Discussion Topic 2
Economic Challenges Facing Contemporary Business http://www.wileybusinessupdates.com
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Discuss microeconomics and explain the forces of demand and supply.
Describe macroeconomics and the issues for the entire economy.
Identify how to evaluate economic performance.
Discuss government’s attempts to manage economic performance.
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Learning Objectives
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Analysis of the choices people and governments make in allocating resources.
Includes microeconomics and macroeconomics
Economics
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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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Supply Curve Example
Supply curve - shows the relationship between different prices and the quantities that sellers will offer for sale, regardless of demand.
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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.
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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)
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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
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Planned Economies
Communism
Property owned and shared by the community under a strong central government.
Adopted in early 20th century by many nations, but government-owned monopolies often suffered from inefficiency.
Socialism
Government ownership and operation of major industries, such as health care or communications.
Some private ownership of industry allowed.
Government controls determine business ownership, profits, and resource allocation.
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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
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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
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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.
GDP is tracked in the United States by the Bureau of Economic Analysis, a division of the U.S. Department of Commerce.
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Price-Level Changes
Inflation is rising prices caused by a combination of excessive consumer demand and increases in the costs of raw materials.
Core inflation rate measures inflation minus energy and food prices.
Hyperinflation - Soaring consumer prices.
Inflation devalues money. People can purchase less with what they have (decreased purchasing power).
Deflation is when prices continue to fall. Deflation can cause a weakened economy.
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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.
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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.
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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
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Fiscal Policy
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)
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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