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Economics Chapter 2.

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1 Economics Chapter 2

2 Definition Economics: study of how society uses its resources to produce goods and services and how it distributes them to people who are competing for those goods/services. Factors of Production Land Labor Capital Entrepreneurship Before we talked about 5 factors of production you need to be concerned with just these four. The factors of production are those things that go into making a business and producing goods and services.

3 Macro vs Micro Economics
Macroeconomics Looks at the operation of a nation’s economy as a whole Microeconomics Looks at the behavior of people and organizations in particular markets Example: Macro: looks at how many jobs exist in the whole economy Micro: looks at how many people will be hired in a particular industry or region of the country. Macro: big picture Micro: smaller picture (micro…think of microscope)

4 Adam Smith Scottish economist; one of the first people to imagine a system for creating wealth and improving the lives of EVERYONE. Believed in creating MORE resources so that everyone could become wealthier 1776: The Wealth of Nations Believed that people would work hard if they were to be rewarded for doing so. Considered to be the father of economics He believed that freedom was vital to the economy b/c we have the freedom to own land or property and the freedom to keep profits from working hard.

5 The Invisible Hand Under Adam Smith’s theory businesspeople do not necessarily want to help others but they want profits and their own prosperity As people try to improve their own situation in life, their efforts serve as an “invisible hand” that helps the economy grow Invisible Hand Turns self-directed gain into social and economic benefits for all So when you do good for yourself you’re going to end up doing good for others too, even though it’s not on purpose or it’s not your main motivation EXAMPLE: Let’s say I want to start a business to sell my own line of clothes. I want to do this b/c I want to make money and I want people to buy my clothes. So I open a store. In my store I need workers. So I’m now doing good for the economy and everyone as a whole b/c I’m supplying people with jobs.

6 Economic Systems Capitalism (Free Market) Socialism Communism
Mixed Economies

7 Capitalism (Free Market)
Economic system in which most of the factors of production are privately owned (not owned by the government) and are operated for a profit. No country is purely capitalist The gov’t gets involved in determining minimum wages and setting farm prices The foundation of the US economic system is capitalism In capitalist countries businesspeople decide what to produce, how much to pay workers, how much to charge for goods and services, whether to produce certain goods in their own country or import them etc…

8 5 Basic Rights under Capitalism
The right to private property We can buy, sell, and use land, buildings, machinery and other forms of property. The right to own a business and keep all profits Profits = Revenues – Expenses The right to freedom of competition Individuals are free to compete with others by offering new products and promotions The right to freedom of choice People are free to choose where they will work and what career they will have; also where to live and what to buy or sell The right to limited role of government. One benefit is that people will take more risks if they have more freedoms.

9 Who wants to buy their “A”???

10 Supply and Demand Under the free market system, decisions about what to produce and how much to produce are made by the market. Prices are NOT determined by sellers; they are determined by buyers and sellers negotiating in the marketplace How is a price determined that is acceptable to both buyers and sellers? We have to look at supply and demand You and I and other consumers in the US send signals to tell producers what to make, how many and in what color. We do this by choosing to buy or not to buy something. EXAMPLE: If we all decided we wanted Bears t-shirts, the clothing industry would respond in certain ways. Maybe the Bears are doing awesome and are having their best year ever and they’ve drafted some great players and they have a new great coach. So, manufacturers and retailers would increase the price of Bears t-shirts b/c people are demanding more of them and will pay more. People in the clothing industry would realize they can make more money selling Bears t-shirts. They may work longer hours. The number of clothing companies that make Bears t-shirts will increase. The prices and quantities that are being made would continue to change based on our actions as the amount of t-shirts we buy changes.

11 Supply Quantity of products that owners are willing to sell at different prices at a specific time Generally speaking…the amount supplied will increase as the price increases because sellers can make more $ with a higher price Look at page 40

12 Demand Quantity of products people are willing to buy at different prices at a specific time Generally speaking…the quantity demanded will increase as the price decreases, because consumers will want more of something if it is cheaper. Look at page 40

13 Market Price Market Price or Equilibrium Point
Where the supply and demand curve intersects Quantity demanded = quantity supplied What is the key factor in determining the quantity demanded and the quantity supplied? In the long run the equilibrium price will become the market price The key factor is PRICE In the long run the equilibrium price will become the market price, therefore supply and demand determines the market price of a good.

14 Supply and Demand Cont…
Surplus: quantity supplied exceeds quantity demanded This signals sellers to lower their prices to get rid of inventory Shortage: quantity supplied is less than quantity demanded This signals sellers to increase their prices Show surplus and shortage on the board using supply and demand curves. Area to the right is a surplus and area to the left is a shortage Use page 40 for the example.

15 Socialism Economic system based on the premise that most basic businesses (steel mills, coal mines, utilities) should be owned by the government so that profits can be easily distributed among the people. Socialist nations rely heavily on the government to provide education, health care, retirement benefits and unemployment benefits. Socialism has become the economic platform for many countries in Europe, Africa, and much of the rest of the world.

16 Communism Economic system in which the government makes almost ALL economic decisions and owns ALL the major factors of production More intrusive than socialism Some communist countries do not allow you to practice certain religions Communism is slowly disappearing

17 Recap Free Market: marketplace determines what is produced, who gets it and how economy grows Capitalism Command Economies: government decides what is produced, who gets it and how the economy grows Socialism and Communism

18 Mixed Economies Some allocation of resources is determined by the market and some is determined by government Movement for free market systems to go towards socialism and for socialist systems to go towards capitalism This causes a mixed economy The US is a mixed economy

19 The United States 3 Major indicators of economic conditions
Gross domestic product (GDP) Unemployment rate Price indexes

20 Economic Indicators GDP: total value of goods and services produced in a country in a given year US GDP in 1999 was over $6 trillion! Unemployment rate: refers to the # of people at least 16 years old who are unemployed and tried to find a job within the last four weeks Any rate under 5% is very good US unemployment rate in 2000 was the lowest in over 30 years…3.9% Price Indexes: Consumer Price Index (CPI); monthly statistics that measure the pace of inflation or deflation on about 400 different goods/services Either a domestic company (one that is owned by someone in the US) or foreign companies may produce the g/s that are included in the GDP. EXAMPLE: Honda is Japanese owned. They have a factory in Ohio. Production values from this factory in Ohio are included in the United State’s GDP even though it’s a Japanese owned company b/c it’s here in the US. The same thing would happen if the US had a company based in Mexico. Those figures would be included in Mexico’s GDP and not ours. Look at the unemployment rate graph on page 50.

21 4 Types of Unemployment Frictional: people who have quit work b/c they didn’t like the job, boss, working conditions and they haven’t found a new job Structural: caused by the restructuring of firms or mismatch b/ skills of job seekers and the requirements (location) of available jobs Example: coal miners in an area where mines are closed Cyclical: occurs b/c of a recession Most serious type of unemployment Seasonal: demand for labor varies over the year Example: harvesting of crops

22 Terms Inflation: general rise in the prices of g/s over time
Disinflation: condition where the increase in prices is slowing (inflation rate is decreasing) Occurs when countries produce so many goods that people cannot afford to buy them all Recession: 2 or more consecutive quarters (3 month periods) of decline in the GDP Depression: severe recession

23 Monetary and Fiscal Policy
Monetary Policy: management of the $ supply and interest rates Fiscal Policy: federal government’s efforts to keep economy stable by increasing or decreasing taxes and/or government spending When the gov’t spends more than it raises in taxes it creates a budget deficit The gov’t borrows $ to pay this deficit and creates the national debt. In 2000 the national debt was $5.6 trillion; over $20,000 for every person in the US.


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