Chapter 3

Economic Challenges Facing Global and

oals
Domestic Business
ng G
a r n i 5 Identify and describe the four
Le stages of the business cycle.
Distinguish between micro-
1 6 Explain the factors that affect the
economics and macroeconomics. stability of a nation’s economy.

2 Explain the factors that drive
supply and demand.
3 Describe the four types of market
structures in a private enterprise
system.
4 Compare the three major types of
economic systems.
7 Discuss how monetary and fiscal
policy are used to manage an
economy’s performance.
8 Describe the major global
economic challenges of
the 21st century.
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 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

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.
 QuickTime™ and a
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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
• Buyers
price. and
sellers
tend to
make
choices
that
restore
the
equilibriu
m 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,

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
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 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,

• 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
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.

• Expansionary monetary policy Efforts to increase

the money supply to
reduce costs of borrowing and encourage new
investment.
Fiscal Policy
Fiscal Policy Government 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

Budget Annual plan for how the government will raise

and spend money in the coming year.

• Primary sources of government funds

• Taxes
• 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

GLOBAL ECONOMIC CHALLENGES
OF THE 21ST CENTURY
GLOBAL ECONOMIC CHALLENGES
OF THE 21ST CENTURY