Ass. Prof. Dr. Özgür KÖKALAN İstanbul Sabahattin Zaim University
Chapter Objectives 1. Distinguish between microeconomics and macroeconomics. 2. Explain the factors that drive demand and supply. 3. Explain major economic indicators of an economy 4. Discuss how monetary policy and fiscal policy are used to manage an economy’s performance 3-2
Economics Economics—social science that analyzes the choices made by people and governments in allocating scarce resources. 3-3
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. 3-4
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. 3-5
Demand Curve for Gasoline 3-6
Factors Driving Demand Each person must choose Between saving and spending How to allocate spending 3-7
Shift in the Demand Curve for Gasoline 3-8
Expected Shifts in Demand Curves 3-9
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 3-10
Supply Curve for Gasoline 3-11
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 3-12
Expected Shifts in Supply Curves 3-13
Law of Supply and Demand 3-14
Evaluating Economic Performance Flattening the Business Cycle Economies flow through various stages of a business cycle 3-15
Four Stages of the Business Cycle 3-16
Productivity and GDP & GNP 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 in a year within a nation’s boundaries GDP per capita; GDP is divided by the number of people in the country Groos National Product – the sum of all goods and services produced in one year by labour and property supplied by the residents of a country 3-17
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 3-18
Price-Level Changes Demand-pull inflation Excess consumer demand Cost-push inflation Generated by rises in costs of factors of production Deflation Consumer pessimism about the future causes individuals to stop purchasing 3-19
Measuring Price Level Changes Consumer Price Index (CPI)—measures the monthly average change in prices of goods and services Market Basket—combination of the goods and services most commonly purchased by urban consumers Producers Price Index (PPI) For Finished Goods For Intermediate Goods 3-20
Contents of the CPI Market Basket 3-21
Employment Levels Unemployment rate— an indicator of a nation’s economic health Top Job Losses by Industry in the Recent Recession 3-22
Four Types of Unemployment 3-23
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. 3-24
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. 3-25
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 3-26