What is an Economy? Unit 2

Scarcity-exists when people’s wants exceed their needs Requires countries to make choices Some developing countries have a lot of natural resources but few skilled workers, little land, and no infrastructure Some economies have labor but not enough natural resources to produce products.

What is an Economy? The way a nation makes economic choices Way a nation makes economic choices concerning its use of resources to produce goods and services Resources  land  labor  capital  entrepreneurship

Scarcity leads to the Three Basic Economic Questions What goods and services should be produced? How should the goods and services be produced? For whom should the goods and services be produced? The way a country answers these questions determines the type of economic system it operates under

Market vs. Command Economies Market-no government involvement  What? Consumers decide what should be produced  How? Left up to businesses in the market economy  For whom? People who have more money are able to buy more goods. Motivates people to work and invest Command-government answers all questions  What? Dictator or group of gov’t officials decides what products are needed  How? The gov’t runs all businesses. It employs all workers.  For whom? Gov’t decides who will get what is produced. It provides for everyone’s basic needs.

Mixed Economies Capitalist Model  Democratic form of government, free enterprise, concerned about people but not as many social programs as socialist country. Japan, US Socialist Model  Democratic form of government (usually), government tries to reduce the difference b/t rich and poor through social programs. Key industries run by gov’t, higher taxes than capitalist countries. Germany, Great Britain, Sweden, Australia, France

Command Economies Communist model  Totalitarian form of government, ensures all people share common economic & political goals.  All who are able to work are assigned jobs. If don’t work--still paid. No unemployment.  Gov’t decides what schooling you receive, where you live. Housing, food and medical subsidies.  Most communist economies have collapsed b/c no incentive to work. Cuba, North Korea

Factors of production Term economists use for resources  Land  Labor  Capital  Entrepreneurship

Factors of Production-all the things used in producing goods & services Labor-all people who work in an economy  Limits on education level of workers Capital-money (needed to start or operate the business) & goods used in the production process  Infrastructure-physical development of a country Land-everything on the earth in its natural state  depletion of natural resources Entrepreneurship- skills of people willing to risk their time and money to run a business  lack of gov’t support

Free Enterprise System-system built on the principle of freedom of choice In the US we have freedom of choice Our economic system is an outgrowth of that philosophy Encourages starting & operating businesses without government interference Modified b/c there is some intervention

Free Enterprise System Four Aspects of a Free Enterprise System 1.Freedom of ownership Free to own houses, natural resources, & businesses some limitations on zoning restrictions, environmental restriction

Free Enterprise System 2. Competition-struggle between companies for customers  Vital to free enterprise  Forces businesses too provide better-quality goods& services at reasonable prices  Develop new products and improve older ones  Wider selection of products to choose from  Two ways to compete: price –focus on sale price of a product Nonprice-business compete on factors not related to price such as quality or customer service

Free Enterprise 2. Competition con’t  Monopoly- exclusive control over a product or the means to produce it. Can you name some examples?  Usually prohibited, but in US a few are permitted 3. Risk-potential for loss or failure  Usually seen in relationship to potential earnings  Greater risk, greater profit

Free Enterprise System 4. Profit-money earned from conducting business after all costs and expenses are paid  Usually 1-5% of sales, 95-99% of sales go to expenses  Costs of unprofitable firms Laid off workers investors lose money on stocks cut backs in R&D Less taxes Effects profitability of suppliers

Free Enterprise System 4. Profit con’t  Benefits of successful firms hire more people & pay them well Investors earn money Vendors & suppliers make money Increased taxes More likely to contribute to charities Attract more competition

Role of Government Plays 4 roles in free enterprise system  provides general services  supports businesses to promote the growth & development of our nation  regulates businesses(fair & safety) Licensing agreement- protects originator’s name and product  competes with private business

Provider of Services Provides military, police, and fire protection Free public education Retraining for displaced workers (JTPA) Roads & bridges Medicare(elderly) & Medicaid (poor)

Supporter of Business Bailouts in times of crisis (Chrysler, floods, earthquakes) Small Business Association (SBA)  counseling, educational materials  guarantees loans Trade alliances & agreements w/ foreign countries

Regulator Make laws to protect the safety, health & welfare of the public Consumer & worker protection (FDA,OSHA)  business licensing  food protection  minimum wage  sales of securities(?)

Regulator To protect businesses  regulations & laws regarding copyrights, patents, & trademarks  licensing agreements  industrial espionage  trade restrictions  Sherman & Clayton Antitrust Acts (FTC)  Monitors& controls money supply

Competitor Government runs three business operations  Tennessee Valley Authority  US Postal Service  Amtrak In addition it runs parks and campgrounds (Arch, Yosemite)

Role of Consumer Deciding which businesses survive  every time consumers purchase they are voting with their dollars  makes consumers very powerful Determining Prices  Laws of supply (amount of goods producers are willing to make and sell) and demand (consumers willingness and ability to buy products)

Determining prices Interaction between supply and demand determine what consumers will pay for products Equilibrium-when the amount of products supplied is equal to the amount demanded Surplus-supply exceeds demand Shortage-demand exceeds supply Supply and Demand

Understanding the Economy Economic Measurements are key indicators that determine the strength of an economy  Productivity - output per worker hour. (Usually measured over a period of time)  Output per year (in tons)/ workers x hours x weeks = output per worker hour.  GDP - Gross Domestic Product - is a measure of the goods and services produced using labor and property located in this country.

Economic Measurements Cont. GNP - Gross National Product - Everything produces by U.S. citizens here and abroad. Today GDP is more useful, most other nations use GDP as well. Standard of Living - Measure of the amount of goods and services that a nation’s people have. A quality of life measurement.

Economic Measurements Cont. Inflation Rate - rising prices. (1 - 5 % is low)  Gov’t controls inflation by raising interest rates. CPI - Consumer Price Index - measures the change in price over a time of some 400 specific goods and services. Also called the cost of living index.

Economic Measurements Cont. Unemployment Rate - the higher the unemployment rate the greater the chances of economic slowdown.

Business Cycles - recurring changes in the economy Prosperity - economic growth (low unemployment/high spending. Recession - economic slowdown (unemployment up/consumer spending down. Depression - Prolonged and deep recession. Recovery - renewed growth/ increased spending and reduced unemployment.

Essential question How does marketing affect consumer goods and services in different economic systems?  Think about how products can be marketed in each system.

International Trade – the exchange of goods and services among nations. Imports – are goods and services purchased from other countries. Exports – are goods and services sold to other countries. These exchanges occur among businesses, but they are controlled by the governments of the countries involved. What is the trade deficit?

Interdependence of Nations Most countries do not produce or manufacture all the goods and services they need. Each country possesses unique resources that other countries need. The principal of economic independence is fundamental to marketing in the global environment. What does the U.S. need from other countries?

Absolute vs. Comparative Advantage Certain nations have economic advantages over its trading partners. Absolute advantage occurs when a country has economic resources that allow it to produce more units than any other country. China produces 80% of all the silk in the world.

Comparative Advantage The value that a nation gains by selling what it produces most efficiently.  When countries specialize in products or services well suited to their capabilities, they may gain a comparative advantage in international trade.  U.S. has a comparative advantage in producing high tech goods because of our educated work force.

Benefits of International Trade Consumers benefit because competition causes the prices to go down. Variety of goods increases. Producers expand their operations in other countries. Workers benefit because international trade can lead to higher employment rates. Toyota has generated 500,000 jobs in the U.S. Increased foreign investment improves the standard of living for that country’s people. We have more options when purchasing items.