FUNDAMENTALS OF BUSINESS ECONOMICS

I.  Measuring Economic Conditions

A.  Introduction

1.  Macroeconomics and business

• Establishes the background in which business takes place

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2.  Long-term vs. short-term

• Short-term (1 - 5 years)

- Time horizon consistent with budget or business plan

- Prices less flexible than in long-run

- Focus mainly on factors that increase demand

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• Long-term (10 - 20 years)

- Absolute and relative prices more flexible

- Focus on factors that increase supply

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3.  Three-Sector Model

a.  Real goods market

• Price level, real output determined

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.b.  Real loanable funds market

• Real risk-adjusted interest rate, equilibrium level of real credit determined

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c.  Foreign exchange market

• Nominal exchange rate, equilibrium quantity of foreign exchange determined

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4.  Supply and demand

a. Demand

• Relationship between the price of a good or service and the quantity demanded, all else held constant

• Concerned with buyers or consumers of a product

(1) Demand curve

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(2)  Changes in demand

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b. Supply

• Relationship between the price of a good or service and the quantity supplied

• Concerned with sellers or the producers of a product

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(1) Supply curve

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(2) Changes in supply

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c. Equilibrium

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• Disequilibrium

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d. Market changes

• What happens to price and quantity when demand or supply changes?

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(1) Changes in demand

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(2) Changes in supply

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