3-1 Chapter Overview Economics—social science that analyzes the choices made by people and governments in allocating scarce resources.

3-2 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.

3-3 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.

3-4 Factors Driving Demand Each person must choose Between saving and spending How to allocate spending

3-5 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

3-6 Demand Curve for Gasoline

3-7 Expected Shifts in Demand Curves

3-8 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

3-9 Supply Curve for Gasoline

3-10 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

3-11 Expected Shifts in Supply Curves

3-12 How Demand and Supply Interact Separate shifts in demand and supply have obvious effects on product price and availability Equilibrium price

3-13 Law of Supply and Demand

3-14 Macroeconomics: Issues for the Entire 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.

3-15 Macroeconomics: Issues for the Entire Economy Capitalism: The Private Enterprise System and Competition Pure competition Monopolistic competition Oligopoly Monopoly Deregulation

3-16 Types of Competition

3-17 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

3-18 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

3-19 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

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3-21 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.

3-22 Four Stages of the Business Cycle

3-23 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.

3-24 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

3-25 Price-Level Changes Demand-pull inflation Excess consumer demand Cost-push inflation Generated by rises in costs of factors of production Recent Fears about Deflation

3-26 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

3-27 Contents of the CPI Market Basket

3-28 Employment Levels Unemployment rate— an indicator of a nation’s economic health Top Job Losses by Industry in the Recent Recession

3-29 Four Types of Unemployment

3-30 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.

3-31 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.

3-32 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

3-33 Where Federal Tax Revenues Come from

3-34 How Your Tax Dollars Are Spent

3-35 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

3-36 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.

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