1 The Creation and Distribution of Wealth Economics Chapter 2

2 What Is Economics? Economics is the study of how society chooses to employ resources to produce various goods and services and to distribute them for consumption among various competing groups and individuals. Economics is the study of how society chooses to employ resources to produce various goods and services and to distribute them for consumption among various competing groups and individuals. Resource development: is the study of how to use technology to increase the known resources of the world and to create the conditions that will make better use of those resources. Resource development: is the study of how to use technology to increase the known resources of the world and to create the conditions that will make better use of those resources.

3 The Economic Theory of Wealth Creation (Adam Smith) Adam Smith advocated creating wealth through entrepreneurship Rather than divide fixed resources. Adam Smith advocated creating wealth through entrepreneurship Rather than divide fixed resources. Smith envisioned creating more resources so that everyone could be wealthier. Smith envisioned creating more resources so that everyone could be wealthier. In 1776 Smith wrote a book called The Wealth of nations in which he outlined steps for creating prosperity. In 1776 Smith wrote a book called The Wealth of nations in which he outlined steps for creating prosperity. The Invisible Hand: Adam Smith called the mechanism for creating wealth and jobs an invisible hand which turns self-directed gain into social and economic benefits for all. The Invisible Hand: Adam Smith called the mechanism for creating wealth and jobs an invisible hand which turns self-directed gain into social and economic benefits for all. Smith is called Father of Capitalism Smith is called Father of Capitalism

4 Capitalism is an economic system in which all or most of the means of production and distribution are privately owned and operated for profit. is an economic system in which all or most of the means of production and distribution are privately owned and operated for profit. In capitalist countries, businesspeople decide how to use their resources and how much to charge. In capitalist countries, businesspeople decide how to use their resources and how much to charge. The driving forces behind wealth creation according to Adam Smith is: The driving forces behind wealth creation according to Adam Smith is: Freedom to keep the profits and to own land Freedom to keep the profits and to own land Incentives to work long hours and to work hard Incentives to work long hours and to work hard

5 Capitalism (Cont.) The advantages of capitalism : the right to private property the right to private property The right to keep all of a business ’ s profits after taxes The right to keep all of a business ’ s profits after taxes freedom of competition freedom of competition freedom of choice freedom of choice

6 Communism A system where all economic decisions are made by the state and the state owns all the major forms of production. A system where all economic decisions are made by the state and the state owns all the major forms of production. Karl Marx wrote The communist Manifesto in 1848 and he became the Father of Communism Karl Marx wrote The communist Manifesto in 1848 and he became the Father of Communism Marx decided that workers should take over ownership of businesses and share in the wealth. Marx decided that workers should take over ownership of businesses and share in the wealth.

7 Communism (Cont.) The main advantage of communism is that creates equality among the citizens The main disadvantage of communism is that it doesn ’ t inspire businesspeople to work hard and no enough job opportunities Communist countries include China, Cuba, and North Korea. It is slowly disappearing as an alternative economic form. Communist countries include China, Cuba, and North Korea. It is slowly disappearing as an alternative economic form.

8 Socialism An economic system based on the premise that some businesses should be owned by the government. Socialists believe that the government should decide about what gets produced, how much workers should be paid, and how much trade should take place between nations. Socialists believe that the government should decide about what gets produced, how much workers should be paid, and how much trade should take place between nations. The major advantage for socialism is that it created more equality among the citizens

9 Socialism The disadvantages of socialism are: socialism took away some work incentives socialism took away some work incentives marginal tax rates (the rate you pay on the additional money earned after a certain income level) marginal tax rates (the rate you pay on the additional money earned after a certain income level) socialism didn ’ t create the jobs or the wealth that capitalism did socialism didn ’ t create the jobs or the wealth that capitalism did

10 The Trend Toward Mixed Economies There are two economic systems vying for dominance in the world: Free Market Economies (Capitalism) Free Market Economies (Capitalism) Command Economies (socialism and communism) Command Economies (socialism and communism) No country is purely capitalist or purely socialist Mixed Economies exist where some allocation of resources is made by the market and some by government. Mixed Economies exist where some allocation of resources is made by the market and some by government.

11 How Free Markets Work In free market system, decisions about what to produce and in what quantities are made by the market. In free market system, decisions about what to produce and in what quantities are made by the market. Consumers send signals to producers what to make, how many, and so on through the mechanism of price. Consumers send signals to producers what to make, how many, and so on through the mechanism of price. How prices are determined: Supply: refers to the quantity of products that manufacturers are willing to sell at different prices at a specific time. Demand: refers to the quantity of products that people are willing to buy at different prices at a specific time.

