1. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-1 Microeconomics Supply and Demand ●Consider the market for music CDs. What happens(ed) when: – The iPod came along – Music downloading was invented – Sting wants his income doubled ●What happened when CDs were first introduced that made the demand curve different from that of today?

2. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-2 “Mental Economics” Exercise ●Exercise A Which option would you select? 1. A sure $400,000, or 2. A 50% chance for $1M and a 50% chance of $0? ●Exercise B Which option would you select? 1.A sure loss of $4,000, or 2.A 30% chance to lose $10,000 and a 70% chance to lose nothing?

3. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. More Exercises ●Exercise C Which option would you select? 1.A 3k sq ft house, all others get 4k sq ft 2.A 2k sq ft house, all others get 1k sq ft ●Exercise D Which option would you select? 1.4 weeks of vacation, all others get 6 weeks 2.2 weeks vacation, all others get 1 week 1-3

4. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-4 Chapter 3 – Part 2 Economic Challenges Facing Global and Domestic Business Macroeconomics

5. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-5 Macroeconomics Issues for the Entire Economy ●Capitalism: The Private Enterprise System –Private enterprise system—economic system in which business success or failure depends on how well firms match and counter the offerings of competitors. –Adam Smith’s “Invisible hand”

6. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-6 Types of Competition –Pure competition  Commodities –Monopolistic competition  Differentiated products –Oligopoly  Small number of suppliers –Monopoly  One dominant supplier –Monopsony  One dominant customer

7. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-7 ●Gulfstream –Airplanes: Oligopolistic Industrial Products

8. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-8 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

9. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-9

10. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-10 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 – What are some government owned businesses in the U.S.? Other countries? – Privatization  Examples of companies going private?  What about the reverse direction?

11. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-11 Planned Economies vs. Capitalism ●The major issue: Who knows what’s best – the government or the people? ●With Adam Smith’s “invisible hand,” people and businesses “vote” with their dollars. – The ‘best’ survive, the ‘poor’ fail – Allocation is done by voting with dollars – Have even used this to predict elections

12. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-12 Discussion ●Will increased government regulation of vaccines, help or hurt flu vaccine shortages?

13. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-13 Government Economic Decisions What is the economic impact of each of these? ● Wage and price freezes ● Minimum wage law ● Limiting prices on flu vaccines ● Increased welfare payments ● Lowering interest rates ● Raising interest rates