1. 3
Chapter
Economic Challenges Facing Contemporary Business

2. Learning Objectives
Discuss microeconomics and explain the forces of demand and supply.
Describe macroeconomics and the issues for the entire economy.
Identify how to evaluate economic performance.
Discuss managing the economy’s performance.
Describe the global economic challenges of the 21st century. 1 4 2 5 3
Start this chapter off with a discussion of current national and local economic data, including the unemployment rate, GDP growth, inflation, and personal income growth at an introductory level.

3. Economics
Analysis of the choices people and governments make in allocating resources.
Includes microeconomics and macroeconomics
How the economy works has an impact on individuals and businesses. Government decisions about the operation of the country’s economy affect individuals and businesses. In a global economy, individual and business decisions may actually have an international scope.
Lecture Enhancer: How do microeconomic issues impact macroeconomics?

4. Microeconomics
The study of small economic units, such as individual consumers, families, and businesses.
Supply: Amount of goods and services for sale at different prices.
Demand: Willingness and ability of consumers to purchase goods and services at different prices.
Both microeconomics and macroeconomics provide a different view of the economy. Microeconomics is focused on a smaller scale – individuals, families, and businesses.

5. Factors Driving Demand
Demand curve - shows the amount of a product buyers will purchase at different prices.
Driven by variety of factors such as competition, price, larger economic events, and consumer preferences.
Supply and demand are at the heart of economic decisions. Economics is a balance between what we want and what we can afford. These decisions drive demand. Demand is driven by factors that influence how people decide to spend their money.
CLASS ACTIVITY: Lead a class discussion to obtain student examples of products which have experienced recent sharp increases and decreases and why these changes may have occurred.

6. Demand Curve A change in overall demand shifts to a new demand curve.
It is important to note the difference between changes in the quantity demanded at various levels and a change in overall demand. A change in overall demand shifts the curve.
Lecture Enhancer: In your opinion, which one of these factors has the most significant effect on a demand curve?
Class Activity: Ask students how Albert Pujols’ decision to play baseball for the Angels affected that team’s ticket sales and prices.
Class Activity: Discuss with the class how current economic weaknesses have affected their restaurant choices.

7. Factors Driving Supply
Production plays a central role in determining the overall supply.
Supply curve - shows the relationship between different prices and the quantities that sellers will offer for sale, regardless of demand.
of goods and services.
Many of the factors of production and other factors can shift the supply curve.

8. Supply Curve Example
Movements along the supply curve are the opposite of movements along the demand curve. While consumers must decide how to spend their money, businesses must decide what products to sell and how. Sellers want to be able to make a profit from what they sell, but they must respond to the demand at different price levels. The factors of production: natural resources, capital, human resources, and entrepreneurship have an impact on the degree of products and services a firm will supply.

9. How Demand and Supply 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.
Shifts and the supply and demand curves are affected by several factors. The factors often change at the same time and keep changing. Multiple factors can force pressure on price and quantities. Students need to understand that the equilibrium price is the prevailing market price at which you can buy an item.
Class Activity: Discuss with students how ticket prices could fluctuate depending on which teams are playing. For example, if your favorite team is playing the Yankees, ticket prices for those games could be higher than if your favorite team were playing the Mariners.

10. Macroeconomics Issues for the Entire Society
Political, social, and legal environments differ in every country.
Economies generally classified in one of three categories:
Private enterprise system: capitalism or market economy
Planned economies: socialism, communism
Mixed economies (combinations of the two)
How a country uses its factors of production creates a country’s economic system. Every country’s economic system is different. There are three categories of economies.
Lecture Enhancer: How might a nation’s cultural practices influence its economic system?

11. Capitalism The Private Enterprise System and Competition
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
The type of competition in an industry is important to note. It dictates the ease of doing business in that industry. Though the United States is based on capitalism, there are some forms of government intervention in the free market, mostly in the form of regulation.
LECTURE ENHANCER: How is a business rewarded in the private enterprise system?

12. Types of Competition
The type of competition in an industry and for a company provides important information about prices and how companies compete. The characteristics that are analyzed are number of competitors, ease of entry into an industry, similarity of goods, and price control.
Lecture Enhancer: Share a specific example of each type of competition.
Lecture Enhancer: Name an industry or business that has been a target for deregulation.

13. Planned Economies Communism Socialism
Government controls determine business ownership, profits, and resource allocation.
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.
Socialism
Government ownership and operation of major industries, such as health care or communications.
Some private ownership of industry allowed.
The writings of Karl Marx in the mid-1800s formed the basis of communist theory. Many countries adopted communist-like economies but found them problematic. Today, communist-like systems only exist in a few countries like North Korea.
Lecture Enhancer: What might be a likely drawback to contributing and distributing resources according to each person’s needs and abilities?

14. 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.
In the United States, Medicare is a good example of a government-run program. France has a blend of socialist and free-enterprise policies that has worked for more than 100 years. Discuss the various aspects (private enterprise, state-owned industries, government planned economy, state influence on banking sector) of the Chinese economy as an example of a mixed economy and how the Soviet Union/Russia has changed.
Lecture Enhancer: What are the key societal benefits of a mixed market economy?
Class Activity: Discuss how important incentives are to students, and whether they might leave their homes to pursue higher incentives elsewhere.

