The Most Challenging Economy in Decades

Chapter 3

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.

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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.

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� 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

Microeconomics

�The study of small economic units, such as individual

consumers, families, and businesses.

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.

Demand Curve

�A change in overall demand shifts to a new demand curve.

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.

Factors Driving Supply

�Production plays a central role in determining the overall supply. of goods

and services.

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.

MacroeconomicsStudy 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)

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

Types of Competition

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.

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.

Comparing Economic Systems

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

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.

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.

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.

CPI Market Basket

Employment Levels

The unemployment rate is the percentage of total workforce actively seeking work

but currently unemployed.

�Bureau of Labor Statistics

�Unemployment “game show”

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.

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.

Global Economic Challenges