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Published on April 9, 2008

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Chapter 6:  Chapter 6 Competition and Economics Competition and Economics:  Competition and Economics After reading and studying the chapter, you should be able to: Demonstrate how the laws of supply and demand interact with the price of a product. Identify the supply curve, demand curve and equilibrium point. Explain the different types of competition that exist in the free enterprise system. Define economics and the subfields of macroeconomics and microeconomics. Identify and discuss the three primary goals of macroeconomics. Describe the concept of the business cycle. Discuss the concept of balance of trade and its relationship to the economy. Identify four basic types of market structure and the primary characteristics of each. Economics:  Economics Defined: The study of how scarce resources are transformed into goods and services and how those goods and services are distributed among a society’s unlimited needs and desires. Economics:  Economics Economics has been here since the Garden. When Adam and Eve were in the Garden there was plenty, and abundance, more than they could ever want, ever need. There was a shortage of nothing. They were given productive work to be done within an environment completely under their dominion. Yet they determined to have their own way as opposed to pursuing the way of their Maker. As a result, they were cast out of paradise and man was told that work would now be different. By the sweat of your brow, you’ll now work. Thorns, thistles, pain. You chose darkness, death, disobedience. Now the consequences. Resources are now going to come by difficulties. Scarcity. Hence the need to study economics Macroeconomics:  Macroeconomics Macroeconomics: The subfield of economics that studies the economy as a whole, examining aggregate data for large groups like a nation. Macroeconomics studies issues of the business cycle, purchasing power, economic growth, full employment, keeping prices steady. Note: Some believe unemployment is a microeconomic concept because it viewed a surplus of labor. Explaining unemployment is the same then as for explaining a surplus of any product. Macroeconomics:  Macroeconomics The Business Cycle: The expansion-recession-recovery pattern in macroeconomics; the business cycle consists of periods of growth, recession, sometimes depression and recovery. Growth or Expansion: Increasing a nations’ goods and services output (gross domestic product). An increase in a nation’s GDP is indicative of growth in the economy. Recession: a decline in output over at least two consecutive quarters. Depression: a prolonged period of deep recession. Recovery: a period of increasing GDP following a recessionary period. Macroeconomics:  Macroeconomics Purchasing Power (PPI): The Producer Price Index calculates changes in wholesale prices by measuring the prices paid by producers and wholesalers for some of the commodities and goods they buy. Price Stability: The average prices for goods and services. When the prices for goods and services in general are rising in an economy, you have inflation and inflation reduces purchasing power—how much a dollar will buy. The government attempts to measure inflation by looking at changes in the CPI, Consumer Price Index. CPI is calculated every month by the Department of Labor pricing a “market basket” of goods and services purchased by typical urban consumers. The CPI and the PPI are both indexes used to measure the change in of inflation.” There is a distinction between monetary inflation and price inflation that economists consider. Some economists contend that the real inflation that brings about increases in overall prices is the increase in the money supply. Macroeconomics:  Macroeconomics Understanding the Fed Federal Reserve: the central banking system for the U.S.; it controls how much money is in circulation by setting interest rates on the money it lends to banks and through open market operations. Monetary Policy: set by the Federal Reserve System (the Fed). By setting interest rates lower (adopting an expansionary policy), more money flows into the economy. Setting interest rates higher (a reductionary or contractionary policy), less money flows into the economy. Fiscal Policy: the federal government’s programs for taxing and spending. Budget Deficit: results when the government spends more for its programs than it collects through taxes. National Debt: also called public debt, it is the accumulation of budget deficits over a period of years, plus interest Microeconomics:  Microeconomics Microeconomics: The subfield of economics that looks at the individual parts of an economy. Microeconomics studies the behavior of households, organizations and industries. In a free market it examines the relationship of prices and the quantity of product through the law of supply and demand. Some argue for employment as a part of microeconomics. Microeconomics:  Microeconomics Employment (also viewed by some economists as a macroeconomic topic) Full Employment: condition where all people wanting and looking for jobs successfully find them—technically occurs when only frictional unemployment exists. Unemployment (Four types): Frictional: short-term; it includes those who are not working but reentering the job market, and new graduates or other first-time entrants into the job market. Structural: a mismatch between those looking for jobs and available vacancies. Cyclical: occurs when the number of vacancies is exceeded by those unemployed due to a decrease in demand for goods and services. Seasonal: occurs during down times that certain industries have like construction work and migratory farm work. Microeconomics:  Microeconomics Demand: the willingness and ability of the market to purchase a product at various prices, all other things constant. Supply: the willingness and ability of businesses to produce and sell a product at various prices, all other things constant. Microeconomics:  Microeconomics The demand curve demonstrates