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Up Coming Stuff Bonus Work Chapter 4 Thursday, October 6, Quiz Chapter 4 Thursday October 6, Bonus Work Chapter 5 Thursday, October 13, Quiz Chapter 5 Thursday, October 13, Test Date this unit Tuesday, October 18, 2005.

Chapters: Consumers (C) / Households Businesses (I) / Capital Expenditure Government (G) / Government Purchases Exports (X) Imports (M) C + I + G + X – M = GDP = $10.6 Trillion Again we need to ask how we deal with those limited resources and unlimited wants. This chapter adds in the idea that government can, does and should play a role in dealing with that basic economic question! Net of Exports Balance of Payments

I. Evolution of Economics? A. 3 basic systems answer 3 basic question (what, how and for who). 1. Traditional 2. Market 3. Command B. How did we evolve from one system to the next? Also how can we create a decent society and continue to improve life for all in society??

I. Evolution cont… C. Traditional 1. Due to travel and increase in populations this inefficient economic system gave way to free markets. 2. Barter proves to be difficult – double coincidence of wants – the need to match-up with who is wanting what you’re selling. 3. Money is created as a medium of exchange.

I. Evolution cont… D. Market 1. Adam Smith – “The Wealth of Nations” (1776) Father of Economics. 2. Not only concerned about creating free markets but also constructing a decent society. 3. Government should play a role but a limited one. 4. Liberal versus Conservative views.

I. Evolution cont… E. Command 1. Developed out of the writings of Karl Marx. Communist Manifesto (1848). 2. Marx’s ideal was to have the working class rise up and take control in a violent revolution. 3. Government was needed to ensure that all in society were taken care of.

Marx’s ultimate vision! Utopia. No government. No money. When all needs are satisfied people will focus on the gifts they can contribute to society. “To each according to his needs, from each according to his ability.” What is he missing?

Pure Capitalism and the Market System CHAPTER FOUR

II. CAPITALIST IDEOLOGY A. PRIVATE PROPERTY 1. Property is owned by individuals and firms not government. 2.The private ownership of capital is what gives capitalism its name. 3.To be able to own your own property provides incentive.

II. CAPITALIST IDEOLOGY B. FREEDOM OF ENTERPRISE & CHOICE PRIVATEPROPERTY 1.Private businesses are free to acquire resources and organize those resources to their liking. 2.Business is free to decide what to do with resources and individuals can decide what lines of work to enter into. 3.Consumer is the most free – they ultimately decide what is to be produced.

PRIVATEPROPERTY II. CAPITALIST IDEOLOGY C. ROLE OF SELF-INTEREST FREEDOM OF ENTERPRISE & CHOICE 1.Individuals and businesses will make decisions based on what will benefit them the most.

FREEDOM OF ENTERPRISE & CHOICE PRIVATEPROPERTY II. CAPITALIST IDEOLOGY D. COMPETITION ROLE OF SELF-INTEREST 1.In pure capitalism the numbers of producers and buyers are large enough that individuals would be unable to “rig” the system. 2.Given a large enough market individuals will have no impact on price. 3.The diffusion of economic power controls and limits the potential abuse of that power. 4.Freedom to enter and exit, expand or contract allows businesses to remain competitive and efficient.

COMPETITION ROLE OF SELF-INTEREST FREEDOM OF ENTERPRISE & CHOICE PRIVATEPROPERTY CAPITALIST IDEOLOGY LARGE NUMBERS

COMPETITION ROLE OF SELF-INTEREST FREEDOM OF ENTERPRISE & CHOICE PRIVATEPROPERTY CAPITALIST IDEOLOGY LARGE NUMBERS ENTRY & EXIT

FREEDOM OF ENTERPRISE & CHOICE PRIVATEPROPERTY E. MARKETS & PRICES I. CAPITALIST IDEOLOGY ROLE OF SELF-INTEREST COMPETITION 1.Markets are the basic organizing force of a capitalist economy. 2.It is where all of the previous factors are brought together and decisions are made.

MARKETS & PRICES FREEDOM OF ENTERPRISE & CHOICE PRIVATEPROPERTY F. LIMITED GOVERNMENT II. CAPITALIST IDEOLOGY ROLE OF SELF-INTEREST COMPETITION 1. The need for gov’t will remain small due to the efficiency of capitalism

II. CAPITALIST IDEOLOGY G. Other Characteristics all have 1. Extensive Use of Capital Goods - Opportunity for technological advancement is more pronounced. - Acquiring capital and technology leads to greater efficiency. - Capital can be used to produce consumer goods more effectively. - However, keep in mind there still is a trade off and opportunity cost.

