Ch. 3 The Economic Impact

الرحيم الرحمن الله بسم

Chapter Objectives

1. Distinguish between microeconomics and macroeconomics.

2. Explain the factors that drive demand and supply.3. Compare the three major types of economic

systems.4. Describe each of the four different types of market

structures in a private enterprise system.5. Identify and describe the four stages of the business

cycle.6. Explain how productivity, price-level changes, and

employment levels affect the stability of a nation’s economy.

7. Discuss how monetary policy and fiscal policy are used to manage an economy’s performance.

8. Describe the major global economic challenges of the 21st century.

Chapter Overview

Economics—social science that analyzes the choices made by people and governments in allocating scarce resources.

Economics

Microeconomics—study of small economic units, such as individual consumers, families, and businesses.

Macroeconomics—study of a nation’s overall economic issues, such as how an economy maintains and allocates resources and how government policies affect the standards of living of its citizens.

Microeconomics:The Forces of Demand and Supply

Demand—willingness and ability of buyers to purchase goods and services.

Supply—willingness and ability of sellers to provide goods and services.

Factors Driving Demand

Each person must choose Between saving and spending How to allocate spending

Factors Driving Demand Demand Curve

Graph of the amount of a product that buyers will purchase at different prices

Demand curves typically slope downward and to the right, meaning that lower prices attract larger purchases

Demand Curve for Gasoline

Shift in the Demand Curve for Gasoline

Expected Shifts in Demand Curves

Factors Driving Supply

Businesses must chose how to use their resources to obtain the best profits

Supply Curve Shows the relationship between

different prices and the quantities that sellers will offer for sale, regardless of demand

Supply Curve for Gasoline

Factors Driving Supply

Central role in determining the overall supply of goods and services is played by factors of production Natural resources Human resources Physical facilities Entrepreneurship

Expected Shifts in Supply Curves

How Demand and Supply Interact Separate shifts in demand and supply

have obvious effects on product price and availability

Equilibrium price

Law of Supply and Demand

Macroeconomics: Issues for theEntire Economy

Capitalism: The Private Enterprise System and Competition. Private enterprise system—economic

system in which business success or failure depends on how well firms match and counter the offerings of competitors; also known as capitalism.

Macroeconomics: Issues for theEntire Economy

Capitalism: The Private Enterprise System and Competition Pure competition Monopolistic competition Oligopoly Monopoly Deregulation

Types of Competition

Planned Economies: Communism and Socialism

Communism: planned economic system in which private property is eliminated, goods are owned in common, and factors of production and production decisions are controlled by the state

Socialism: planned economic system characterized by government ownership and operation of all major industries

Planned Economies: Communism and Socialism

What’s Ahead for Communism? Many formerly communist nations

have undergone dramatic changes in recent year after introducing private enterprise systems

Has not been smooth Communism remains firmly

entrenched in just a few countries

Mixed Market Economies Economic system that combines

characteristics of both planned and market economies in varying degrees, including the presence of both government ownership and private enterprise Privatization

Evaluating Economic Performance Flattening the Business Cycle

Economies flow through various stages of a business cycle

Recession—cyclical economic contraction that lasts for six months or longer.

Four Stages of the Business Cycle

Productivity and the Nation’s Gross Domestic Product

Productivity—relationship between the goods and services produced in a nation each year and the inputs needed to produce them.

Gross domestic product—the sum of all goods and services produced within a nation’s boundaries each year.

Price-Level Changes

Inflation—rising prices caused by a combination of excess consumer demand and increases in the costs of raw materials, human resources, and other factors of production. Hyperinflation—economic situation

characterized by soaring prices

Price-Level Changes

Demand-pull inflationExcess consumer demand

Cost-push inflationGenerated by rises in costs of factors of production

Recent Fears about Deflation

Measuring Price Level Changes

Consumer Price Index (CPI)—measures the monthly average change in prices of goods and services Market Basket—compilation of the goods and

services most commonly purchased by urban consumers

Producers Price Index (PPI) For Finished Goods For Intermediate Goods

Contents of the CPI Market Basket

Employment Levels

Unemployment rate— an indicator of a nation’s economic health Top Job Losses by

Industry in the Recent Recession

Four Types of Unemployment

Managing the Economy’s Performance

Monetary Policy—government actions to increase or decrease the money supply and change banking requirements and interest rates to influence banker’s willingness to make loans.

Managing the Economy’s Performance

Fiscal Policy—government spending and taxation decisions designed to control inflations, reduce unemployment, improve the general welfare of citizens, and encourage economic growth.

Fiscal Policy Budget—organization’s plan for how it

will raise and spend money during a given period of time.

Budget deficit—funding shortfall that results when the government spends more than the amount of money it raises through taxes and fees

National debt Budget surplus Balanced budget

Where Federal Tax Revenues Come from

How Your Tax Dollars Are Spent

The U.S. Economy: A Roller Coaster Ride

Economic recession, wars, and terrorism battered the U.S. economy. Unemployment Inflation and Deflation Productivity Consumer Spending

Creating a Long-Term Global Strategy

Global Economic Challenges International terrorism Shift to a global Information economy Aging of the world’s populations Improving quality and customer service Enhancing competitiveness of every

country’s workforce.