Chapter 19

Objectives:

7.01, 7.04, 7.05, 7.06,

8.02, 8.03, 8.06, 9.01

Economic Resources

• Goods – a physical product• Services – like entertainment or lawn care• Factors of production: resources necessary to

produce goods/services1. Natural Resources: ‘gifts of nature’

2. Labor: human resources

3. Capital: manufactured goods used to make other goods and services (like a hammer)

4. Entrepreneurs: an individual who starts a new business, introduces new products, improves processes; are innovators and willing to take risks

Economic Resources

• Gross Domestic Product: a measure of the economy’s size; the total value in dollars of all the final goods and service produced in a country during a single year

– Need to know the relative value of each good– Used as an indicator of standard of living:

• Quality of life based on possession of necessities and luxuries to make like easier

– Only measures quantity, not quality

Economic Resources

• Net Domestic Product: is the GDP subtracted by the loss in value of capital goods by depreciation

– Depreciation is the loss of value due to wear and tear on a product

Economic Activity

• Market: the free and willing exchange of goods and services between buyers and sellers; not necessarily a place.

– Can be global, national, regional, or local– Resources, goods, and services flow in a

circular pattern– Market is made of different sectors

Economic Activity

• Consumer Sector: – Consumers earn income in factor markets:

• Markets where productive resources are bought/sold• Earn wages, salaries, etc. for labor

• Business Sector:– Individuals spend income in product markets:

• Markets where producers offer goods/services for sale

• Businesses sell goods for payment and then use that payment to buy resources, labor, capital.

• Smaller than the consumer sector

Economic Activity

• Government Sector: – Made of all levels of gov’t– Gov’t buys productive resources from the factor

markets and goods/services from product markets• For example, military buys trucks, planes, & ships

– Gov’t also produces goods and services• Public Universities, hospitals, transportation

– Usually the second largest sector

Economic Activity

• Foreign Sector: – Every other country in the world– We buy from and sell to the Foreign Sector– Usually the smallest sector

Economic Growth

• Occurs when total output of goods/services increases over time

– Productivity: efficient use of resources• measure of amount of output produced by given

level of inputs in specific period of time

– Specialization: when people, businesses, regions, & countries concentrate on goods or services that they can produce better than anyone else• Increases productivity

Economic Growth

• Division of Labor: breaking down a job into small tasks performed by different workers

– also improves productivity

• Human capital: Businesses invest in people’s skills, abilities and motivation to increase productivity

• Economic Interdependence: because of specialization people rely on each other

Capitalism

• Capitalism: an economic system in which private citizens own and use the factors of production in order to seek a profit.

• Free enterprise: competition is allowed to grow with minimal gov’t interference.

• Thus America’s economy is a combination of the two

Capitalism

• Factors helping capitalism to succeed:– Markets

• Connect the different sectors• Help determine prices• Consumer is “king” of the market

– Economic Freedom• Can choose your occupation, what to buy, sell, etc.• You also have the freedom to fail

– Private Property Rights:• Freedom to own, use, or dispose of your property (without

interfering with others)• Gives people motivation to work hard and take care of property

Capitalism

– Competition• The struggle between buyers and sellers to get the

best products at the lowest prices• Helps keep prices low, quality high

– Profit Motive• Profit: the amount of money left over after all the

costs of production have been paid• A large factor in growth of free-enterprise

– Voluntary exchange• the act of buyers and sellers freely/willingly engaging

in market transactions• The buyer and seller both believe they will profit

History of Capitalism

• Adam Smith– Scottish philosopher and economist– Wrote The Wealth of Nations (1776)

• Individuals, when left alone, work for their own self-interest; they would be guided by an “invisible hand”

• The basic principles of economics

– Laissez-faire economics based on book• French phrase meaning “to let alone”• Means gov’t’s role is only to ensure free competition

– Many founding fathers influenced by book