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
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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
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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
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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
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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
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Being an Economically Smart Citizen Understanding the role of
the government 1.Economists think the role of the government should
be to maintain competitive markets Competition forces businesses to
use resources efficiently 2.Government provides many services the
private sector does not provide (schools, defense, social welfare
services) 3.Government also reward and punishes actions Can
encourage production through subsidies Can use taxes and fines to
discourage consumption and punish lawbreakers
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The American Economy Chapter 19
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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
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Economic Resources Factors of Production Resources necessary to
produce goods and services 1.Natural Resources- fields, rain,
forests, minerals and other resources used to make products
2.Labor- physical and mental efforts people use to produce goods
and services 3.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 4.Entrepreneurs- individuals who bring together
factors of production, seen as the driving force of the American
economy
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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
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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
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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)
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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
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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
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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
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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 cant make for ourselves
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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
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Capitalism and Free Enterprise Under our economic system
customer is most important, they decide what is produced (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 wont bail it out)
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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
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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
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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
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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
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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
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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 cant 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 20 th century, there are
private interests that protect consumer rights as well
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The Economy and You 1960s special effort was made to protect
consumer rights Consumer Bill of Rights was developed 1.Right to
safe products- one that will not harm health or lives 2.Right to be
informed- protection against fraud, deceit, misleading facts that
keep us from making informed choices 3.Right to choose-
availability of products at fair process 4.Right to be heard-
consumer interests will be heard when laws are passed 5.Right to
redress- consumers need adequate ability to collect for damages
caused by product
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The Economy and You Consumer Responsibility 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
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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
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Demand Chapter 20
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What is Demand? Supply and demand are the backbone of a market
economy Demand is the desire, willingness and ability to buy a good
or service Consumer must want it Consumer must be willing to buy it
Customer must have the resources to buy it
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What is Demand? Demand schedule is a table that lists various
quantitates of a product or service that someone is willing to buy
and the possible prices Demand curve is a graph that shows amount
of a product that would be purchased at all possible prices Prices
are on the vertical axis and quantity is on the horizontal axis
Demand curves usually slope downward because people are normally
willing to buy less of a product as the price increases and more if
the price is low Law of demand quantity demanded and price move in
opposite directions
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What is Demand? Companies are interested in market demand
(total demand of all consumers for a product) Almost everything we
buy provides utility (pleasure, usefulness, satisfaction we receive
from using a product) Utility we get from consumption changes as we
consume more of the product Diminishing marginal utility - receive
less additional satisfaction (marginal utility) from each unit
consumed Concept explains why the demand curve slopes downward
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Factors Affecting Demand Demand for a product changes over time
Graphed using a market demand curve When demand goes down the
demand curve shifts to the left When demand increases, curve shifts
to the right
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Factors Affecting Demand Several factors cause market demand to
change I.Changes in the number of consumers I.More consumers, the
higher the demand II.Number of consumers changes fro reasons like:
higher birthrate, immigration, etc. II.Changes in consumer income
I.Health of economy affects demand III.Changes in consumer tastes
I.Popularity of product affects what price consumers will pay for a
product IV.Changes in consumer expectations Refers to the way
people think about the future If people expect a shortage the
demand increases
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Factors Affecting Demand V.Changes in substitutes Demand
influenced by change in price or quality of related products
Competing products called substitutes When two goods are
substitutes a change in the price of one good causes the demand for
