Chapter 3 Economic Challenges Facing Contemporary business Overview economics study of the choices people gov ts make in allocating scarce resources microeconomics study of small economic units consumers families businesses macroeconomics study of a nation s overall economic issues how to allocate resources how gov t policies affect standards of living Microeconomics Forces of Supply Demand demand willingness and ability of buyers sellers to purchase goods services supply willingness and ability of buyers sellers to provide goods services Factors Driving Demand demand is driven by a number of factors that influence how people decide to spend their money price outside circumstances larger economic events consumer preferences demand can increase the availability of certain types of webs sites and services as price rises demand declines demand curve graph of the amount of a product that buyers will purchase at different prices negative slope change in quantity demanded is movement along the demand curve change in overall demand results in an entirely new demand curve higher income increases demand at every price curve shift right supply curve shows relationship between different prices and quantities that sellers will offer to sell regardless of demand as price rises quantity sellers will supply rises positive slope change in cost of any of inputs factors of production can shift entire supply curve Factors Driving Supply Demand Supply Interact law of supply demand states that prices are set by intersection of supply demand curves point where two curves meet identifies the equilibrium price Macroeconomics Issues for the Entire Economy Capitalism Private Enterprise System Competition a private enterprise system rewards businesses for meeting the needs and demands of consumers competition regulates economic life creating opportunities and challenges that businesspeople must handle to succeed Four basic types of competition that take place in private enterprise system o pure competition large number of buyers sellers exchange homogeneous products and no single participant has significant influence on price prices are set by the market itself as supply demand interact no single company dominates o monopolistic competition large number of buyers sellers exchange differentiated heterogeneous products so each o participant has some control over price oligopoly few sellers compete high start up costs form barriers to keep out new competitors limited number of sellers enhances the control these firms exercise over price o monopoly single seller dominates trade in a good or service for which buyers can find no close substitutes occurs when a firm possesses unique characteristics so important to competition that they serve as barriers to prevent entry by would be competitors because monopoly market lacks benefits of competition many gov ts regulate monopolies Sherman Act Clayton Act During 1980s and 1990s US tended away from regulated monopolies and toward deregulation Planned Economies Socialism Communism planned economy gov t controls determine business ownership profits and resource allocation to accomplish gov t goals communism socialism socialism gov t ownership and operation of major industries health care communications o major industries are too important to a society to be left in private hands communism all property is shared equally by the people of a community under the direction of a strong central gov t under communism the central gov t owns the means of production people work for state owned enterprises o mixed market economies systems that draw from both types of economies gov t owned firms frequently operate alongside Many countries have converted gov t owned and operated companies into privately held businesses privatization gov t may privatize state owned enterprises in an effort to raise funds and improve economies Mixed Market Economies private enterprises ex Medicare Evaluating Economic Performance economic system should provide 2 important benefits for its citizens stable business environment and sustained growth o o overall supply of needed goods services is aligned with the overall demand for goods services ideal economy incorporate steady change directed toward continually expanding the amount of goods services produced from nation s resources Flattening the Business Cycle recession cyclical economic contraction that last six months or longer consumer postpone major purchases if an economic slowdown continues in a downward spiral over an extended period of time the economy falls into a depression in the recovery stage the economy emerges from recession and consumer spending picks up steam prosperity unemployment remains low consumer confidence is high leads to more purchases business expansion Productivity and the Nation s GDP productivity relationship between the number of units produced and the number of human production inputs necessary for production total productivity output goods services input resources capital an increase in labor productivity means that the same amount of work produces more goods services than before GDP sum of all goods services produced within a country s boundaries during a specific time period year Price Level Changes inflation rising prices caused by a combo of excess demand and increases in raw materials component parts human resources and other factors of production core inflation rate inflation rate of an economy after energy and food prices are removed excess consumer demanded generates demand pull inflation increases in costs of factors of production generates cost push inflation in extreme cases an economy may experience hyperinflation soaring prices inflation devalues money as persistent price increases reduce the amount of goods services people can purchase with a given amount of money deflation occurs when prices continue to fall weakens the economy Consumer Price Index CPI measures the monthly average change in prices of goods services running measurement of changes Measuring Price Level Changes in consumer prices Employment Levels Unemployment rate percentage of total workforce who are actively seeking work but are currently unemployed Total labor force includes all people who are willing and available to work at the going market wage employed or not Frictional unemployment temporarily not working looking for a job graduates Cyclical unemployment not working due to slow economy looking for a job executives laid off Structural
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