1. The Economy and the Individual
Unit 6

2. What is Economics?
Chapter 18

3. The Fundamental Economic Problem
Economics is the study of how we make decisions in a world where resources are limited
Individuals have needs ( required for survival) and wants (things we would like to have)
Fundamental economic problem is scarcity
We do not have enough resources to produce everything everybody wants

4. The Fundamental Economic Problem
Three Key Economic Questions
What goods and services should be produced?
How should these goods and services be produced?
Who consumes these goods and services? How are they distributed?
Economists use economic models to explain how our economy works
Models are simplified representations to predict what will happen if the economy changed

5. Making Economic Decisions
Scarcity forces us to make economic decisions
These decisions involve trade-offs
Trade-offs are made by individuals, businesses, governments and societies
Economists call term opportunity cost (cost of the next best use of your time when you decide to one thing over another)
Involves more than money, also inconvenience and discomfort to choices made

6. Making Economic Decisions
Other Measures of Cost
Fixed costs- expenses that are the same no matter how many units of goods are produced, cost remains the same
Variable cost- change with number of products produced (wages, raw materials), expenses increase as business grows
Total Cost- Sum of fixed and variable cost
Marginal Cost- extra cost of producing one more unit, one measure of how to maximize profit
Marginal Revenue- change in revenue that results in one more unit being sold
Cost Benefit Analysis
When marginal cost and its benefits are determined economist use a cost benefit analysis to compare marginal costs and benefits of a decision
if benefit of more production exceeds cost you continue producing, if cost outweighs benefits you reject option

7. Being an Economically Smart Citizen
U.S has a market economy (supply, demand and price help make decisions and allocate resources)
Choices made by consumers affect the products made and prices that businesses receive
Market economy is based in capitalism (where private citizens own most means of production) and free enterprise (business compete for profit without interference from government)
Economic incentives influence behavior
Incentives are rewards that are offered to get people to take certain actions

8. Being an Economically Smart Citizen
Understanding the role of the government
Economists think the role of the government should be to maintain competitive markets
Competition forces businesses to use resources efficiently
Government provides many services the private sector does not provide (schools, defense, social welfare services)
Government also reward and punishes actions
Can encourage production through subsidies
Can use taxes and fines to discourage consumption and punish lawbreakers

9. The American Economy
Chapter 19

10. Economic Resources
U.S amount of output of its goods and services equaled $10 trillion or 30% of the worlds total output
Goods are tangible products
Services are work that is preformed for someone else

11. Economic Resources Factors of Production
Resources necessary to produce goods and services
Natural Resources- fields, rain, forests, minerals and other resources used to make products
Labor- physical and mental efforts people use to produce goods and services
Capital- tools, machinery, money, etc. used to make products
Capital goods are the result of production
Satisfy wants in aiding production of consumer goods
Consumer goods are produced using capital goods
Entrepreneurs- individuals who bring together factors of production, seen as the driving force of the American economy

12. Economic Resources
Success of overall economy is measured by Gross Domestic Product (GDP)
Total value of all goods and services produced in one year
Only measures final goods, sale of used goods or goods used to make something are not counted
GDP is a measure of standard of living (quality of life based on possession of necessities and luxuries that make life easier)
GDP measures quantity not quality

13. Economic Activity and Productivity
A market is a location or other situation that allows buyers and sellers to exchange certain economic products
Markets can be global regional or national
Consumers, businesses, government and foreign sectors are economic decision makers
Flow of resources, goods and services and money in a market system is circular
Model is called a circular flow diagram

14. Economic Activity and Productivity
Consumers earn their income in factor markets (where productive resources are bought an sold)
Workers earn wages, people who own land exchange it for rent, people who control capital (banks) exchange it for interest
Individuals spend their incomes in the product market (where producers offer goods and services for sale)
Business use this money to buy the factors of production they use
They do purchase some of their own output, mostly on capital goods, to produce more goods and services
Business sector is smaller than consumer sector (15-20% of GDP)

15. Economic Activity and Productivity
Government sector produces goods and services (schools, national defense, transportation, housing) it purchases productive inputs from factor markets
Receives revenues from services it provides but cost is rarely covered by fees
Most government revenue is from taxes
Uses revenues to purchase services in product markets

16. Economic Activity and Productivity
Growth of economy occurs when total output of goods and services increases over time
Growth leads to a higher standard of living
Economies try to increase productivity by using resources more efficiently
Business try to purchase more efficient capital goods and farmers try to farm the most fertile land

