14th edition

1. Chapter 3
Economic Challenges Facing
Contemporary Business

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

3. Economics
nalysis of the choices people and governments make in
allocating resources.
s Supply: Amount of goods and services for sale at
different prices.
s Demand: Willingness and ability of consumers to
purchase goods and services at different prices.

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

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

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

7. Supply Curve
s
Supply curve - shows the relationship between different prices and
the quantities that sellers will offer for sale, regardless of demand.

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

9. How Supply and Demand Interact
s
Supply and demand curves meet at the equilibrium price.
s
Buyers and sellers make choices that restore the equilibrium price.
s
Changes affect both supply and demand.

10. Macroeconomics
Issues for the Entire Society
s Political, social, and legal environments differ
in every country.
s Economies generally classified in one of three
categories:
s Private enterprise system: capitalism or market
economy
s Planned economies: socialism, communism
s Mixed economies (combinations of the two)

11. Capitalism
The Private Enterprise System and
Competition
s Businesses meet needs of consumers and are
rewarded through profit.
s Government favors a hands-off approach.
s Marketplace competition regulates economic life.
s Four degrees of competition:
s Pure competition
s Monopolistic competition
s Oligopoly
s Monopoly

12. Types of Competition

13. Planned Economies
Government controls determine business ownership, profits, and resource allocation.
Communism Socialism
sProperty owned and sGovernment ownership
shared by the community and operation of major
under a strong central industries, such as health
government. care or communications.
sAdopted in early 20th sSome private ownership of
century by many nations, industry allowed.
but government-owned
monopolies often suffered
from inefficiency.

14. Mixed Market Economies
s Economic systems that combine features of
private enterprise and planned economies.
s Mixture of public and private enterprise can vary
widely from country to country.
s 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.
s Business decisions and consumer behavior differ
at various stages of the business cycle:
s Prosperity—High consumer confidence,
businesses expanding
s Recession—Cyclical economic contraction lasting
for six months or longer
s Depression—Extended recession
s Recovery—Declining unemployment, increasing
business activity

17. Productivity and GDP
s Productivity: Relationships between the goods
and services produced and the inputs needed to
produce them.
s Gross Domestic Product (GDP): Sum of all
goods and services produced within a nation’s
boundaries; a measure of national productivity.
s 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
s Inflation is rising prices caused by a combination of
excessive consumer demand and increases in the
costs of raw materials.
s Core inflation rate measures inflation minus energy
and food prices.
s Demand-pull inflation - Excessive consumer demand.
s Cost-push inflation - Rises in costs of the factors of
production.
s Hyperinflation - Soaring consumer prices.
s Inflation devalues money. People can purchase less
with what they have (decreased purchasing power).
s Deflation is when prices continue to fall. Deflation can
cause a weakened economy.

19. Measuring Price-Level Changes
s Changing prices are tracked by the Consumer
Price Index (CPI).
s The monthly average change in prices of goods
and services.
s A multitude of items is priced to compile the data
included in the “CPI Market Basket.”
s 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.
s
Bureau of Labor Statistics
s
Unemployment “game show”

22. Managing the Economy’s Performance
s Monetary Policy - government actions to increase or
decrease the money supply and change banking
policy and interest rates to influence consumer
spending.
s Expansionary monetary policy: Efforts to increase the money
supply to reduce costs of borrowing and encourage new
investment.
s Restrictive monetary policy: Efforts to decrease the monetary
supply to curb rising prices and overexpansion.
s 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
s Fiscal Policy - Government actions to influence economic
activity through decisions about taxes and spending.
s The Federal Budget - Annual plan for how the government
will raise and spend money in the coming year. The primary
sources of government funds:
s taxes, borrowing, fees
s 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)
s If the government has more money than it spends, there is a
budget surplus.
s National debt is tracked by the
Government Accountability Office.

24. Global Economic Challenges