15. Comparing Economic Systems
The key difference in comparing economic systems is the ownership of enterprises and who has the “right to profits.” Also, the rights of employees and worker incentives differentiate the various economic systems and affect individuals’ economic lives.

16. Evaluating Economic Performance
Economic system should provide stable business environment and sustained growth.
Business decisions and consumer behavior differ at various stages of the 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
Economic systems should benefit citizens through a stable business environment and sustained growth. There are four defined stages of the business cycle. Discuss the current state of the U.S. economy.
Lecture Enhancer: How can we determine which phase of the business cycle an economy is in at a certain time?
Class Activity: Survey the class to see how many have purchased more “store brand” items at the grocery or drugstores where they shop, as a result of softer economic conditions.

17. 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.
GDP is tracked in the United States by the Bureau of Economic Analysis, a division of the U.S. Department of Commerce.
Measures of the economy are constantly reported. Productivity shows the efficiency and strength of an economy. GDP for the United States remains the highest in the world. Click the link to the Bureau of Economic Analysis to view GDP and economic details.

18. Price-Level Changes
Inflation is rising prices caused by a combination of excessive consumer demand and increases in the costs of raw materials.
Core inflation rate measures inflation minus energy and food prices.
Demand-pull inflation - Excessive consumer demand.
Cost-push inflation - Rises in costs of the factors of production.
Hyperinflation - Soaring consumer prices.
Inflation devalues money. People can purchase less with what they have (decreased purchasing power).
Deflation is when prices continue to fall. Deflation can cause a weakened economy.
More than one factor causes inflation. Inflation is not desired and can prove problematic to an economy. The core inflation rate does not tell the entire story as it does not include energy and food prices. Although deflation provides consumers with low prices, it also dictates a weak economy. Discuss how each individual’s inflation rate could be different due to their specific purchasing “baskets.” College students may face a higher inflation rate due to the increasing costs of college (tuition, fees, textbooks, etc.). Senior citizens also face a higher inflation rate as they spend more money (based on their income) on health-related expenses, which have increased dramatically over the past decade.
Lecture Enhancer: How does inflation benefit wealthier individuals?

19. Measuring Price-Level Changes
Changing prices are tracked by the Consumer Price Index (CPI).
The monthly average change in prices of goods and services.
A multitude of items is priced to compile the data included in the “CPI Market Basket.”
The Bureau of Labor Statistics calculates the CPI monthly along with other economic measures.
The consumer price index provides a measure of everyday purchases of households. Click the link to show students the current CPI along with a variety of other economic measures.

20. CPI Market Basket
Note the goods that are included in the CPI Market Basket.
Class Activity: Ask students which goods or services they think have risen and declined the most in the last few years.

21. Employment Levels Bureau of Labor Statistics Unemployment “game show”
The unemployment rate is the percentage of total workforce actively seeking work but currently unemployed.
Bureau of Labor Statistics
Unemployment “game show”
Employment dictates the amount of money people have to spend in the economy. People need money to buy goods and services and therefore need jobs to make money. Unemployment is an important measure of economic performance. Click on the link to discuss the recent national and state unemployment statistics. Play the YouTube video for the unemployment game show.
Lecture Enhancer: Think of an example of each type of unemployment.

22. Government uses monetary and fiscal policy to fight unemployment,
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.
Expansionary monetary policy: Efforts to increase the money supply to reduce costs of borrowing and encourage new investment.
Restrictive monetary policy: Efforts to decrease the monetary supply to curb rising prices and overexpansion.
The Federal Reserve System formulates and implements monetary policy.
Government uses monetary and fiscal policy to fight unemployment,
Government uses monetary and fiscal policy to fight unemployment, increase spending, and reduce the duration and severity of economic recession.
The Federal Reserve manages monetary policy for the United States. It may use both expansionary or restrictive monetary policy. The Federal Reserve uses these policies to respond to economic measures like unemployment and business cycles. Discuss what the Fed is doing now to manage the economy.

23. Fiscal Policy
Fiscal Policy - Government actions to influence economic activity through decisions 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. (Debt clock)
If the government has more money than it spends, there is a budget surplus.
National debt is tracked by the Government Accountability Office.
The Federal Budget is the government’s expenses and revenue for the coming year. The Federal Budget will dictate fiscal policy regarding the spending and taxing efforts by the government to influence the economy. Unlike individuals, the government can spend more money than is available, which drives the national debt through budget deficits. Discuss the issues the U.S. has with debt and budget deficits and the debt problems other countries have.
Click the link to go to the Government Accountability Office – the budget check for Congress.
Click the link to the U.S. “debt clock” to view the debt per citizen.
Lecture Enhancer: Provide an example of a U.S. spending decision intended to encourage economic growth.
Lecture Enhancer: Why must government spending policies be flexible and modifiable?

24. Global Economic Challenges
These challenges are growing in importance as the economies become more global and countries are more connected. No country is an economic island in today’s global economy.
Lecture Enhancer: What are some drawbacks to this type of worldwide economic interdependency?