And the Creation of Economic Policy Economics And the Creation of Economic Policy

What is Economics? Economics is the study of how individuals and society choose to use limited resources in an effort to satisfy people’s unlimited wants. Together, the problems of limited resources and unlimited wants form what is known as the problem of scarcity.

Because of scarcity, individuals and society must make difficult choices as to how to best use those resources. When a choice is made between two uses for limited resources, there will be a cost known as “opportunity cost”. Refers to what is given up when a choice is made.

Three Basic Economic Questions What goods and services are to be produced? With limited resources, everything everyone wants cannot be produced. How shall they be produced? Methods of production, number of workers, level of technology, etc.

For whom shall they be produced? Society must have some method of distributing the scarce goods and services to its people. How societies decide these 3 questions, determines its economic makeup.

Three Basic Economic Systems Traditional Economy. Found primarily in rural, non-industrialized areas of the world. Basically a subsistence type of economy. Small units produce enough to ensure their own survival. Excess may be “bartered”.

Command Economy. Basic economic questions are answered by the government. Planned economies in which the government engages in elaborate, detailed planning in an effort to produce and distribute goods and services according to the wishes of government leaders.

Often causes critical shortages of what the consumer wants and workers are usually not free because of government restrictions. Means of production are usually owned by the government. Best examples are the old Soviet Union and other “communist” countries.

Market Economy. Basic economic questions are answered by the “marketplace”. Means of production usually held in private hands. Examples are the United States and most of the “Western World”.

In reality, there are no “pure” economic systems In reality, there are no “pure” economic systems. They are really Mixed Economies. Distinction is made between private sector and public sector. Predominantly command economies concentrate on the public sector. Predominantly market economies concentrate on the private sector.

Law of Demand Demand refers to the ability and willingness of the people to buy things. Demand affected by 2 basic principles.

As the price of an item rises, and other factors remain unchanged; the quantity demanded by consumers will fall. As prices fall, and other factors are unchanged; the quantity demanded will rise.

Law of Demand 5 4 PRICE 3 2 1 1 2 3 4 5 Demand

Law of Supply Supply refers to the ability and willingness of sellers to make things available for sale. Supply affected by two basic principles.

As the price of an item rises, and other factors remain unchanged; the quantity supplied by suppliers will rise. As the price falls, and other things remain the same; the quantity supplied will fall.

Law of Supply 5 4 PRICE 3 2 1 1 2 3 4 5 Supply

Markets Supply and demand together, creates a market. A market is the arrangement through which potential buyers and sellers come together to exchange goods and services. A market exists whenever and wherever the decisions of buyers and sellers interact through the laws of supply and demand.

Markets may be as small as a local farmer’s market. Markets usually cover larger geographical areas. Some markets extend over an entire nation or the world. In its purest form, prices are determined in the market by the laws of supply and demand.

Market Price Supply and demand schedules are put together to create the market price. The market price is called the Equilibrium Price. Market attempts to balance supply with demand. Changes in supply or demand causes equilibrium price to change.

Equilibrium Price 5 4 PRICE 3 Equilibrium Point 2 1 1 2 3 4 5 Product 1 2 3 4 5 Product Demand Supply

Government and Market The United States is primarily a market economy with a very strong private sector. Government influence in that economy is called economic policy.

U.S. economic policy divided into 2 forms. Fiscal Policy-taxing and spending. Monetary policy-control of the money supply and interest rates. U.S. uses these two forms of policy to “manage” the economy. Control ups and downs and attempt a steady growth.

Fiscal Policy The government is the largest spender in the U.S. Annually the U.S. spends about 23 % of the Gross Domestic Product (All the money produced in the country). Where does this money come from?

Majority of government funds come from personal and corporate income taxes. Other funds come from borrowing, special fees and fines, etc.

Taxation Original forms of taxation. Tariffs: taxes on imports. Excise tax: consumer taxes on a specific kind of merchandise. Direct tax: states paid a tax which was based on apportionment.

During the Civil War (1861-65), the U. S During the Civil War (1861-65), the U.S. passed the first income tax law. Later declared unconstitutional in 1895. Reintroduced with the passage of the 16th Amendment in 1913. In the U.S., the income tax is a progressive tax: the more you make, the larger fraction of tax paid. Social impact as well: leveling on wealth.