the other good to move in the same direction Customer can trade off
one good for another if it is advantageous to do so VI.Changes in
Complements Some products are used together (computers and
software) Demand for one moves in the opposite direction as the
price of the other
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Factors Affecting Demand Elasticity of Demand All products
affected differently by price changes Demand elasticity is the
extent to which a change in price causes a change in the quantity
demanded Some goods a price change can drastically affect the
quantity demanded When there are substitutes for goods and services
demand tends to be elastic Expensive items have elastic demand
Items that the purchase can be postponed have elastic Inelastic
Demand Price changes have little effect on the quantity demanded
Demand for goods with few or no substitutes are likely to be
inelastic
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Supply Chapter 21
Slide 39
What is Supply? Supply is the various quantities of goods and
services that producers are willing to sell Opposite of demand
Suppliers offer differing quantities of a product depending on the
price buyers are willing to pay Law of supply- principle that
suppliers will normally offer more for sale the higher the price is
Profit motive motivates producers in a free market economy The
higher the price the more incentive for the producer to produce
more
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What is Supply? Supply curve is a graph that shows the amount
of product that would be supplied at all possible prices in the
market Supply curve slopes upward The total supply schedules of all
businesses that supply the same good or service is called market
supply Price is the most significant influence on the quantity
supplied of any product Businesses set prices that allow them to
recover costs of capital resources put into production of goods and
services Profit is the money a business receives for products over
and above its costs Producers use profits to increase wages, invest
money back into the company, keeping money for themselves and
investors Profit is the driving force for business owners
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Factors Affecting Supply When supply goes DOWN the supply curve
moves to the left When it goes UP the supply curve is pushed to the
right When supply increases prices come down What causes supply to
change? Changes in the cost of resources When resource prices fall
sellers are able to offer more of the good, because it is cheaper
to do so When resource prices go up the goods become more expensive
and supply decreases Productivity This is the degree to which
resources are used efficiently Increases productive output More
products can be produced at every price
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Factors Affecting Supply Technology causes supply to increase
Can make production more efficient Allows companies to track
purchases and what goods to produce Cut business costs Changes in
government policies New regulations can affect the cost of
production and cause changes in supply Tighter government
regulation restricts supply and increases the cost of production
Relaxed regulation increases supply by lowering the cost of
production Changes in taxes and subsidies Higher taxes mean higher
costs Subsidies by the government can lower the cost of production
and encourage new producers to enter the market Expectations of
producers If business believe demand will be lower in the future
they will decrease supply Change in the Number of suppliers Causes
changes in the market supply
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Factors Affecting Supply Elasticity of Supply Supply elasticity
is how the quantity of a good or service changes in response to
changes in price Elasticity depends on how quickly a company can
change the amount of a product it makes in response to price
changes Products that require a producer to invest large sums of
money are considered inelastic Products that can be made quickly
without huge amounts of capital and skilled labor are elastic
Slide 44
Markets and Prices Markets bring buyers and sellers together
Forces of supply and demand work together with markets to establish
prices Prices form the basis for economic decisions Surplus- amount
by which the quantity supplies is higher than the quantity demanded
Surplus signals that the price is too high and sellers need to
lower their price Shortage amount by which the quantity demanded is
higher than the quantity supplied Shortage signals that the price
is too low Market economy eliminates shortages and surpluses The
point where supply and demand achieve balance is called the
equilibrium price It stays at this price until supply or demand
changes
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Markets and Prices Price controls can be set by governments
because they feel that supply and demand are unfair Price ceiling
is the maximum that can be charged for goods and services Price
floors are the minimum that can be charged for goods and services
Price floors are more common than price ceilings They prevent
prices from dropping too low Minimum wage is an example of a price
floor
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Markets and Prices Prices help businesses and consumers make
decisions What to produce- purchases help producers decide what to
sell at what price How to produce- helps to utilize labor and
supplies, so producers can meet the price consumers are willing to
pay Whom to produce business aim goods at prices their customers
are willing to pay
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Markets and Prices Advantages of prices A.Prices are neutral-
in a free market economy they favor neither producers or consumers
Prices are the result of competition between buyers and sellers
B.Prices are flexible- unforeseen events affect supply and demand
Buyers and sellers adjust consumption and production Ability of the
price system to absorb these changes is an advantage of a free
market economy C.Price and freedom of choice- market economy
provides a wide variety of choices at a variety of prices No one
forces a consumer to pay a certain price for a product in a
competitive market economy D.Prices are familiar- they are familiar
and understood, allows people to make economic decisions quickly
and efficiently
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Business and Labor Chapter 22
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Types of Businesses 1.Sole proprietorship Most common form of
business organization Business owned and operated by a single
person Easiest form of business to set up Advantages Owner receives
all profits Decisions on how to run the business can be made
quickly Disadvantages Owner responsible for all problems related to
business Owner has unlimited liability, all personal assets of
owner may be seized to pay debts Hard to raise financial capital
Difficult to attract qualified employees, cant offer fringe
benefits (insurance, sick leave, etc.)
