Units 1 & 2 Economic Decisions and Systems PRINCIPLES OF BUSINESS, FINANCE AND MARKETING

 Satisfying Wants & Needs  Economic Choices  Economic Systems  Supply and Demand UNIT 1.01

 Wants  Not necessary for survival, but add comfort and pleasure to our lives  i.e. video games, designer clothes,  Needs  Things that are necessary for survival  i.e. food, clothing, shelter Question: Is a car a want or a need? SATISFYING WANTS AND NEEDS

Unlimited wants and needs, limited economic resources  Scarcity  Not having enough resources to satisfy every need  Limited supplies of goods and services  Someone’s going to go without BASIC ECONOMIC PROBLEM

 Opportunity Cost  Value of the next best alternative that you were not able to chose  Trade Off – what you make when you give something up to have something else  College vs. Work ECONOMIC CHOICES Job College Year Annual Income/ ExpenseCumulative Annual Income/ ExpenseCumulative 1 $ 20,000 $ (20,000) 2 $ 20,000 $ 40,000 $ (20,000) $ (40,000) 3 $ 20,000 $ 60,000 $ (20,000) $ (60,000) 4 $ 20,000 $ 80,000 $ (20,000) $ (80,000) 5 $ 20,000 $ 100,000 $ (20,000) $ (100,000) 6 $ 20,000 $ 120,000 $ 50,000 $ (50,000) 7 $ 20,000 $ 140,000 $ 50,000 $ - 10 $ 20,000 $ 200,000 $ 50,000 $ 150, $ 20,000 $ 300,000 $ 50,000 $ 400, $ 20,000 $ 400,000 $ 50,000 $ 650, $ 20,000 $ 500,000 $ 50,000 $ 900,000

 6 Steps  Define the problem  Identify the alternatives  List all pros and cons  Choose among alternatives  Act on your choice  Evaluate your decision  Example  Can’t get to work  Walk, bike, car, mooch ride  Lazy, embarrassing, cool  CAR!  Spend $20K on used car  Can’t afford gas  DECISION MAKING PROCESS

 Values  Things that are important to you in life  Goals  Things a person wants to accomplish  i.e. college degree, starting a business Freedom of Choice – the freedom to make decisions independently while accepting the consequences of those decisions FACTORS THAT AFFECT DECISION-MAKING

 Factors of Production  Natural Resources: raw materials (water, oil, trees)  Renewable resources can be replaced  Non-renewable resources cannot be replaced  Human Resources : people who contribute physical or mental energy  Capital Resources : tools, equipment, buildings, money, etc. used to produce goods and services ECONOMIC RESOURCES

Initiative to combine natural, human and capital resources to produce goods or services  The 3 economic questions 1.What to produce? 2.How to produce? 3.What needs and wants to satisfy? Who decides this determines a countries economic system ENTREPRENEURIAL RESOURCES

 Traditionalism or Traditional Economy  Do things the way they’ve always been done  Pros: everyone has a role in the economy; economic life is stable  Cons: discourages new ideas; growth is limited  Examples: parts of Africa, Latin American rain forest ECONOMIC SYSTEMS

 Communism or Command Economy  Government owns/controls all resources  Pros: everyone has a job and benefits; can make a dramatic change in a short time on production of goods  Cons: consumer goods rank low on priority list, few consumer wants are met; lack of incentive to work hard  Examples: North Korea, China, Cuba ECONOMIC SYSTEMS

 Capitalism or Market Economy  People owns/controls all resources  Pros: produce goods & services people want and need; freedom of choice; income: input ratio; competition keeps prices lower  Cons: wealth of economy not equally distributed  Examples: US, Japan, Canada, Great Britian ECONOMIC SYSTEMS

 Socialism or Mixed Economy  Government owns major industries; allows for private ownership of other businesses  Pros: gov’t and private business work together; insurance/social security benefits provided  Cons: high tax rates; smaller spendable income; discourages private business  Examples: Sweden, France ECONOMIC SYSTEMS

