
Unemployment “game show”

22. Managing the Economy’s
Performance
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.
Government uses monetary and fiscal policy to fight unemployment,
Government uses monetary and fiscal policy to fight unemployment, increase
spending, and reduce the duration and severity of economic recession.

23. Fiscal Policy
Fiscal Policy - Government actions to influence economic
activity through decisions 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.
(Debt clock)
If the government has more money than it spends, there is a
budget surplus.
National debt is tracked by the Government Accountability
Office.

24. Global Economic Challenges