The Power of Economics

 How society chooses to employ resources to produce goods and services and distribute for consumption  Macro and Micro  Macro: the nation’s economy as a whole Micro: the behavior of individuals in markets  Resources are limited

 The Wealth of Nations (1776)  Assumptions: ▪ People will work hard to see the fruits of their labor ▪ Those who get wealthy will return the wealth back to society.  Freedom is vital to any economy (Capitalism)  People work for themselves, but somehow this gets translated into societal gain ▪ “The invisible hand” – individual gain  benefits for all  Do people who make it big turn it back?

 Can own private property  Can own a business  Can compete freely and make business decisions, like producing what you want and pricing however you wish  Can live freely and make choices YOU create your future…  Creates classes of individuals; however.

1. What are the two types of economics fields of study, and what does each study? 2. Who is Adam Smith? 3. What does the invisible hand do? 4. What about the United States’ economy is capitalist?

 Supply – upward sloping (firms supply more when prices are high)  Demand – downward sloping (people demand more when prices are low)  In the long run, they meet at equilibrium. This is the long-run market price.

 Perfect  Many sellers, omniscient buyers, identical products  Really doesn’t exist  Monopolistic competition  Differentiating factors set many sellers apart (computers)  Oligopoly  Only a few sellers dominate market, different products (gasoline)  Monopoly  Only one seller exists for the product (utilities)

1. When the price offered for each product is higher, suppliers will supply (more/less)? 2. When the price required to buy each product is lower, consumers will demand (more/less)? 3. What types of behaviors will suppliers show when there is a shortage in the market? 4. What is the equilibrium point?

 Is our local electric system a monopoly, or is it perfect competition?  Is the toy industry an oligopoly, or an example of monopolistic competition.  What is an industry that you can think of that is the closest to perfect competition you can imagine?

 Most businesses should be owned by the government so that profits can be distributed equally  High tax rates  Often free education, free health care, less emphasis on work  Many highly aspiring people leave (brain drain)

Current socialist countries: China, Cuba, North Korea, Bangladesh, Laos, and Vietnam; Egypt, Guyana, India, Libya, Portugal, Sri Lanka, Syria, Tanzania, and Venezuela ; yet others exist with some socialist policies

 A special, more extreme type of socialism  The state makes most decisions and owns most businesses  State also practices social control (religion, jobs, residences)  Shortages often occur because government cannot successfully predict supply and demand

 Even the U.S. isn’t an example of pure capitalism!  Give me examples of the U.S. system that go against pure capitalism.  Mixed economies offer a middle ground wherein the poor are cared for, and the market determines supply and demand.

1. Why does a brain drain occur in a socialist economy? 2. Why is it hard for entrepreneurship to occur in a socialist economy? 3. What factors of production are limited in a socialist economy? 4. What is the thing that socialist countries try to eliminate that does occur in capitalist economies? Is this good for a society?

 Gross Domestic Product (GDP) Gross Domestic Product (GDP)  All of the goods and services produced in our borders by U.S. and foreign firms  Gross National Product (GNP)  Unemployment – U.S. Recovering? UnemploymentRecovering  Consumer Price Index  Recent inflation rates:

Source: International Monetary Fund, 2009

 Economic boom  Recession – two consecutive decreases in GDP  Depression – 10% or greater decline in GDP Depression  Recovery

 Fiscal policy – increased government spending and lowered taxes, in theory, will increase economic activity Fiscal policy  Monetary policy – the Federal Reserve can stimulate the economy by lowering interest rates and increasing the money supply  Neither are really working well!