 Private Property  Business or individual owns their own property, not the government  Freedom of Choice  Freedom to make decisions independently while accepting the consequences of those decisions  Profit  Amount of money available to a business after all costs and expenses have been paid  Competition  Rivalry among businesses to sell their goods and services THE US ECONOMIC SYSTEM

The process of choosing which needs and wants will be satisfied  Consumer – person who buys and uses goods & services  Producer – business that makes the goods & services  Demand – the quantity of a good or service that consumers are willing to buy  The cheaper an item is, the more people will want/be able to afford it (and visa versa)  Supply – the quantity of a good or service that businesses are willing and able to provide  The more expensive it is to produce, fewer businesses are willing to make it (and visa versa) Consumers set demand, producers establish supply ECONOMIC DECISION-MAKING

SUPPLY AND DEMAND Price of 3-day Pass Number of Passes Sold Demand

SUPPLY AND DEMAND Price of 3-day Pass Number of Passes Sold Supply

SUPPLY AND DEMAND Price of 3-day Pass Number of Passes Sold Demand Supply Market Price

 Private Enterprise System  Role of the Individual as a Producer  Role of the Individual as a Consumer  Role of the Individual as a Citizen UNIT 1.02 KEY CHARACTERISTICS OF THE PRIVATE ENTERPRISE SYSTEM

An economic system that rewards firms for their ability to perceive the needs and demands of consumers  Capitalism  30 million US businesses in operation  3 main types of business 1.Sole Proprietors 2.Partnerships 3.Corporations  Fortune 500 Fortune 500 PRIVATE ENTERPRISE SYSTEM

 Role of the Individual as a Producer  Role of the Individual as a Consumer  Role of the Individual as a Citizen HOW DO BUSINESSES AND CONSUMERS INTERACT?

 Contribution to Economy  Goals – Things a person wants to accomplish, such as getting a college education, buying a car, or starting a business  Values – Things that are important to you in life  Standard of Living  Measure of how well people in a country live  Quality and quantity of wants and needs that are satisfied  Often determined by your choice of career  Career Choices  INDIVIDUAL AS A PRODUCER

Someone who takes a risk in starting a business to earn a profit  The bad news:  Over 1 million businesses start up in America each year  Over 500,000 close each year  Most start ups close within 16 months  The good news:  Average income for small business owner is $233,600 ENTREPRENEUR

The amount of money available to the business after all costs and expenses have been paid  How to increase profits?  Increase sales  Increase price  Decrease costs PROFIT

 Consumes goods and services  Vitale role in economic system  Buy/Not-Buy decision effects what goods and services are produced  Heavily targeted by businesses  Pay for Needs First  Food  Clothing  Shelter  Consumer Wants are a Huge Market! INDIVIDUAL AS A CONSUMER

GALLUP DAILY: U.S. CONSUMER SPENDING

HOUSEHOLD SPENDING BY CATEGORY

 Customer Service Key  70% of Americans are willing to spend 13% more with companies they believe provide excellent customer service  78% of consumers have bailed on a transaction because of poor customer service  Advocacy Groups  Protect people from corporate abuse (unsafe products, predatory lending, false advertising, etc.)  Prevention & Awareness (anti-smoking groups, parental advisory labels, etc.) STRENGTH OF THE CONSUMER

 Bill of Rights 1.Freedom of religion, speech, press, assembly, and petition. 2.Right to keep and bear arms in order to maintain a well regulated militia. 3.No quartering of soldiers. 4.Freedom from unreasonable searches and seizures. 5.Right to due process of law, freedom from self-incrimination, double jeopardy. 6.Rights of accused persons, e.g., right to a speedy and public trial. 7.Right of trial by jury in civil cases. 8.Freedom from excessive bail, cruel and unusual punishments. 9.Other rights of the people. 10.Powers reserved to the states. INDIVIDUAL AS A CITIZEN

 Vote  Pay Taxes  Obey the Law CITIZEN’S ECONOMIC RESPONSIBILITY

WHAT HAPPENS IF ECONOMIC RESPONSIBILITY IGNORED?