17. Economic Activity and Productivity
Specialization can create increased productivity
It occurs when an individual, business, etc. can produce a good or service better than anyone else
When people specialize they are more productive than when they try to do many things
Division of labor is breaking down of jobs into smaller tasks
It is a form of specialization
By doing a single task it is easier to improve the techniques of production

18. Economic Activity and Productivity
Productivity increases when businesses invest in human capital
Human capital is the skill and abilities of people
Investment in training, education, healthcare increase productivity
Employers are rewarded with higher quality products and increased profits
Workers are rewarded with higher pay and better jobs
Because of specialization the American economy has a high degree of economic interdependence
We rely on others to produce goods and services we can’t make for ourselves

19. Capitalism and Free Enterprise
American economy based on free markets and private ownership
Capitalism is where private citizens own and use factors of production to make a profit with a minimum of government interference
Our economic system has been the most successful on the history of the world
Markets are the most important part of our economic system
Markets set prices of goods and services
Connect different parts of the economy (labor is sold on the factor market, goods and services purchased on the product market)
Where buyers and sellers meet to negotiate product prices

20. Capitalism and Free Enterprise
Under our economic system customer is most important, they decide what is produced and they have a choice of what to buy (consumer sovereignty )
In the U.S. we place a high value on our freedom of choice
Choice in what we buy, where we work, business have the right to sell what they want
Freedom also has costs
Individuals need to accept consequences of decisions (example: if business fails government usually won’t bail it out)

21. Capitalism and Free Enterprise
Private property rights
Give us the freedom to own, use and dispose of our own property as long as we do not interfere with others
Protected by the Constitution
Gives us the incentive to save and invest because we can keep any gains we might earn

22. Capitalism and Free Enterprise
Capitalism thrives on competition between buyers and sellers to get best products at best prices
Keeps the cost of production low and quality of goods higher
Competition rewards the most efficient producers
Forces least efficient producers out of business
Under free enterprise people are free to invest their own money into businesses to earn a profit
Profit is the amount of money left over after all of the costs of production have been paid
Profit motive is the driving force that encourages companies and individuals to improve their material well being

23. Capitalism and Free Enterprise
Voluntary exchange is the act of buyers and sellers freely and willingly engaging in market transactions
Buyer and seller benefit
Heart of the market economy
Both parties feel they will be better off (will profit) from the exchange

24. Capitalism and Free Enterprise
Why do these groups cooperate ?
According to Scottish social philosopher Adam Smith it is competition and our own self interest that keeps marketplace moving
Smith wrote Wealth of Nations (1776) that described how the market functions
Self Interest
He said an economy is made up of countless transactions
In each the buyer and seller consider only their own self interest and this motivates the free market

25. Capitalism and Free Enterprise
Competition
Because of self interest consumers have an incentive to look for the best prices
Firms seek to make greater profit by increasing sales
The struggle between producers and consumers is called competition
Self interest is a motivating force and competition is a regulating force
These forces working together to regulate the market was called by Smith “the invisible hand”

26. The Economy and You
Free enterprise system gives consumers rights and protections
Rights require consumer to take on some responsibility
We need to know what we are buying, how to get the best value and we can’t always rely on business to protect us
Consumerism is the movement to educate buyers about purchases they make, to demand better and safer products
Congress has passed laws protecting consumers since the early 20th century, there are private interests that protect consumer rights as well

27. The Economy and You
1960’s special effort was made to protect consumer rights
Consumer Bill of Rights was developed
Right to safe products- one that will not harm health or lives
Right to be informed- protection against fraud, deceit, misleading facts that keep us from making informed choices
Right to choose- availability of products at fair process
Right to be heard- consumer interests will be heard when laws are passed
Right to redress- consumers need adequate ability to collect for damages caused by product

28. The Economy and You Consumer Responsibility Role as a consumer
Follow directions of warranty
Exhibit ethical behavior
Respect the rights of the producer and seller
Role as a consumer
Disposable income (money left over after all taxes on it have been paid)
Spent first on necessities of living
Discretionary income (money left over after necessities have been paid)
Income used to purchase wants

29. The Economy and You
Purchases made can be in cash (or debit card) or paid with a credit card
Credit cards can be paid all at once or in installments
If not paid all at once consumer pays interest on money owed
Late payments result in additional charges
All steps of decision making involve an opportunity cost
Need to consider goals in making purchases
If you buy now will you have enough to spend later?
Saving is an economic goal
When individual saves it helps the whole economy
Provides money for banks to loan out to others to invest and spend, allows business to expand
Person with bank account earns interest on what they have in the bank