1. Foundations of Personal Finance Ch. 1

2. 1
What Is Economics?

3. Chapter Objectives Distinguish between needs and wants.
Compare different types of economic systems.
Define scarcity in terms of needs and wants.
Analyze a decision in terms of trade-offs and opportunity cost.
Explain the role of profit motive in the economic system of the U.S.
continued

4. Chapter Objectives
Evaluate how competition among producers influences the price of goods in a market economy.
Interpret the relationship between supply and demand.

5. Economic Systems
In earliest times families were the basic economic unit
Self-sufficient families
grew their own food
provided for members’ needs and wants
only consumed what they produced
continued

6. Economic Systems
The family lost its role as the basic economic unit as
people moved away from agricultural base
new ways of organizing production through specialization and technology emerged
larger quantity and wider variety of goods and services became available

7. Types of Economic Systems
Four types of economic systems:
Traditional
Market or free enterprise
Command
Mixed

8. Traditional Economy Found mostly in underdeveloped countries
Change comes slowly
People tend to stick with what they know and do as they always did
People are governed by strong cultural, religious, or tribal leadership

9. Market Economy Decisions and activities of consumers impact businesses
Businesses react to consumers’ needs
Businesses have the opportunity to grow and profit
Individuals are given incentives to succeed
continued

10. Market Economy
A marketplace brings consumers and producers together to exchange goods, services, and money
continued

11. Market Economy Examples:
Market for all goods and services in an economy
Market for cars
Market for a certain brand of sneakers

12. Command Economy Commonly found in socialist and communist countries
A central authority, usually government,
decides how resources are allocated
decides who will produce what
sets prices and decides how much to produce

13. In Your Opinion
Why might some people choose to live under a command economy?

14. Mixed Economy Combines features of command and market economies
Exists in the U.S., China, Great Britain, Japan, and many other nations
Most economies are mixed
Though mixed, the U.S. economy has minimal government involvement

15. The Challenge of Scarcity
Needs and wants are unlimited
Resources are limited
Economic systems attempt to resolve the problem of scarcity
Scarcity is a problem for individuals, families, companies, and nations
continued

16. The Challenge of Scarcity
Nonhuman resource
Examples: natural resources, capital, or physical things used to make and distribute other goods and services
Human resource
Examples: human labor, good health, skills, knowledge, education, entrepreneurship

17. Trade-Offs and Opportunity Cost
Scarcity forces everyone to make choices, which involve
trade-offs
opportunity costs

18. Scarcity and Economic Systems
Three problems for all societies:
What and how much to produce
How to allocate resources in producing goods and services
How to divide the goods and services produced

19. How the U.S. Economy Works
Flows of goods, services, and resources between producers/sellers and consumers/workers
continued

20. How the U.S. Economy Works
Flows of payments for goods, services, and resources between consumers/workers and producers/sellers

21. Four Qualities of a Market Economy
Private ownership and control of productive resources
Profit motive
Free economic choice
Competition

22. Private Ownership and Control of Productive Resources
Individuals and businesses have
the right to own property such as possessions, real estate, business enterprises
freedom to decide how to use resources

23. Profit Motive Provides incentives for
entrepreneurs to take risks to start new businesses
businesses to produce goods and services
investors to buy stocks, bonds, and other investments
people to sell their resources: labor, land, ideas, capital

24. Free Economic Choice Consumers can choose how they earn income
what to do with their money: spend, save, or invest
what, where, and how much to buy
continued

25. Free Economic Choice Businesses can choose what they produce
how and where to produce it
how and where to sell what they produce
what to do with their profits

26. Competition Competition among businesses and individuals affects
prices
wages
quality of goods and services
features of goods and services
quality of customer service
innovation
continued

27. Competition
Businesses must innovate to be competitive and successful by investing in research and development (R&D)
Advances in technology drive innovation
U.S. invests more money in research and development than any other country in the world
continued

28. Competition
Market economies can provide the best products and services at the lowest prices

29. Laws of Supply and Demand
Supply is closely connected to price
Businesses produce more of something when they can sell it at higher prices
When price rises, supply rises
When price falls, supply falls
continued

30. Laws of Supply and Demand
Price and supply move in same direction in the supply curve
continued

31. Laws of Supply and Demand
Demand is closely connected to price
When price rises, demand falls
Consumers buy more of something at a lower price than at a higher price
When price falls, demand rises
continued

32. Laws of Supply and Demand
Price and demand move in same direction, opposite the supply curve

33. Equilibrium Laws of supply and demand work together
When demand and supply are relatively balanced, the market is in equilibrium
Equilibrium is an ideal
continued

34. Equilibrium
Equilibrium price is when quantity supplied equals quantity demanded

35. Changes in Demand Trigger Price Adjustments
Price rises when
demand is greater than supply
demand rises and supply stays the same
Example: airline ticket prices are highest during peak travel times
continued

36. Changes in Supply Trigger Price Adjustments
Price falls when
supply is greater than demand
supply rises and demand stays the same
Example: stores drop prices for winter coats and hats at end-of-season clearance sales

37. The Market’s Answer to Scarcity
Demand in the marketplace determines what and how much to produce
Businesses decide how to allocate resources in producing goods and services
Forces of supply and demand in the job market determine how to divide goods and services produced

38. In Your Opinion
Is understanding the free enterprise system important to the study of personal finance?

39. Central Ideas of the Chapter
Economics is the study of how people use scarce resources to satisfy their unlimited needs and wants.
In a free enterprise system, market forces allocate the resources.

40. Foundations of Personal Finance Ch. 1
Glossary of Key Terms
Back
command economy. A system in which a central authority, usually the government, controls economic activities.
consumer. A buyer and user of goods and services.
demand. The quantity of a product or service consumers are willing to buy.
economic system. Structure in which resources are turned into goods and services to address unlimited needs and wants. 40

41. Foundations of Personal Finance Ch. 1
Glossary of Key Terms
Back
free enterprise system. See market economy. Also called capitalism.
goods. Physical items such as food and clothing.
human resource. Qualities and characteristics that people have within themselves.
innovation. The process of creating something—new or improved products and new ways to do things and solve problems. 41

42. Glossary of Key Terms
Back
market economy. A system in which privately owned businesses operate and compete for profits with limited government regulation or interference.
marketplace. An arena in which consumers and producers meet to exchange goods, services, and money.
mixed economy. A combination of market and command systems.

43. Foundations of Personal Finance Ch. 1
Glossary of Key Terms
Back
needs. Items a person must have to survive.
nonhuman resource. External resources, such as money, time, equipment, and possessions.
opportunity cost. The value of the best option or alternative given up.
producer. An individual or business that provides the supply of goods and services to meet consumer demands.
profit. The total amount of money earned after expenses are subtracted from income. 43

44. Foundations of Personal Finance Ch. 1
Glossary of Key Terms
Back
resources. Any input used to generate other goods or services.
scarcity. The challenge of stretching resources to cover needs and wants.
services. Work performed.
supply. The amount of a product or service producers are willing to provide.
technology. The application of scientific knowledge to practical uses and product development. 44

45. Foundations of Personal Finance Ch. 1
Glossary of Key Terms
Back
trade-off. Part of making choices that involves evaluating two or more options and selecting just one; the item given up in order to gain something else.
traditional economy. System in which economic decisions are based on a society’s values, culture, and customs.
wants. Items a person would like to have that are not essential to life. 45