 Different Types of Businesses  Forms of Business Ownership  Determining Type of Business Ownership  Other Considerations UNIT 1.03

 Sole Proprietor  Partnership  Corporation TYPES OF BUSINESS

 A business owned by one person  Most common legal form of ownership for new businesses  Million sole proprietors in United States  Accounts for 75% of businesses in US SOLE PROPRIETOR

 Pros:  Control the entire business  Keep all of the profits  Make decisions quickly  Easy to establish  Pay fewer taxes  Cons  Unlimited liability SOLE PROPRIETOR

 A business owned by 2 or more persons who share responsibilities and profits/losses  Partnership Agreement (not filed with the government)  Name of the new business  Amount each person is to invest in the business  Amount each partner is to draw in salary/profit  How profits/losses after salaries are paid will be shared in proportion to each partner’s investment  Responsibilities of the partners in the entity  What will happen in the event of death of a partner(s)  3 Million business partnerships in United States PARTNERSHIP

 Pros:  Combine talents and financial resources  Share in responsibility of running the business and making decisions  Relatively easy to establish  Pays less taxes than a corporation  Cons:  Unlimited liability  Potential for disagreements  Loss of partner could mean end of business PARTNERSHIP

 A business organization that operates as a legal entity separate from its owners  Recognized as a person under the law  Articles of Incorporation  Sell Stock  Most revenue generated from this type of business CORPORATION

 Key Terms  Stockholders/Shareholders: People who own stock in a corporation  Board of Directors: A group of people elected by shareholders to guide a corporation  Corporate Officers: are the directors and senior level management of a corporation  Charter: a license to operate from that state  Proxy: ability of a shareholder to vote on the affairs of a company CORPORATION

 Pros:  Limited liability  Share of the profits  No management responsibility  Can raise money by selling stock  Easier to get credit  Cons:  Legal red tape  Increased tax burden CORPORATION

BUSINESS OWNERSHIP DISTRIBUTION

 the potential risks and liabilities of your business  the formalities and expenses involved in establishing and maintaining the various business structures  your income tax situation  your investment needs DETERMINING TYPE OF BUSINESS OWNERSHIP

 Franchise  Extractor  Producer  Processor  Manufacturer  Distribution  Service Firms OTHER TYPES OF BUSINESSES

FRANCHISE  A contractual agreement to sell a company’s products or services in a designated geographic area

 Franchisee: the person or group of people who have received permission from a parent company to sell its products or services  Franchisor: the parent company that grants permission to a person or group to sell its products or services FRANCHISE

 Average McDonald’s restaurant generates $2.5 million in sales annually  75% of restaurants worldwide are owned by franchisees  To become a franchisee  Potential franchisees must have liquid assets of at least $750,000  Expect to pay between $1M - $2M in start up costs based on  Geography and size of the restaurant  Type of kitchen equipment  Signage and décor  Landscaping  40% of start-up costs paid in cash up front, rest can be financed  $45,000 franchise fee  Monthly service fee of 4% of gross sales  Pay monthly rent to corporate (approx. 8.5%) MCDONALD’S

 Pros:  Name brand recognition  Established method of doing business  Access to centralized advertising  Professional help in startup/training  Cons:  High startup costs in purchasing rights to use the business name  Must follow corporate standards FRANCHISE

 Extractors: A business that grows products or takes raw materials from nature  Producers: A business that gathers raw products in their natural state  Processors: Businesses that change natural materials (raw goods) into a more finished form for manufacturers to process further  i.e. paper mills, oil refineries, steel mills, etc. OTHER TYPES OF BUSINESSES

 Manufacturers: A business that takes an extractor’s products or raw materials and changes them into a form that consumers can use  Industrial production  i.e. General Motors, GE, Dell, Intel  Service Firms: A business that does things for you instead of making products  Intangible goods  i.e. hospitality, banking, legal, logistics/delivery OTHER TYPES OF BUSINESSES

