1. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Part 1 Business in a Global Environment

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

3. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 3-3 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 21 st century.

4. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 3-4 Chapter Overview Economics—social science that analyzes the choices made by people and governments in allocating scarce resources.

5. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 3-5 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.

6. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 3-6 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.

7. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 3-7 Factors Driving Demand Each person must choose Between saving and spending How to allocate spending

8. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 3-8 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

9. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 3-9 Demand Curve for Gasoline

10. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 3-10 Shift in the Demand Curve for Gasoline

11. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 3-11 Expected Shifts in Demand Curves

12. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 3-12 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

13. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 3-13 Supply Curve for Gasoline

14. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 3-14 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

15. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 3-15 Expected Shifts in Supply Curves

16. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 3-16 How Demand and Supply Interact Separate shifts in demand and supply have obvious effects on product price and availability Equilibrium price

17. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 3-17 Law of Supply and Demand

18. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 3-18 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.

19. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 3-19 Macroeconomics: Issues for the Entire Economy Capitalism: The Private Enterprise System and Competition Pure competition Monopolistic competition Oligopoly Monopoly Deregulation

20. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 3-20 Types of Competition

21. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 3-21 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

22. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 3-22 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

23. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 3-23 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

24. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 3-24

25. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 3-25 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.

26. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 3-26 Four Stages of the Business Cycle

27. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 3-27 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.

28. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 3-28 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

29. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 3-29 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

30. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 3-30 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

31. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 3-31 Contents of the CPI Market Basket

32. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 3-32 Employment Levels Unemployment rate— an indicator of a nation’s economic health Top Job Losses by Industry in the Recent Recession

33. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 3-33 Four Types of Unemployment

34. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 3-34 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.

35. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 3-35 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.

36. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 3-36 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

37. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 3-37 Where Federal Tax Revenues Come from

38. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 3-38 How Your Tax Dollars Are Spent

39. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 3-39 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

40. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 3-40 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.

41. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 3-41