1. Extensive Use of Capital Goods II. CAPITALIST IDEOLOGY G. Other Characteristics all have 2. Specialization and Efficiency - Self-sufficiency breeds inefficiency. - Division of labor – human specialization. - Geographic – what are the resources best suited for? - Results in greater total output.

1. Extensive Use of Capital Goods II. CAPITALIST IDEOLOGY G. Other Characteristics all have 3. Use of Money 2. Specialization and Efficiency - facilitates the exchange of goods and services.

CAPITALIST IDEOLOGY Extensive Use of Capital Goods TECHNOLOGICAL ADVANCE

CAPITALIST IDEOLOGY Extensive Use of Capital Goods TECHNOLOGICAL ADVANCE ROUNDABOUT PRODUCTION

CAPITALIST IDEOLOGY Specialization and Efficiency ROLE OF SPECIALIZATIO N

CAPITALIST IDEOLOGY Specialization and Efficiency DIVISION OF LABOR

CAPITALIST IDEOLOGY Specialization and Efficiency GEOGRAPHIC SPECIALIZATION

Use of Money Medium of Exchange

Use of Money Medium of Exchange NOTES: Difficulties in a barter system - Coincidence of wants

III. THE COMPETITIVE MARKET SYSTEM A.The Five Fundamental Questions How much to produce?

The Five Fundamental Questions.... The Five Fundamental Questions.... THE COMPETITIVE MARKET SYSTEM How much to produce? 2. What is to be produced?

The Five Fundamental Questions.... THE COMPETITIVE MARKET SYSTEM How much to produce? What is to be produced? 3. How is the output to be produced?

The Five Fundamental Questions.... THE COMPETITIVE MARKET SYSTEM How much to produce? What is to be produced? How is the output to be produced? 4. Who is to receive the output?

The Five Fundamental Questions.... How much to produce? THE COMPETITIVE MARKET SYSTEM What is to be produced? How is the output to be produced? Who is to receive the output? 5. Can the system adapt to change?

EconomicProfits Implicit costs (including a normal profit) ExplicitCosts Accounting costs (explicit costs only) AccountingProfits Economic (opportunity) Costs TotalRevenue Profits to an Economist Accountant Copyright McGraw-Hill, Inc. 1999

B. How do we decide what to produce? 1. Common sense dictates you will produce when profit exceed costs. 2. Compare TR vs.TC; total revenue vs. total costs. 3. TR = P X Q(produced/supplied). 4. TR – TC = profits or losses. 5. TR>TC industry will expand. 6. TR<TC industry will contract or find ways to lower costs in the production process.

B. What cont… 7. In economics costs are measured differently. 8. Economic costs give payments to the 4 factors of production CELL vs. WPiR. 9. Accountants typically include WiR but not the P as a cost. 10. Economic costs include those payments to the entrepreneur also known as normal profits. 11. Normal profits indicate that a resource is being used.

Economic Costs Economic Costs or Opportunity Costs Forgoing the opportunity to produce alternative goods and services Explicit Costs Implicit Costs

Normal Profits

Treated as a cost Treated as a cost Normal Profits

Treated as a cost Treated as a cost Required to attract & retain resources Required to attract & retain resources Normal Profits

Treated as a cost Treated as a cost Required to attract & retain resources Required to attract & retain resources Economic or Pure Profits Normal Profits

Treated as a cost Treated as a cost Required to attract & retain resources Required to attract & retain resources Economic or Pure Profits EconomicprofitTotalrevenue Opportunity cost of all inputs Normal Profits

TotalRevenue Profits to an Economist Accountant Copyright McGraw-Hill, Inc. 1999

ExplicitCosts Accounting costs (explicit costs only) TotalRevenue Profits to an Economist Accountant Copyright McGraw-Hill, Inc. 1999

ExplicitCosts Accounting costs (explicit costs only) AccountingProfits TotalRevenue Profits to an Economist Accountant Copyright McGraw-Hill, Inc. 1999

Implicit costs (including a normal profit) ExplicitCosts Accounting costs (explicit costs only) AccountingProfits Economic (opportunity) Costs TotalRevenue Profits to an Economist Accountant Copyright McGraw-Hill, Inc. 1999

EconomicProfits Implicit costs (including a normal profit) ExplicitCosts Accounting costs (explicit costs only) AccountingProfits Economic (opportunity) Costs TotalRevenue Profits to an Economist Accountant Copyright McGraw-Hill, Inc. 1999

B. What cont… 12. A product will be produced when TR=TC. 13. Industry will expand when TR>TC. 14. Economic profit is what lures other producers into the industry because the producers have to consider the opportunity cost of what they are giving up.

