Economics

Economic Systems The way people produce and exchange goods and services is called an economic system. Four types of economic systems: traditional, command, market and mixed.

Traditional Economy Goods and Services are traded without exchanging money. Also called “barter”.

Market Economy Production of goods and services is determined by the demand from consumers. Also called a Free Market Economy.

Command Economy Production of goods and services is determined by a central government, which usually owns the means of production.

Mixed Economy A combination of command and market economies provides goods and services so that all people will benefit.

Economic systems: Satisfy our Wants and Needs Goods – Things we can touch or see that satisfy our wants or needs. Services – Actions people undertake in order to satisfy their wants and needs.

Types of resources: Production Resources Businesses use three types of production resources to produce goods and services. Natural Human Capital

Natural Resources Resources that are present without human interference “gifts of nature” Examples are land, timber and mineral deposits

Human Resources Any human effort used to produce goods and services Examples include workers and their skills, training and education

Capital Resources Tools of production Goods used to produce other goods or services Examples include tools, machinery and buildings. Money used to purchase these resources is called capital.

Identifying Resources: NATURAL HUMAN CAPITAL cotton tractor marketing degree table saw computers water driver’s license crude oil employees factory building aluminum electrician’s license land

Identifying Resources: NATURAL HUMAN CAPITAL cotton water crude oil land Marketing degree Driver’s license Employees Electrician’s License Tractor Table saw Computers Factory building Land cotton tractor marketing degree table saw computers water driver’s license crude oil employees factory building aluminum electrician’s license land

Levels of Economic Activity Primary – First level Secondary – Second level Tertiary – Third level

Primary Activities Businesses involved in gathering raw materials. Examples include mining and timber companies.

Secondary Activities Businesses that add value to materials by changing their form. Examples include automobile manufacturers and textile factories.

Tertiary Activities Companies that provide business or professional services. Examples include salespeople, teachers and doctors.

Identifying Levels of Activity _____ Hershey Chocolate _____ Pilot Gas Station _____ Luck Stone Corp. _____ NTelos _____ Law Well Drilling Inc. _____ Fry Appraisal Co. _____Oak Lawn Mausoleum _____ Walmart _____Augusta Medical Center _____ Hollister

Identifying Levels of Activity _____ Hershey Chocolate _____ Pilot Gas Station _____ Luck Stone Corp. _____ NTelos _____ Law Well Drilling Inc. _____ Augusta Lumber _____Oak Lawn Mausoleum _____ Walmart _____Augusta Medical Center _____ Hollister _____ Hershey Chocolate _____ Pilot Gas Station _____ Luck Stone Corp. _____ NTelos _____ Law Well Drilling Inc. _____ _____Oak Lawn Mausoleum _____ Walmart _____Augusta Medical Center _____ Hollister P T P P T T T S

Important Note: The more developed an economy is, the greater the number and variety of activities you will find.

World trade: Why Do Countries Trade With Each Other? Trade maintains and improves relations between countries. Trade allows countries to acquire goods and services, often natural resources or raw materials, that they do not have available to them. Trade allows countries to obtain products that other countries may produce more efficiently and therefore are less costly.

International Trade Some Basic Terms: Imports – goods or services that a nation buys from other nations Q: What type of goods does the U.S. import the most? A: crude oil, refined petroleum, automobiles, food and beverages, raw materials, and consumer goods Exports – the goods or services that a nation produces and then sells to another nation Q: What type of goods does the U.S. export the most? A: capital goods, industrial supplies, raw materials, agriculture products, and automobiles

…MORE TERMS Specialization – the idea of countries only making those products that they produce the most efficiently Absolute Advantage – a country’s ability to produce more of a given product than can another country Comparative Advantage – a country’s ability to produce a given product relatively more efficiently than another country – or – production at a lower opportunity cost

SPECIALIZATION The key to international trade is specialization. Even though one country may have an absolute advantage over another country in producing all concerned products it can still be beneficial for both countries to specialize and trade. Take some time to complete the Enrichment Activity and you will see for yourself.

Meet Betsy and bert

Their bedrooms…

Their predicament: Betsy and Bert must help with the household chores before they can go out with their friends. Their job is twofold: They must wash and dry one sink full of dirty dishes that accumulated for 3 days. They must sweep up and take out 3 loads of trash from the garage, which hasn’t been cleaned since the summer of 2000.

They must wash and dry one sink full of dirty dishes that accumulated for 3 days.

They must sweep up and take out 3 loads of trash from the garage, which hasn’t been cleaned since the summer of 2000.

Dishwashing (Number of sink loads) Sweeping (Number of trash loads) Betsy 2 3 Bert 1

Option #4 Option #4 allows both Bert and Betsy to finish in one hour; the shortest time of the four options and the shortest possible time for this example.

Opportunity cost When Betsy and Bert specialize where each has the comparative advantage and work together, both are better off. Opportunity Cost is the value of the next-best alternative that must be given up when scarce resources are used for one purpose instead of another.