Economics! 26/12/14

By the end of the class today…  You should be able to  Define economics  Identify and define the four types of economic systems  Know basic information about the economy in the United States

What is Economics?  What does this term mean?  What are some related terms or ideas?  What are some examples of economic decisions people have to make?  How does economics affect people in their daily lives?  Who does economics affect?

Economics “The study of how people make decisions in a world where there are unlimited wants but limited resources.”

Wants & Needs  What is a need?  Things that are required for survival  Food, water, clothing, shelter  What is a want?  Things we would like to have

Wants & Needs  Even in a country like the United States, with vast resources and money, we cannot produce every single thing we want and need  Must make decisions among the alternatives  Must answer 3 fundamental questions!

1. WHAT is produced?  Both producers and consumers must decide what should be reduced in a world of limited resources  For example  With limited resources, should a local government use its money to build a school or fix a highway?  With limited resources, should a farmer produce cotton, soybeans or lettuce?

2. HOW is it produced?  Producers and consumers must decide how to produce something  For example  How should we get oil for our energy needs?  How much pollution should a factory be allowed to give off?  How should animals be treated?

3. WHO consumes what is produced?  After goods/services are produced, society must decide how these goods will be distributed among members of society.  For example  Who should receive the limited supply of flu vaccines?  Who should a shoe company market their product towards?  Who should attend a new school?

Who makes these decisions?  In the U.S.  People (consumers)  Businesses (producers)  Government  But not every economic system is like this  What is an economic system?  “a particular set of social institutions which deals with the production, distribution, and consumption of goods and services in a particular society.”  There are four types of economic systems!

Traditional  Tradition and custom govern economic decisions  Decisions revolve around family, tribe  Resources are allocated based on inheritance  Farming, hunting, gathering stays the same over generations  Choices are determined by technology  Little/no technology

Traditional  Advantages  Little competition= little friction between members  Clearly defined roles  System well understood by participants  Disadvantages  Little growth or development  Slow to change  No technology  No social mobility  No control over environmental factors

Command  Government makes all economic decisions  Individuals have little or no influence over economics  Government owns resources  No competition  Businesses provide services and goods  Consumers have few choices  Government set prices of gods

Command  Advantages  Stability (doesn’t follow business cycle)  Focus on equality, serving collectively  Distributes wealth  Products fulfill needs  Disadvantages  Often insufficient resource distribution  Cannot determine consumer preferences like a market can  No personal freedom  Cannot easily adjust to change  Lack of incentives for innovation

Market  Economic decisions are made by individuals competing to earn profits based on supply and demand  Resources owned by individuals  Profit is motive  Competition determines prices and quality  Individual freedom is important (choices!)

Market  Advantages  Competition determines prices, brings them down  Consumers can buy whatever they want  Little government intervention  Adjusts to change  Variety  Disadvantages  Doesn’t always provide basic needs of everyone  Makes it difficult for gov’t to provide for needs  Market failures  People can make harmful decisions

Mixed  Combines Command and Market economies  Individuals and the government share in economic decision making process  Government guides and regulates production of goods  Resources owned by individuals  Government tries to protect producers and consumers from unfair policies and practices

Mixed  Advantages  Advantages of command and market  Combines focus on social welfare and individual liberties  Disadvantages  Disadvantages of command and market  May not mean all resources are being used well  Government infringement may not always be good

Which type of economy?  On a piece of paper, write:  1. Type of economy:  How do you know?:

Factors of Production  There are four “ingredients of production”  Capital  Money or assets  Land  Labor  # of people in population  Willingness to work  Enterprise  Creativity  LABOR intensive vs. CAPITAL intensive

Words to know (and understand!)  Gross Domestic Product: value of all goods and services in one year  Measure of economic activity, size of economy  GDP per capita= GDP divided by population  If GDP is the whole pie, GDP per capita is how big of a slice each person gets

The United States Economy  Type: Mixed  Private individuals and businesses make most of the decisions  The Government buys good in private sector  Advantages  Economic efficiency  Individual freedom  Most technologically advanced nation  Disadvantages  Difficult to enter home market  GDP per capita= $52,800

Government in US economy  Although the U.S. economy is based on capitalism and free enterprise and individualism, the government is still involved in some ways  The Government wants high employment and price stability  Fiscal Policy  Taxes, spending  Monetary Policy  Supply of money

Government in US economy  Four ways  1. Provides services and goods like roads, education, public safety, national defense  2. Social Security and Medicare  3. Collects taxes, borrows money  4. Regulates business activity  Food and Drug Administration  Working conditions  Pollution

Trade  One of the most important parts of the economy of the U.S.  Promotes growth, democracy, social stability  Since WWII  A move to get rid of trade barriers  Free Trade agreements  Top 3 partners: Canada, Mexico, China

Competition and Small Businesses  Competition is a defining characteristic of the U.S. economy  Along with small businesses  Account for majority of new U.S. jobs  “Shop owners and other small businesses account for more than half of the U.S. private-sector nonfarm economic output and work force.” –US Economy in Brief

Challenges  Financial Crisis  Largest since the Great Depression in 1930s  Globalization  Protecting industry at home  DEBT  $18 trillion dollars