Productivity: is a measure of output produced by a given amount of inputs in a given period of time. 42
There are 2 ways productivity increases. 1. When more output is produced with the same number of inputs. 2. When the same output is produced using fewer inputs. 43
Over time, productivity growth means that the average worker is producing more per hour, which means that the average standard of living in the economy will be higher. 44
A good example might be washing cars. Initially, someone might be able to wash 1 car in 1 hour. 45
With some practice one of two things will happen. What do you think they are? 46
1.You might be able to wash 1 car, but in less time than it took before to wash 1 car. 2.You might be able to wash 2 cars in the same time it used to take to wash 1 car. 47
Division Of Labor: When work is arranged so that individual workers perform fewer tasks than before. A good example is assembly line production used by Henry Ford.. 48
Specialization: As a task is divided into smaller steps, workers perform tasks that they are better suited for or can do more efficiently than others. This is the opposite of self- sufficiency. 49
Specialization has certain benefits which include; Taking advantage of individual differences in ability. Learning by doing or practice makes perfect. Saving time by not having to switch tasks. 50
Human Capital: The sum of the skills, abilities, health and motivation of people. An investment in your education and training will boost your productivity, your income and finally, your standard of living. 51
Economic Interdependence: When decisions made by 1 person affect decisions made by other people, or events in 1 part of the world affect other parts of the world. We are dependent on people in many parts of the world for things we need and they are dependent on us for things they need. 53
Opportunity Cost: The cost of the next best alternative use of money, time, or resources when one choice is made rather than another. 54
Cost-benefit analysis: involves reaching a decision after considering alternative courses of action by comparing the extra benefits with the extra costs of that action as measured in small incremental steps. 55
A tool called a decision making grid can be used to evaluate various alternatives. 56
The basic lessons we learn from looking at this model are: All points on the curve are efficient. We can’t produce outside the curve at a point in time because we don’t have enough resources. Movements along the curve involve an opportunity cost. Points inside the curve are possible but inefficient. An outward shift in the curve over time represents economic growth. 61
Incentives: A cost or benefit that motivates a decision or action by consumers, workers, firms or other participants in the economy. Incentives matter! 62
Here are a few examples. 1. Prices 2. Wages 3. Interest Rates 4. Profits 5. Government Policies 63
Economic system: An organized way of answering the what, how, and for whom questions every society must answer. 64
1.Traditional Economy: What, how, and for whom questions are made through ritual, habit or custom. Examples include: African Mboti Australian Aborigines Canadian Inuits 65
2. Command Economy: A central authority or government makes most of the what, how, and for whom decisions. Examples include: Cuba North Korea China Former Soviet Union 66
3. Market Economy: People and firms acting in their own best interests answer the what, how, and for whom questions. Examples include: o United States o Hong Kong o Japan o South Korea o Canada 67
4. Mixed Economy: Also called a modified private enterprise economy. This is an economy where people carry on their economic affairs freely, but with some government intervention and regulation. In reality, all economies around the world are mixed. 68
Economic and Social Goals Every society has a set of basic beliefs and goals they think are important. Keep in mind these goals are not universally accepted, nor are they in any particular order. Sometimes one goal may be compatible with another goal,but at other times goals may conflict with each other. 70
1.Economic Freedom: People are free to make their own economic decisions such as who to work for or how to spend your income. 71
2. Economic Efficiency : Means getting the most out of our limited resources so we can meet as many of society’s needs and wants as possible. 72
3. Economic Equity: This goal stresses justice, impartiality, and fairness. Examples include equal pay for equal work and reducing discrimination. Minimum wage is one way the government tries to improve equity. 73
The idea of minimum wage supports the goal of economic equity. With what other goals does it conflict?
It conflicts with the goal of economic freedom because businesses are not free to pay employees what they want. It may also conflict with full employment because minimum wage may lead to job losses. And finally, it may conflict with price stability because firms may raise prices in response to the increase in the minimum wage.
4. Economic Security: Provides protection against unforeseen events such as layoffs, illness or injury. Social security is one government program that provides security to most working people. 76
5. Full Employment: All available resources should be put to work so that society can meet as many needs and wants as possible. We want every person who wants to work to be able to find suitable employment. 77
6. Price Stability: We want to avoid drastic fluctuations in the price level, or inflation. The reason is that certain groups of people are hurt by inflation. For example people living on fixed incomes don’t get raises that keep pace with inflation. 78
7. Economic Growth: The goal here is to be able to produce more goods and services over time. This is reflected in rising GDP from year to year. Remember the pie! 79
Capitalism or Free Enterprise has 7 important characteristics 1.Economic Freedom: Same as above. 80
2. Voluntary exchange: Buyers and sellers freely and willingly engage in market transactions and both parties expect to benefit from the transaction. It’s a win-win situation for both parties. Self interest 81
3. Private Property Rights: These rights entitle people to own, use, and control their possessions as they wish. It provides people with the incentive to work, save and invest because they are the ones who reap the rewards. Examples include: Real property Intellectual property patents copyrights 82
4. Profit Motive: The driving force that encourages people and firms to improve their material well being. 83
5. Competition: The struggle among firms to attract consumers while lowering costs. Competition is important to a market economy because consumers get lower prices and better quality products. 84
6. Consumer Sovereignty: The consumer is the “ruler” of the market, ($ votes). Business firms must be sensitive to the needs and wants of consumers and try to make the best product at the lowest price in order to be successful. 85
7. Government Regulation: Legal restrictions established by government on people and firms with which they must comply. FDA EEOC EPA OSHA FTC FCC 86
87 In Capitalism, governments’ role should be limited. This is called laissez faire.
o Protector false and misleading advertising unsafe food and drugs environmental hazards o Provider National defense Education o Regulator preserve competition—Antitrust Laws regulate industries o Promote National Goals 88
89 Deregulation: Is the opposite of regulation. Here the government becomes less involved in people’s lives. Add this to your notes.
Legal Forms of Business - shows the 3 main ways businesses are set up. Let’s look at 3 pie charts to see some interesting facts about businesses. 1.Sales 2.Net income 3.# of firms
1.Sole Proprietorship: A business owned and operated by 1 person. It is the most common form of business numerically.
2. Partnership: a business jointly owned by 2 or more people. 2 Types include General Partnership Limited Partnership
General– all partners are responsible for the management and financial obligations of the business. Limited– at least 1 partner is not active in the daily operation of the business although they may have contributed funds to finance the operation.
3. Corporation: is recognized by law as a separate legal entity having all the rights of an individual.
Important aspects of corporations include: Charter: a government document giving permission to create a corporation. Corporation’s name Its purpose Number of shares to be issued Names of parties who started it
Stock: ownership certificates in a corporation. Investors buy shares of stock in hopes of making a profit by selling the stock for more than they paid for them.
Stockholders/Shareholders: investors who buy shares of stock. Dividends: a check representing a portion of the corporations profits paid back to the stockholders each quarter. This is another way investors make money in the stock market.
Profit Motive: this is the driving force that encourages people and organizations to improve their material well-being. Entrepreneurs start businesses to make the greatest amount of profit possible. Total revenue >Total cost – profits Total revenue < Total cost– losses Total revenue = Total costs-- breakeven