Unit 2

I. Traditional Economies Def: Economic Questions answered by customs Predominately Agricultural Developing or “3 rd World” Trade and barter oriented Low GDP & PCI (per capita income = avg. inc.)

The Circular Flow Model II. Concepts to Understand

A measure of the production of an entire country in one year is GDP The total $ value of ALL final Goods and Services produced in a country in a year. (GROSS DOMESTIC PRODUCT)

II. Concepts to Understand World GDP Total GDP 2005 (millions of US dollars) 1 United States 12,455,068 2 Japan 4,505,912 3 Germany 2,781,900 4 China 2,228,862 5 United Kingdom 2,192,553 6 France 2,110,185 a 7 Italy 1,723,044 8 Spain 1,123,691 9 Canada 1,115, Brazil 794, Korea, Rep. 787, India 785, Mexico 768, Russian Federation 763, Australia 700, Netherlands 594, Switzerland 365, Belgium 364, Turkey 363, Sweden 354, Saudi Arabia 309,778

II. Concepts to Understand A. Cost and Revenue 1. Cost – the total amount of money it takes to produce an item (to pay for ALL Factors of Production).

II. Concepts to Understand 2. Revenues – the total amount of $ a company or the government takes in.

II. Concepts to Understand 3. Fixed Costs – the amount of money a business MUST pay each month or year (like rent and Capital expenses).

II. Concepts to Understand 4. Variable Costs – the amount of money a business pays that changes over time (Labor and Raw Materials).

II. Concepts to Understand 5. Total Costs = Fixed + Variable Costs.

II. Concepts to Understand 7. Marginal Costs – the additional Cost of the NEXT UNIT produced. Margin=Extra Space

Costs and Revenues 8. Profit – the difference between Total Costs and Revenues. This is WHY you’re in BUSINESS (Profit Motive!) Profit=Revenues-Total cost Profit Motive=why you are in business---to make MONEY (principles of Capitalism)

II. Concepts to Understand 9. Cost Benefit Analysis – weighing the Marginal Costs vs. the Marginal Benefits of producing an item or making any economic decision. If the Benefit is GREATER than the Cost, then business does it. Marginal Benefits Marginal Costs

II. Concepts to Understand 10. When Production Decreases Downsizing – laying off employees to save costs. Outsourcing – sending jobs and manufacturing overseas or contracting to outside companies to save money. Bankruptcy – government allows business to restructure it’s debt, but now all profits go to paying off debt rather than to the owners/investors. Out of Business – lose all your business, money, and profits. The current trend in the U.S. is that manufacturing jobs are declining

II. Concepts to Understand 11. LABOR Wages – what companies pay employees for their labor (usually based upon an hourly rate). Blue Collar Manufacturing, work with hands Usually the ‘labor’ in production Salary – the amount of pay a person gets over a year (especially for “professional” jobs). White Collar ‘Office’ jobs Usually control production

II. Concepts to Understand 12. Labor Unions: organization of workers who have banded together to achieve common goals Wage protection Workplace safety Benefits Job protection

II. Concepts to Understand 13. Collective Bargaining Representatives of the Union and the company negotiate a contract for the workers; usually they rely on compromise 14. Strikes When an agreement can’t be reached, workers stop working to try to force the hand of the company

I. There are 3 main types of economies present in the world today A. Capitalism B. Socialism C. Communism

II. Market Economy A. Also known as free enterprise or Capitalism B. Practiced in the US C. Individuals own the productive resources i. People can own their own businesses and resources ii. People run the economy, not the government iii. Can result in corporations- business managed on the behalf of stockholders

II. Market Economy A. Held together by the Pillars of Free Enterprise i. Private Property- Resources and businesses owned and ran by Individuals, not the government ii. Price System- Prices are used to allocate scarce resources 1. Ex. Diamonds and poor people 2. When people exchange goods or money for something, they are setting the price 3. People being willing to buy something at a certain price

II. Market Economy i. Market Competition- Competition in market for resources and products 1. Companies compete to own and sell resources 2. Companies Compete to sell their products ii. Entrepreneurship- skills needed to start and operate a business 1. Entrepreneurs are competitive and willing to take risk 2. Entrepreneurs see a product and try to make it better or try to come up with something to buy instead

II. Market Economy Free Market (Capitalist) Economies Economic questions answered by producers and consumers Limited government involvement Private property rights Wide variety of choices and products U.S., Japan

III. Mixed Economy/Socialism A. The Government controls the means of production B. The Government controls major industries such as health care, mass transportation and utilities (Electric) C. Government controls how industries are ran i. How much to charge for a product ii. How much to pay employees iii. Who gets what benefits iv. Controls Quality v. Social “safety net” for people D. Common in Europe, Latin America, and Africa

III. Mixed Economy/Socialism A. Problems with Socialism i. National Governments are notorious at not handling finances appropriately- Why should they, they can just print more money. ii. Quality begins to decline 1. Socialism removes competition which results in a decline in quality iii. Most government ran projects spend more than they make

IV. Command Economy A. Also known as Communism B. A system in which the government controls everything C. The government controls every aspect of an industry i. The government controls who works at a career, the wages, the production and the resources D. All wealth is shared in the economy i. The Construction worker gets paid as much as the Bank CEO E. Government controls every aspect of life F. No true form of communism has been practiced on the large scale for a long period of time

IV. Command Economy Karl Marx 19 th century German economist Author of “Communist Manifesto” and “ Das Kapital” Government should control economy and distribute goods and services to the people Founder of revolutionary socialism and communism

IV. Command Economy A. Problems with Communism i. People are greedy and tend to be lazy ii. Communism results in Economic Stagnation- it doesn’t grow but gets worse iii. National governments waste a lot of money iv. There is no competition 1. One shoe brand, one color v. Very little economic choices vi. Government officials usually live better lives then the general public vii. Quality is lousy viii. IT FLAT OUT DOES NOT WORK! RIP 1991

V. Black Markets A. An illegal market in which goods are sold above legal price (textbook definition) B. Predominantly happens in the open in under- developed countries C. Drugs, guns, bootleg movies/software and other illegal goods D. During Prohibition, there was a black market for alcohol i. A bottle of wine that cost $5 when legal selling for $50

V. Black Markets A. Black markets will always exist in as economy B. Black Markets cause many problems i. Crime Rates increase ii. Cost of law enforcement increases iii. Corruption Increases

VI. Important Economist Adam Smith 18 th century Scottish economist Published “The Wealth of Nations” in 1776 Explained the workings of the free market within capitalist economies Invisible hand of the market

VI. Important Economist Adam Smith (continued) Laissez-faire - Government stays out of business practices “hands off” to let the market place determine production, consumption and distribution. Individual freedom and choice emphasized.

VI. Important Economist John Maynard Keynes Government should intervene in economic emergencies through tax and spending (Fiscal Policy) and changing the money supply (Monetary Policy). This is done to smooth out the business cycle (expansion and recession) and keep inflation low.

VII. Conclusion A. What type of economy is the better choice and why? B. Why is Capitalism successful? C. Why would Socialism appeal to some people? D. Know how the Circular Flow Model Works