The Market System At Work.... Revenues & Costs THE COMPETITIVE MARKET

The Market System At Work.... Revenues & Costs Normal Profit Economic or Pure Profit

The Market System At Work.... THE COMPETITIVE MARKET Revenues & Costs Normal Profit Economic or Pure Profit Expanding & Declining Industries

Revenues & Costs Normal Profit: TR = TC Economic or Pure Profit: TR>TC Expanding & Declining Industries 15.“Dollar Votes” - Consumer Sovereignty Consumers ultimately decide “what” with their demand. THE COMPETITIVE MARKET The Market System At Work....

Revenues & Costs Normal Profit Economic or Pure Profit Expanding & Declining Industries “Dollar Votes” - Consumer Sovereignty The Market System At Work.... THE COMPETITIVE MARKET NOTES: Circular Flow

Revenues & Costs Normal Profit Economic or Pure Profit Expanding & Declining Industries “Dollar Votes” - Consumer Sovereignty The Market System At Work.... THE COMPETITIVE MARKET NOTES: Circular Flow 16. Derived Demand – Demand for resources are dependent on Demand for the ultimate product. The Circular Flow!

THE COMPETITIVE MARKET C. Organizing Production.... Production & Profits Least Cost Production Work Sheet on Least Cost 1.Producers will employ the least cost technique to produce their products. 2.If resources or technology change, how those resources may be used will change.

Total Revenue = P x Q -Total Cost = (Q x Land + Q x Labor + Q x Capital + Q x Entre.) + Total Profit 0 Breakeven - Total Loss

Total Revenue = P x Q -Total Cost = (Q x Land + Q x Labor + Q x Capital + Q x Entre.) + Total Profit 0 Breakeven - Total Loss

Total Revenue = P x Q -Total Cost = (Q x Land + Q x Labor + Q x Capital + Q x Entre.) + Total Profit 0 Breakeven - Total Loss

THE COMPETITIVE MARKET Organizing Production.... Production & Profits Least Cost Production Distributing Total Output

THE COMPETITIVE MARKET C. Organizing Production.... Production & Profits Least Cost Production Distributing Total Output 3. Accommodating Change

Organizing Production.... Production & Profits Least Cost Production Distributing Total Output Accommodating Change - Guiding Role of Prices - Guiding Role of Prices THE COMPETITIVE MARKET Consumers send signals to the producers through changes in demand. As the demand curve shifts prices change and producers respond by reorganizing their resources.

Organizing Production.... Production & Profits Least Cost Production Distributing Total Output Accommodating Change Guiding Role of Prices THE COMPETITIVE MARKET NOTES: Initiating Progress

Organizing Production.... Production & Profits Least Cost Production Distributing Total Output Accommodating Change Guiding Role of Prices THE COMPETITIVE MARKET NOTES: Initiating Progress Capital Accumulation

1.The Case for the Market System - Efficiency - Efficiency - Incentives - Incentives - Freedom - Freedom D. THE INVISIBLE HAND

Circular Flow Model BUSINESSES HOUSEHOLDS RESOURCEMARKET RESOURCESCELL INPUTS:CELL $ COSTS $ INCOMES WPiR WPiR PRODUCTMARKET GOODS & SERVICES SERVICES $ CONSUMPTION $ REVENUE $$ $ $

Chapter Conclusions

private property freedom of enterprise freedom of choice self-interestcompetition roundabout production specialization division of labor medium of exchange bartermoney Five Fundamental Questions economic costs normal profit economic profit expanding industry declining industry consumer sovereignty dollar votes derived demand guiding function of prices “invisible hand”

THE MIXED ECONOMY: PRIVATE & PUBLIC SECTORS Coming up next... Chapter 5