 Distributor:  Wholesaler  A middle firm that assists with distribution activities between businesses  The sale of goods to anyone other than a standard consumer  Often sold in bulk/at a discount and not typically a name consumers would recognize  McLane Company  HQ in Temple, TX $47 Billion 2015 revenues 20,545 employees  39 grocery and foodservice distribution centers across the country  Proves grocery and foodservices to convenience stores, drug stores, restaurants  Retailer  A business that sells directly to the consumer  Purchases can be made in-store or on-line  HEB, Gap, Macy’s, Best Buy, Barnes & Noble OTHER TYPES OF BUSINESSES

EXAMPLE OF PROCESS FLOW

 The Business Cycle  Measuring Economic Activity UNIT 1.04

Recurrent periods during which the nation’s economy moves in and out of recession and recovery phases  Major ups and downs of economy  Short Term (2-3 years)  Long Term (50-60 years) THE BUSINESS CYCLE

 Peaks  Growing economy  Increasing investor confidence  Anticipation of future price increases BULL MARKET

 Troughs  General decline in the stock market over a period of time  Transition from high investor optimism to widespread investor fear and pessimism  price decline of 20% or more over at least a two-month period  sometimes referred to as "The Heifer Market" BEAR MARKET

A phase of the business cycle where most people who want to work are working and businesses produce goods & services in record numbers.  Economic Growth   $200B in war bonds matured  GI Bill financed well-educated work force  Middle class swelled  Increase in GDP and Productivity PROSPERITY

A period where demand begins to decline, businesses lower production of goods & services, unemployment begins to rise, and GDP growth slows for several quarters  Reduced Economic Activity  GDP negative for 2 or more quarters  1.5% rise in Unemployment in 12 months  Late 2000s  Collapse of the housing market  Bank failures  High Unemployment  Low Consumer Confidence  Escalating Debt  Inflation  Rising gas and food prices RECESSION

A phase marked by high unemployment, weak sales of goods & services, and business failures  Sustained, long-term economic downturn  Large increases in Unemployment  Reduced credit availability  Large number of bankruptcies  Deflation  Bank failures DEPRESSION

 1929 – late 1930s  Stock Market Crash October 29 th  “Black Tuesday”  Massive Bank Failures  Millions lost jobs  Global in scale THE GREAT DEPRESSION Economic IndicatorsUnited States Great Britain FranceGermany Industrial Production-46%-23%-24%-41% Wholesale Prices-32%-33%-34%-29% Foreign Trade-70%-60%-54%-61% Unemployment+607%+129%+214%+232%

A phase of the business cycle in which unemployment begins to decrease, demand for goods & services increases, and GDP begins to rise again  High levels of growth following a Recession  Government stimulus packages RECOVERY What phase is the US in now?

 Gross Domestic Product (GDP)  Inflation  Consumer Price Index (CPI)  Productivity  Unemployment  Debt  Consumer Confidence ECONOMIC INDICATORS

The total value of all final goods & services produced in a country in one year  GDP = private consumption + gross investment + government spending +(exports – imports)  Often reflects a country’s Standard of living GROSS DOMESTIC PRODUCT

 Top 10 largest world economies  Trading Economics Trading Economics STRENGTH OF US ECONOMY TO OTHER COUNTRIES Gross Domestic Product in $ trillion World RankCountryGDP 1United States China Japan Germany United Kingdom France Brazil Italy India Russia1.857

An increase in the general price level  When prices increase, each unit of currency buys fewer goods & services  Caused by excessive growth of the money supply INFLATION

Shows change in the average prices of goods & services bought by consumers over a period of time  Related to inflation  Shows how much your money can buy CONSUMER PRICE INDEX

The quantity of a good an average worker produces in an hour  Measure of output from a production process  GDP per hour worked PRODUCTIVITY

State of being without paid work, though willing and able to work and actively seeking work  Proportion of labor force that is without paid work UNEMPLOYMENT 09/ %

money borrowed by the federal government of the US at any one time through the issue of securities by the Treasury and other federal government agencies  Deficit – the difference between the total amount spent by Congress and the amount received by the IRS  Was $17.7T last year, this year it’s $18.4 TRILLION  US National Debt Clock US National Debt Clock  Surplus – revenues exceed spending  Balanced Budget – revenues = spending  President Clinton, ? DEBT