Understanding Evolving
Economic Systems and
Competition
Chapter 2
Chapter 2 Learning Goals
1. What is economics, and how are the three
sectors of the economy linked?
2. How do economic growth, full employment,
and price stability indicate a nation’s
economic health?
3. What is inflation, how is it measured, and
what causes it?
4. How does the government use monetary
policy and fiscal policy to achieve its
macroeconomic growth?
5. What are the basic microeconomic
concepts of demand and supply, and how
do they establish prices?
Chapter 2 Learning Goals
6. What are the four types of market structure?
7. Which trends are reshaping micro- and
macroeconomic environments?
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
Economics:
The study of how a society
uses scarce resources to
produce and distribute goods
and services
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
Circular Flow Between
3 Sectors of the Economy
spending
income
Households
labor
Government
taxes, revenues,
inputs, outputs,
public goods and services
costs
materials
Transparency 2-5
Businesses
goods
revenues
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.
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
1. Macroeconomics/ 1. Economic growth
The Goal of Economic Growth
Benefits:
• Increased standard of living
• Increased employment
• Increased income
Drawbacks:
• Pollution
• Strain on facilities
1. Macroeconomics
• Economic growth is measured by the
gross domestic product (GDP)
US economy’s growth during the 1990’s
5
Real GDP grow th (%)
4
3
2
1
0
-1
1990 1991 1992 1993 1994 1995 1996 1997 1998
-2
Source: Fortune, Mar. 1, 1999, p. 34.
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.
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
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
The Goal of Steady Prices
• Inflation is measured by the
consumer price index
• Inflation rates in the US:
1979
1987
1998
Source: Fortune, Sept. 28, 1998, p. 64.
13.3%
4.4%
2.0%
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
1. Macroeconomics
2 Tools to Reach
Macroeconomic 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
Revenues and Expenses
for the Federal Budget
Revenues
Corporate income taxes
Excise taxes
Other
Expenses
Medicaid
Reserve pending social security reform
Other
Social
insurance
payroll
taxes
Transparency 2-13
Individual
income
taxes
Medicare
Social
security
National
defense
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
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
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
2. Microeconomics
Equilibrium:
The point at which quantity
demanded equals quantity
supplied
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
Types of Market Structure
Market structure:
number of suppliers in a market
1. Perfect competition
2. Pure monopoly
3. Monopolistic competition
4. Oligopoly
Types of Market Structure
Perfect competition
Pure monopoly
Monopolistic competition
Oligopoly
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
Trends in Economics
Microeconomic
• delivering value & quality
• creating long-term relationships
• creating a competitive workforce
Macroeconomic
• nations formerly with command
economies are becoming
entrepreneurial
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)