Understanding Evolving Economic Systems and Competition

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Understanding Evolving Economic Systems and
Competition

• Chapter 2

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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 nations 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?

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Chapter 2 Learning Goals

• What are the four types of market structure?
• Which trends are reshaping micro- and
  macroeconomic environments?

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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

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

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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

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Circular Flow Between3 Sectors of the Economy
Households
Government
taxes, revenues, inputs, outputs, public goods
and services
Businesses
Transparency 2-5
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Learning Goal 2

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

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3 Main Macroeconomic Goals
1. Macroeconomics

• 1. Economic growth
• increased output of a nations goods and services
• 2. Full employment
• all who want to work have jobs
• 3. Price Stability
• avoiding rapid inflation

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The Goal of Economic Growth
1. Macroeconomics/ 1. Economic growth

• Benefits
• Increased standard of living
• Increased employment
• Increased income
• Drawbacks
• Pollution
• Strain on facilities

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1. Macroeconomics

• Economic growth is measured by the gross domestic
  product (GDP)

US economys growth during the 1990s
Source Fortune, Mar. 1, 1999, p. 34.
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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 Reserves
  preferred rate of growth

Source The Arizona Republic, Nov. 25, 1999, p.
D1.
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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

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The Goal of Steady Prices
1. Macroeconomics/ 3. 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

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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.
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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

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2 Tools to ReachMacroeconomic Goals
1. Macroeconomics

• 1. Monetary Policy
• governments programs for controlling the amount
  of money circulating in the economy and interest
  rates
• 2. Fiscal Policy
• governments use of taxation and spending to
  affect the economy

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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
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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

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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

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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

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2. Microeconomics

• Equilibrium
• The point at which quantity demanded equals
  quantity supplied

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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 industrys
  output, is difficult to enter, and what one firm
  does will influence others

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Types of Market Structure

• Market structure
• number of suppliers in a market
• 1. Perfect competition
• 2. Pure monopoly
• 3. Monopolistic competition
• 4. Oligopoly

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Types of Market Structure
Perfect competition
Monopolistic competition
Pure monopoly
Oligopoly
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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

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Trends in Economics

• Microeconomic
• delivering value quality
• creating long-term relationships
• creating a competitive workforce
• Macroeconomic
• nations formerly with command economies are
  becoming entrepreneurial

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• 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 Sonys handheld devices
(Source Newsweek, Nov. 29, 1999, p. 12)