Understanding Evolving Economic Systems and Competition

1. Understanding Evolving Economic Systems and Competition Chapter 2

2. Chapter 2 Learning Goals • What is economics, and how are the three sectors of the economy linked? • How do economic growth, full employment, and price stability indicate a nation’s economic health? • What is inflation, how is it measured, and what causes it? • How does the government use monetary policy and fiscal policy to achieve its macroeconomic growth? • What are the basic microeconomic concepts of demand and supply, and how do they establish prices?

3. Chapter 2 Learning Goals • What are the four types of market structure? • Which trends are reshaping micro- and macroeconomic environments?

4. Learning Goal 1 • What is economics, and how are the three sectors of the economy linked? • Economics is the study of how individuals, businesses, and governments use scarce resources to produce and distribute goods and services. • Three sectors are linked by a series of two-way flows • Government provides public goods and services for the other two sectors • Government receives income in the form of taxes • Changes in one flow affect the other sectors

5. Economics: The study of how a society uses scarce resources to produce and distribute goods and services

6. 2 Subareas of Economics 1.Macroeconomics • focus on economy as a whole; considers aggregate data from large groups of people, companies, or products 2. Microeconomics • focus on individual parts of economy, such as households or firms

7. spending income labor costs goods materials revenues Circular Flow Between3 Sectors of the Economy Households Government taxes, revenues, inputs, outputs, public goods and services Businesses Transparency 2-5

8. Learning Goal 2 • How do economic growth, full employment, and price stability indicate a nation’s economic health? • A nation’s economy is growing when the level of business activity, as measured by GDP, is rising. • A nation’s employment goals are measured by the unemployment rate.

9. 1.Macroeconomics 3 Main Macroeconomic Goals 1. Economic growth • increased output of a nation’s goods and services 2. Full employment • all who want to work have jobs 3. Price Stability • avoiding rapid inflation

10. 1.Macroeconomics/ 1.Economic growth The Goal of Economic Growth Benefits: • Increased standard of living • Increased employment • Increased income Drawbacks: • Pollution • Strain on facilities

11. 1.Macroeconomics • Economic growth is measured by the gross domestic product (GDP) US economy’s growth during the 1990’s Source: Fortune, Mar. 1, 1999, p. 34.

12. 1.Macroeconomics Policy Concerning Economic Growth • When growth is too fast, the Federal Reserve may raise interest rates to prevent inflation by slowing down the economy • A real GDP of 3% is the Federal Reserve’s preferred rate of growth Source: The Arizona Republic, Nov. 25, 1999, p. D1.

13. Learning Goal 3 • What is inflation, how is it measured, and what causes it? • Inflation is the general upward movement of prices. • Rate of inflation is measured by changes in the consumer price index (CPI) and the producer price index (PPI). • Causes • Demand-pull • Cost-push

14. 1.Macroeconomics/ 3.Steady prices The Goal of Steady Prices Inflation: increase in the average price of goods and services Demand-pull inflation: caused by demand exceeding supply Cost-push inflation: caused by increase in production cost leading to increased price

15. The Goal of Steady Prices • Inflation is measured by the consumer price index • Inflation rates in the US: 1979 13.3% 1987 4.4% 1998 2.0% Source: Fortune, Sept. 28, 1998, p. 64.

16. Learning Goal 4 • How does the government use monetary policy and fiscal policy to achieve its macroeconomic goals? • Fed restricts the money supply to slow growth and expands the money supply to stimulate growth • Government reduces taxes or increases spending to stimulate the economy; raises taxes or decreases spending to slow economy

17. 1.Macroeconomics 2 Tools to ReachMacroeconomic Goals 1. Monetary Policy • government’s programs for controlling the amount of money circulating in the economy and interest rates 2. Fiscal Policy • government’s use of taxation and spending to affect the economy

18. Revenues and Expensesfor the Federal Budget Revenues Expenses • Corporate income taxes • Excise taxes • Other • Medicaid • Reserve pending social security reform Other Social security Individual income taxes Social insurance payroll taxes National defense Medicare Net interest Non-defense discretionary Transparency 2-13

19. Learning Goal 5 • What are the basic microeconomic concepts of demand and supply, and how do they establish prices? • Demand • Quantity of a good or service that people buy at a given price • Supply • Quantity of a good or service that firms will make available at a given price • Balance of demand and supply is achieved by market adjustments of quantity and price

20. 2.Microeconomics Demand Curve: A graph showing the quantity of a good or service that can be sold at various prices Changes in demand: • change in customer income • changes in fashion or taste • change in price of related products • expectations about future prices • change in number of buyers

21. 2.Microeconomics Supply Curve: A graph showing the quantity of a good or service that a business will provide at various prices Changes in supply: • new technology • change in price of resources • change in price of related products • change in number of producers • change in taxes

22. 2.Microeconomics Equilibrium: The point at which quantity demanded equals quantity supplied

23. Learning Goal 6 • What are the four types of market structure? • Perfect competition • Large number of buyers and sellers, similar products, good market information for buyers and sellers, ease of entry and exit into the market • Pure monopoly • Single seller in a market • Monopolistic competition • Many firms sell close substitutes in market that is easy to enter • Oligopoly • Few firms produce most or all of the industry’s output, is difficult to enter, and what one firm does will influence others

24. Types of Market Structure Market structure: number of suppliers in a market 1.Perfect competition 2. Pure monopoly 3. Monopolistic competition 4. Oligopoly

25. Types of Market Structure Perfect competition Monopolistic competition Pure monopoly Oligopoly

26. Learning Goal 7 • Which trends are reshaping the micro- and macroeconomic environments? • Firms are placing more emphasis on delivering value and quality to the customer • Companies are establishing long-term relationships with both customers and suppliers • Entrepreneurial spirit is sparking wealth among individual business owners and fueling the growth of capitalism

27. Trends in Economics Microeconomic • delivering value & quality • creating long-term relationships • creating a competitive workforce Macroeconomic • nations formerly with command economies are becoming entrepreneurial

28. Strategic alliance: A cooperative agreement between business firms; sometimes called a strategic partnership • Example: • Sony Corporation formed a strategic alliance with Palm Computing to provide the operating system for Sony’s handheld devices(Source: Newsweek, Nov. 29, 1999, p. 12)