the quantity of product people are willing to buy at different prices at specific times. As the price increases, the quantity demanded is lower. As the price decreases, the quantity demanded is higher. The demand for pencils slopes downward to the right as the quantity of pencils increases and the price per pencil drops. As the price is lowered, more people are willing to pay for the product and therefore demand more. Demand is the willingness and ability of the market to purchase a product. Microecomics:  Microecomics The supply curve sweeps upward to the right. As price increases, there is a trend for more product to be available. The higher the price that pencils are fetching, the more the company is willing to produce and sell. Supply is the willingness and ability of businesses to produce and sell a product. Slide14:  Microeconomics Equilibrium: The supply and demand curves cross at a certain quantity and price. At that point, ‘E,’ the quantity demanded equals the quantity of supply. Market equilibrium is determined by the interactions between supply and demand and the key factor, price. Since supply and demand determine the price, in a free market there is no need for government interference as in a command economy. D S E Macroeconomics:  Macroeconomics SURPLUS: If there is more product available than there is quantity demanded, a surplus results. A company must lower prices to help sell the surplus. They do this because if there is a surplus, some pencil companies become frustrated that there is not enough demand. Pencil companies willing to accept a lower price bid down the price they ask and this process continues until all who want to sell can sell. SHORTAGE: If there is a greater quantity demanded for a product than there is product available, there is a shortage. In this case, the price would rise. Some frustrated buyers willing to buy at the prevailing price cannot because there are not enough sellers willing to sell. Those buyers who are willing to pay higher prices bid up the price until everyone who wants to, can buy. Competition:  Competition Four Types of Market Structures Perfect Competition: a market in which there is a large number of small firms selling similar –almost identical—products; entrance into the market is relatively easy. Monopolistic Competition: a market in which there are a large number of firms producing similar products which, though not identical, are close substitutes; entrance into the market is fairly easy but product differentiation is crucial. Oligopoly: a market structure generally with a handful of large firms; difficult entrance into this type of market. Monopoly: a market structure in which there is only one seller or provider of a product. Competition and Trade Deficits:  Competition and Trade Deficits “What matters to the economy is not the difference between imports and exports but the extent to which Americans are free to benefit from the efficiencies, opportunities and consumer choice created in an economy open to world trade.” Daniel Griswold, “America’s Maligned and Misunderstood Trade Deficit,” http://www.freetrade.org/pubs/pas/tpa-002.html Competition and Trade Deficits:  Competition and Trade Deficits The U.S. trade deficit nearly tripled between 1992 and 1997. Meanwhile, U.S. industrial production increased by 24% and manufacturing output increased by 27%. As trade deficits rose, unemployment rates fell. Trade deficits signal global investor confidence in the US and rising purcasing power among domestic consumers. Daniel Griswold, “America’s Maligned and Misunderstood Trade Deficit,” http://www.freetrade.org/pubs/pas/tpa-002.html. Competition and Economics Discussion Questions:  Competition and Economics Discussion Questions Define supply and demand and describe their interaction with price. Describe the difference between monopolistic competition, oligopoly, monopoly and pure competition. Differentiate between macroeconomics and microeconomics. What are the three primary goals of macroeconomics? Briefly define each and give your opinion about which of the goals is the most significant. Justify your position. What kind of impact does a country’s trade deficit have on a nation’s economy? Explain with a specific example. List the four basic types of market structure and give an example of an industry for each. Draw an equilibrium graph for any product or use the illustration from the text. Shade and label the areas which illustrate shortages and surpluses. Read the classic essay by Leonard Read, “I, Pencil.” Summarize in five to seven sentences, the essence of the essay Competition and Economics Activities:  Competition and Economics Activities Watch the video, “Tucker, the Man and His Dream,” rated PG or review the “Tucker Automobile Club of America” website at http://www.tuckerclub.org/index.php and read the history of Tucker and his car. Write a one-page memorandum to the instructor identifying the major elements of the story, and how it relates to market structures. Identify the market structure in which Tucker was operating and describe how his story might illustrate some of the principles of that market structure. Do some research in the library about the origins of the Sherman Anti-Trust Act. On a sheet of paper identify the precipitating event for this act which regulates monopolies. Identify the company which was at the root of the dispute and any major personality or personalities involved. Look up the current U.S. national debt. Report it and report the most recent year’s budget deficit or surplus. Competition and Economics Integrating Faith and Discipline:  Competition and Economics Integrating Faith and Discipline How do the facts of the first chapters of Genesis relate to economics? Specifically, how does the “Fall” described in Genesis relate to economics. How are competition and free enterprise consistent with teachings in the New Testament? How might it be inconsistent? To what extent might Carol have behaved unethically in her dealings with Christian? What Bible verse can you use to defend your thinking?

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