Unit 7a Economics

American Free Market System Introduction Challenges in a free market Supply and Demand Economic systems The U.S. economy Factors of Production Business organizations

The Circular flow of Economics Resources, goods and services and money flow continuously among households, businesses and the government in the U.S. economy.

The Circular flow of Economics Continued… Individual households own the resources used in production; sell the resources and use the income to purchase products. Businesses (producers) buy resources used in production; sell the resources and use the income to purchase products. Businesses provide households with income and goods and services. Governments use tax revenue from individuals and businesses to provide public goods and services.

Businesses provide households with income and goods and services. Households supply businesses with labor (workforce) and payments for goods and services The government supplies businesses with public goods and services and payments for products purchased. Households provide the government with labor (workforce) and taxes Businesses provide the government with taxes and goods and services. The government provides households with income and public goods and services.

Production, Consumption and Distribution Four Questions all Economic Systems must Address

Four Questions All Economic Systems must address… What is produced? *Production* Goods and services must satisfy the consumers wants and desires

Four Questions All Economic Systems must address… HOW should these goods be produced? *Factors of Production* Capital Entrepreneurship Land Labor Combine the factors of production to make or produce the goods and services

Four Questions All Economic Systems must address… For WHOM are the goods and services produced? *Distribution* Getting the goods and services from producer to consumer

Four Questions All Economic Systems must address… HOW MANY goods and services should be produced? *Consumption* Make enough to have a large profit and still have consumer demand. How many is determined by supply and demand.

Supply and Demand

Supply and Demand… Scarcity is the inability to satisfy all wants at the same time due to limited resources Choices must be made as to what to produce, how much to produce and who will receive what is produced. PRICE: Mechanism to decide who gets goods and services. The amount that satisfies both producers for profit and consumers for value.

Scarcity

Choices

Price

Supply and Demand determine price through their interaction DEMAND: is the amount of a good or service that consumers are willing and able to buy at a certain price SUPPLY: is the amount of a good or service that producers are willing and able to sell at a certain price.

LAW OF SUPPLY : LAW OF DEMAND: Businesses will provide more products when they can sell them at higher prices LAW OF DEMAND: Buyers will demand more products when they can buy them at lower prices

Incentives Incite or motivate Change economic behavior Something that spurs someone into action: sale, coupons, etc.

Resources, Scarcity & Opportunity Cost

Good Anything that can be grown or manufactured (made) Food Clothes Cars

Service Something a person does for someone else in exchange for money or value. Doctor Hairdresser waiter

Resources Natural Human Capital Combine to make goods and services

Our Basic Economic Problem…

People have Unlimited Wants Food Clothing Shelter Schools Hospitals Cars Transportation

But Resources are Limited Land Soil Minerals Fuels People Money Technology

Scarcity The inability to satisfy all wants at the same time; the NEEDS are greater than the RESOURCES

Since resources are LIMITED consumers and producers must make CHOICES CHOICE: selecting from a set of alternatives OPPORTUNITY COST: what is given up when the choice is made.

*Scarcity forces us to choose which needs and wants to satisfy with available resources. *Scarcity affects decisions concerning what and how much to produce, how goods and services will be produced and who will get what is produced

Production: (sellers) *Combining resources to make goods and services. *Available resources and consumer preference determine what is produced Consumption (buyers) *Using goods and services *Consumer preference and price determine what is purchased

SELLER Buyer

Challenges in a Free Market: Terms

Scarcity In English You can't have everything you want. Lessons for life Acceptance of scarcity will help you make more reasoned choices

Alternatives In English Different options from which you can choose Lessons for Life There are many different ways to allocate resources and to solve problems Yes….these are generic converse!

Choice In English Because you can't have everything you want, you have to make choices from a list of alternatives Lessons for life When policy-makers decide on a particular resource allocation, recognize that a choice had to be made due to scarcity. You may not like the alternative chosen, you may question the choice, but the villain is scarcity

Trade-off’s In English Choices involve giving up something to get something. All choices have consequences, both positive and negative Lessons for Life You are responsible for the consequences of your choices. Since you make choices, you can't be a victim.

Opportunity Cost In English What is given up when a choice is made Lessons for Life All choices have opportunity costs. A good idea is only a good idea if its value is greater than the value of its opportunity cost. Voters must always identify the opportunity cost of a particular policy

Economic Systems

Command Economy The central government makes decisions and determines how resources will be used. The central government owns property and resources. Businesses are not run for profit. Businesses are not run for profit. No competition Lack of consumer choice The government sets the prices of goods and services. China, North Korea, Cuba

Mixed Economy Most common type of economic system Government and individuals share the decision making process Individuals and businesses make decisions for the private sector Individuals own the means of production Government makes plans for the public sector Government guides and regulates production of goods and services offered. A greater government role than in a free market economy Most effective economy for providing goods and services U.S. and most Western European countries are mixed economies

Free Market Economy Also known as capitalism or free enterprise Private ownership of property and resources (owned by individuals) Individuals and businesses make profits Individuals and businesses compete Economic decisions are made by supply and demand Profit is a motivator for productivity No government involvement Consumer sovereignty: buyers determine what is produced

Money left over after all business expenses have been paid. Rivalry between businesses for the same customers; results in better quality Money left over after all business expenses have been paid. COMPETITION PROFIT Individuals can own the means of production & property without undue government interference The U.S. economy is a MIXED ECONOMY FREE MARKETS PRIVATE PROPERTY Markets are allowed to operate without undue interference from the government. Money, goods and services flow continuously among individual households, businesses and the government Consumers determine what goods and services are produced by what they buy CONSUMER SOVEREIGNTY

anything that goes into the making of a good or service Factors of Production anything that goes into the making of a good or service

Business owner and risk taker combines the factors of production Capital Ex: tools, machinery, money and technology Entrepreneur Business owner and risk taker combines the factors of production

Factors of production cont… Land Natural Resources Labor Workers and their time and energy

Business Organizations The 15 million businesses in the U.S. fall into three categories: sole proprietorships, owned by a single individual, partnerships, with more than one owner sharing the risks and profits and corporations, owned by their stockholders.

Sole Proprietorship 1 owner The owner takes all the risks Supplies capital, hires help, pays taxes The owner makes all the profits The owner is solely responsible for losses

Partnership More than one owner (2+) Risks are shared amongst the owners Profits are shared amongst the owners Often more successful than sole proprietorships Responsibilities are shared

Corporation Owned by stockholders Authorized to act as a legal person regardless of the number of owners Owners share the profits Liability is limited to investment (you can only loose as much as you put in) Raise money by selling stocks No one is responsible for corporation’s debt if it fails