12 How prices are determined The amount supplied will increase as the price increases The amount supplied will increase as the price increases Supply Curve indicates the quantity that the producers are willing to supply at certain prices Supply Curve indicates the quantity that the producers are willing to supply at certain prices The quantity demanded will decrease as the price increases The quantity demanded will decrease as the price increases Demand Curve indicates the quantity consumers are willing to buy at certain prices. Demand Curve indicates the quantity consumers are willing to buy at certain prices.

13 The Equilibrium Price (The Market Price) is the price at which the quantity demanded and the quantity supplied are equal. is the price at which the quantity demanded and the quantity supplied are equal. It is the interaction between supply and demand that determines the market price in the long run. It is the interaction between supply and demand that determines the market price in the long run. If surpluses develop (quantity supplied is more than quantity demanded), a signal is sent to sellers to lower the price. If surpluses develop (quantity supplied is more than quantity demanded), a signal is sent to sellers to lower the price. If shortages develop (quantity demanded is more than the quantity supplied), a signal is sent to sellers to increase the price. If shortages develop (quantity demanded is more than the quantity supplied), a signal is sent to sellers to increase the price.

14 Competition within free markets Perfect Competition: (many sellers) Example: agricultural products Perfect Competition: (many sellers) Example: agricultural products Monopolistic Competition:: (large number of sellers) Example: fast food industry. Monopolistic Competition:: (large number of sellers) Example: fast food industry. Oligopoly: (few sellers dominate a market) Examples: breakfast cereal, beer, automobiles, and soft drinks. Oligopoly: (few sellers dominate a market) Examples: breakfast cereal, beer, automobiles, and soft drinks. Monopoly: (only one seller) Monopoly: (only one seller)

15 Key Economic Indicators: Gross Domestic Product (GDP): is the total value of a country ’ s output of goods and services in a given year. The Price Indexes: A- The Consumer Price Index (CPI): measures the price of an average market basket of goods for an average family over time. It is also a measure of the pace of inflation or deflation. B- The producer Price Index (PPI): measures prices at the wholesale level.

16 Key Economic Indicators: The Unemployment rate: refers to the number of civilians, 16 years old or older, who are unemployed and tried to find a job within the prior 4 weeks. Types of unemployment: A- Frictional Unemployment: people quit work because they didn ’ t like the job, the boss, or working conditions. B- Structural unemployment: caused by restructuring of businesses or by a mismatch between the skills of job seekers and the requirements of available jobs. C- Cyclical Unemployment: caused by a recession or similar downturn in the business cycle. D- Seasonal Unemployment: occurs when the demand for labor varies over the year.

17 Inflation, Disinflation, and Deflation: Inflation: refers to a general rise in the price level of goods and services over time Inflation: refers to a general rise in the price level of goods and services over time Disinflation: describes a condition where the increase in prices is slowing (the inflation rate is declining) Disinflation: describes a condition where the increase in prices is slowing (the inflation rate is declining) Deflation: means that prices are actually declining, occurring when countries produce so many goods that people can ’ t afford to buy them all. Deflation: means that prices are actually declining, occurring when countries produce so many goods that people can ’ t afford to buy them all.

18 Recession vs. Depression: Recession: is two consecutive quarters of decline in the GDP. Recession: is two consecutive quarters of decline in the GDP. Depression: is the severe recession. Depression: is the severe recession. Monetary Policy vs. Fiscal policy: Monetary Policy: is the management of the money placed into the economy and the management of interest rates. Monetary Policy: is the management of the money placed into the economy and the management of interest rates. Fiscal policy: refers to the government ’ s efforts to keep the economy stable by increasing or decreasing taxes and/or government spending. Fiscal policy: refers to the government ’ s efforts to keep the economy stable by increasing or decreasing taxes and/or government spending.

Assignment Questions page 41and page 51 Questions page 41and page 51 Due Sunday 23 rd of September Due Sunday 23 rd of September No late assignments. No late assignments. Review the questions in page and key terms in page 54 for chapter 2 Review the questions in page and key terms in page 54 for chapter 2 Review the questions in page and key terms in page 25 for chapter 1 Review the questions in page and key terms in page 25 for chapter 1 19