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CB12e ch03

CB12e ch03

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Chapter 3

Economic Challenges Facing Global and Domestic Business oals

g rnin a


5 Identify and describe the four
stages of the business cycle.

Distinguish between microeconomics and macroeconomics. supply and demand.

6 Explain the factors that affect the
stability of a nation’s economy. policy are used to manage an economy’s performance. economic challenges of the 21st century.

2 Explain the factors that drive 3 Describe the four types of market
structures in a private enterprise system. economic systems.

7 Discuss how monetary and fiscal 8 Describe the major global

4 Compare the three major types of

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.

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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 and price. sellers tend to make choices that restore the equilibriu m price.

• 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 mid-1800s. • Theoretical basis developed by Karl Marx in • Property owned and shared by the community under a strong central need. • Adopted in early 20th century by many nations, government; benefits shared according to

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.

• 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 national productivity. • GDP is tracked in the United States by the Bureau of Economic Analysis, a division of the U.S. Department of Commerce.

produced within a nation’s boundaries; a measure of

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.

• 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 investment. reduce costs of borrowing and encourage new

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



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