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Types of Businesses Partnerships Owned by two or more people
Business partners bound by articles of partnership Determine how
much each member will contribute, what role each person has How
profits will be shared How partners will be added or removed
Advantages Multiple owners can raise more money Owners do not pay
corporate income tax Each owner brings certain skills to help the
business Disadvantages Legal structure is complex Owners have
unlimited liability
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Types of Businesses 3.Corporations Has many of the rights and
responsibilities of an individual Can do anything a person can do
(own property, pay taxes, get sued) except vote 20% of all
businesses are corporations Charter is a government document that
grants them permission to organize Specifies amount of stock that
will be issued Stockholders become owners of the corporation Money
received from selling stock is used to set up and run company
Stockholders elect a board of directors to act on their behalf
Board hires managers to run the company on a daily basis
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Types of Businesses Advantages Easy to raise financial capital
(sell shares of stock) Ability to raise capital allows corporations
to grow huge Many have economies larger than some countries Board
of directors can hire managers to run company and replace them if
they fail Ownership can be easily transferred by selling stock
Corporations have limited liability, if company fails individuals
not liable for companies debts Disadvantages Expensive and complex
to set up Owners have little say in business because of
stockholders Subject to more regulation by government Have to
release financial reports to keep shareholders informed of business
Stockholders subject to double taxation (taxes on corporation and
on shareholder earnings
Slide 53
Types of Businesses Other types of business organizations
Non-profits Uses surplus funds to promote interests of members
(hospitals, churches and social service agencies) Earnings not
distributed to owners Exempt from income and property taxation
Cooperatives Voluntary organization that is formed for economic
activity Buy bulk goods on behalf of members Farmers Cooperatives
members sell crops directly to central markets
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Labor Unions Labor unions are groups of workers who band
together to gain better pay and working conditions 14% of American
workers belong to a union Two types of unions Trade unions- all
workers perform the same skill (craft union) Industrial unions- all
workers in the same industry
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Labor Unions Organized labor operates at three levels- local,
national and the federation Local- members of a factory, company or
geographic area Deals with a company negotiating a contract and
monitors the terms of a contract National unions help set up local
unions and to negotiate contracts between local unions and
companies Provides lawyers and staff to negotiate contracts for the
entire industry Federation level- AFL-CIO is a union that
represents 13 million workers worldwide
Slide 56
Labor Unions Some criticize unions for trying to control the
labor supply Some unions support the closed shop where a worker had
to be a union member to be hired 1947 Taft-Hartley Act closed shops
became illegal in any company that participated in interstate
commerce More common now is the union shop Companies hire nonunion
workers but they must join the union to begin working Taft Hartley
allows states to ban this activity These states are called right to
work states that prevent unions from forcing workers to join unions
Modified union shops workers can join union if they want to, but
are not required to join Union cant be brought into a workplace
unless a majority of workers vote for it National Labor Relations
Board oversees union activity
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Slide 58
Labor Unions Union carries out collective bargaining Officials
from union and company meet to discuss terms of worker contacts
(hours worked, wages, benefits) When two parties cant agree they
try mediation Third party comes in to help both sides reach an
agreement Some cases workers choose arbitration Where third party
decides how to settle the disagreement Both parties agree in
advance to accept what arbitrator decides Unions and management use
different tools to try to get other side to accept agreement
Workers can strike where all union workers refuse to work Unions
can encourage the public to boycott the business products Companies
can lockout workers until they meet their terms
Slide 59
Business in Our Economy Section 3
Slide 60
Business in Our Economy Businesses play many different roles in
our economy Consumers- purchase goods and services from other
businesses (raw materials, office supplies, etc.) Employers-
provide jobs and pay workers Producers- produce a wide variety of
goods and services for consumption
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Business in Our Economy Responsibilities of Businesses
1.Responsibility to consumers to make sure products are safe To
advertise truthfully If they do not follow these rules government
can step in and regulate the industry or pull the products from the
market 2.Responsibilities to owners Especially important for
corporations To protect shareholders corporations release financial
information regularly One purpose of transparency is to provide
investors with information to see if investment is worth the risk
Government can step in if companies are not honest
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Business in Our Economy 3.Responsibility to employees Give
workers a safe workplace Treat workers fairly without
discrimination 1990 Americans with Disabilities Act keeps employees
from discriminating on the basis of mental or physical disabilities
4.Responsibilities to the Community Many businesses feel they have
a social responsibility to pursue goals that benefit society as
well as themselves Many companies give money to charities or take
an active role in their community
