Chapter 3

Economic Challenges Facing

Contemporary Business
Economics

Analysis of the choices people and governments make

in allocating resources.
Includes microeconomics and macroeconomics
Microeconomics
The study of small economic units, such as individual
consumers, families, and businesses.

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.
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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.
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Demand Curve

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

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Factors Driving Supply

Production plays a central role in determining the overall supply.
Supply curve - shows the relationship between different
prices and the quantities that sellers will offer for sale,
regardless of demand.
of goods and services.
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Supply Curve Example

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How Demand and Supply 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.
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 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
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Types of Competition
 Planned Economies
Government controls determine business ownership, profits, and resource allocation.

Communism Socialism
Property owned and Government ownership
shared by the community and operation of major
under a strong central industries, such as health
government. care or communications.
Adopted in early 20th Some private ownership of
century by many nations, industry allowed.
but government-owned
monopolies often suffered
from inefficiency.
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.
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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. It is
based on the per-capita output of a country. See
page 76 for chart of Nations with the Highest GDP.

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.
Inflation devalues money. People can purchase less
with what they have (decreased purchasing power).
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.
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.
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CPI Market Basket

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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.
If the government has more money than it spends, there is a
budget surplus.
National debt is tracked by the Government Accountability
Office.
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Global Economic Challenges

Economy Assignment
Review Questions
#1, #4, #6, #7, #10 on page 87
Do any four of the five.
Type the question number, the question,
and the answer.

Don’t forget the assignment title and to be sure to check

spelling, grammar, and punctuation.