Chapter 3

Economics Analysis of the choices people and governments make in allocating scarce resources. In fact, our daily lives are affected by economics everyday. Economics is the study of the production and consumption of goods and the transfer of wealth to produce and obtain those goods.

Economics (cont’d….) At the heart of every business transaction is an exchange between a buyer and a seller. Hence, the exchange process involves both demand and supply. Supply: willingness and ability of sellers to provide goods and services. Demand: Willingness and ability of consumers to purchase goods and services at different prices.

Microeconomics** The study of small economic units, such as individual consumers, families, and businesses.

Demand curve Demand curve - shows the amount of a product buyers will purchase at different prices. Driven by variety of factors like competition, price, larger economic events, and consumer preferences.

Supply Curve Supply curve - shows the relationship between different prices and the quantities that sellers will offer for sale, regardless of demand.

How Supply and Demand 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.

Macroeconomics Issues For The Entire Society How a country uses its factors of production to create a country’s economic system. Every country’s economic system is different. Political, social, and legal environments differ in every country. Economies are generally classified in one of three categories: Private enterprise system: capitalism or market economy Planned economies: socialism, communism Mixed economies (combinations of the two)

Capitalism The Private Enterprise System Most industrialized nations operate economies based on the private enterprise system also known as capitalism or market economy. 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

Capitalism Four degrees of competition: Pure competition – large number of buyers and sellers exchange homogeneous products and no single participant can significantly influence price e.g. agricultural sector in Bangladesh Monopolistic competition – large number of buyers and sellers exchange differentiated (heterogeneous) products, so each participant has some control over the price e.g. fast moving consumer goods (such as  soft drinks, toiletries, and grocery items) industry in Bangladesh

Capitalism Oligopoly – few sellers compete and high start-up costs form barriers to deter new entrants e.g. telecom operators in Bangladesh such as GP, Robi, Banglalink, etc. Monopoly – single seller dominates trade in a good or service for which buyers have no substitute e.g. Bangladesh Railway has a monopoly in rail transport. 

Capitalism

Planned Economies In a planned economy, government controls determine business ownership, profits, and resource allocation to accomplish government goals rather than those of individual firms. 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. Former Soviet Union, North Korea Socialism Government ownership and operation of major industries, such as healthcare or communications. Some private ownership of industry allowed. Some Scandinavian countries

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.

Evaluating Economic Performance Economic system should provide stable business environment and sustained growth. Business decisions and consumer behavior differ at various stages of the economic or 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

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.

Price-Level Changes Inflation is rising prices caused by a combination of excessive consumer demand and increases in the costs of raw materials. Inflation devalues money - people can purchase less with what they have. Deflation is when prices continue to fall. Deflation can cause a weakened economy.

Employment Levels The unemployment rate is the percentage of total workforce actively seeking work but currently unemployed.

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. Bangladesh Bank formulates and implements monetary policy in Bangladesh. Government uses monetary and fiscal policy to fight unemployment, increase spending, and reduce the duration and severity of economic recession.

Fiscal Policy Fiscal Policy - Government actions to influence economic activity through decision 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 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. If the government has more money than it spends, there is a budget surplus.