1. Unit 6 Free Market and Role of Government
Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice.

2. The government can protect a free market economy by maintaining a stable currency, tax breaks to proprietorships, law and order…
Scarcity – The basic economic problem that arises because people have unlimited wants but resources are limited

3. 51. How do individuals and governments utilize scarce resources?
Trade Off/Opportunity Costs – A benefit, profit, or value of something that must be given up to acquire or achieve something else.
Factors of Production – Resources
required for the production process.
Ex. Land, Labor, Capital, Enterprise

4. Economic Questions:
What is to be produced?
How are the goods to be produced? 
For whom are the goods produced.

5. Traditional Economic Systems
The economy is based on custom, the
way things have always been done.
low technology development
the “village” takes care
of each other
Often a leader and elders
make decisions.

6. Command Economy The government controls the economy.
technology use varies according to the economic system and the country
The government provides the goods and services it chooses.

7. Market economy (free market, capitalism, free enterprise)
The economy is based on supply (producers) and demand (consumers).
medium to high technology use
Each individual takes care of
him/herself
Government stays out of the
economy (“laissez-faire)

8. Characteristics of a market economy
Laissez-faire – government
leave business/free enterprise
alone, “hands off”
Invisible hand – the economy will be balanced
by competition, profit motive and self interest
Consumer sovereignty - the consumers and their demand are the driving forces in a market economy
What consumers purchase is
their private property, the
goods/services belong to the
consumers

9. Sole Proprietorship Sole Proprietorship
a business owned and operated by a single individual

10. Advantages of a Sole Proprietorship
Most popular type of business in the US (75% of businesses)
Easy to start-up
Least-regulated form of business
Owner gets to keep all profits
Owner has full control of management of the business

11. Disadvantages of Sole Proprietorships
Unlimited Liability (unlimited losses)
Owners are fully and personally responsible for all of firm’s debts
Limited Life
“dies” when the owner retires or closes the business

12. Partnerships Partnership
A business owned and managed by two or more people

13. Partnerships Advantages
Able to raise more money than a sole proprietor
Owners are able to specialize
Disadvantages
Require articles of partnership
Unlimited liability
(unlimited losses)
Potential for conflict

14. Corporations Corporation
A legal entity, owned by individual stockholders who face limited liability for firm’s debts

15. “A legal entity…”
To start a corporation, must create a legal charter to describe business
Corporations have legal identities separate from that of their owners
Corporations function in many ways like individuals
Pay taxes
Sign contracts
Can sue others and be sued

16. “…owned by individual stockholders…”
Stock – certificate of ownership
Stockholder(s) are the owner(s)
Stockholder(s) elect leaders of the company
Money from stock is used to start-up and run the corporation

17. “…who face limited liability for the firm’s debts.”
Limited liability (limited losses/debts, can only lose what you put in, NOT personal assets, personal items)
Only the corporation, not the owners, is responsible for any debt of the corporation
Stockholders can only lose the amount of money they have invested in the business

18. Advantages of Corporations
Limited liability for owners
Unlimited Life
Ability to raise financial capital through stock
Can grow very large

19. Disadvantages of Corporations
Difficult to start-up
Owners/stockholders may have very little say in management
More government regulation
Higher tax rates

20. Law of Demand When prices goes up the quantity demanded goes down.
When the price goes down the quantity demanded goes up.

21. Demand Curve ..

22. Demand Shift Factors Population – more people = more demand
Income – more money = more demand
Substitutes – higher price for butter decreases demand for butter and increases the demand for margarine
Complements – higher price for peanut butter usually reduces demand for peanut butter and for jelly
Tastes and Preferences – more popular = more demand

23. Demand Shifts
rise in demand = rise in demand curve to the right. (high demand for turkeys before Thanksgiving)
drop in demand – lower in demand curve to the left (little demand for turkeys after Thanksgiving).

25. Law of Supply
Suppliers will offer more (higher quantity) of a good at a high price
As price increases, quantity the supplier is willing to supply increases
Price and quantity supplied go in same direction

26. Economics choices for the supplier (the producer)
1. fixed costs – a cost that will remain fairly constant; the price of rent,
2. variable costs – costs that will change, a producer will not pay the same every month; the electricity
3. total costs – the fixed costs + the variable costs
4. marginal costs – the cost of adding one more unit of production (what is the cost of producing just one more item, one more “baconator” if new employees/machinery must be included in the pricing?)

27. Supply shifts too! Cost of Resources (input)
(also called factors of production)
If the price of resources used in production increase, the supply will decrease
Price of resources decreases, supply increases
Government Influence (taxation + regulation)
If government limits supply, the supply decreases
If government supports more supply, the supply increases (ex/ farm subsidies)
If government regulations increase production costs (environmental regulations EPA, or safety regulations OSHA), supply may decrease

30. When the supply and demand curves intersect, the market is in equilibrium

31. Surplus is when there is an excess supply of a product.
Shortage is when the quantity demanded is higher than the available supply

32. Monopoly How does competition affect price and output?
1. Only one seller in the market
2. Extremely difficult to enter the market
3. Produces 1 product
4. Doesn’t need to compete
5. Full control over price
Examples
Duke Power
Pizza at Wake Forest

33. Monopolies Sometimes called a “market failure” Full price control
Total market power
Should the government regulate monopolies?

34. Oligopoly How does competition affect price and output?
1. A few (2-4) sellers in the market
2. Difficult to enter the market
3. Similar products
4. Compete with few other sellers
5. Some control over price
Examples
Forsyth and Baptist Hospital
American Car Companies

35. Competitive Market How does competition affect price and output?
1. Large number of sellers
2. Easy entry into the market
3. Very similar products
4. Highly competitive
5. Very little price control
Examples
Pizza
Groceries

36. Monetary policy $$$$$$$$$$$$$$$$$$$$$$$$$$$
Controlled by the Federal Reserve System
Discount rate
The rate the Federal Reserve Bank (a bank for the banks) charges a member bank for a loan.
Open market operations
Buying and selling of government bonds

37. Monetary policy $$$$$$$$$$$$$$$$$$$$$$$
Loose monetary policy (to help the business cycle expand)
Decrease the discount rate, decreases interest rates
Buy bonds – gives $ to bond holders
Tight monetary policy (to help the business cycle contract)
Increase the discount rate – increases interest rates, fewer customers/businesses will borrow $
Sell bonds – takes money from bond holders

38. Monetary policy $$$$$$$$$$$$$$$$$$$$$$$$$$$
Loose monetary policy
Creates more money
Long term could cause inflation
Tight monetary policy
Reduces the money available
Long term could cause unemployment if consumers stop spending and businesses begin to lay off employees

39. Fiscal (freaking, federal, fiscal tax me and spend it on you policy)
Government spending
Spending money on infrastructure (roads, bridges, dams, flood gates…)
Military, education, Medicare, Social Security
Unemployment, health care
Government taxes
Progressive income taxes
Excise taxes (gas, alcohol, cigarettes, tanning)

40. Fiscal (freaking, federal, fiscal tax me and spend it on you policy)
Loose fiscal policy
Increase government spending
Decrease taxes
Tight fiscal policy
Decrease government spending
Increase taxes

41. Fiscal (freaking, federal, fiscal tax me and spend it on you policy)
Loose fiscal policy effects
More $ for consumers and businesses
Business cycle will expand
Tight fiscal policy effects
Less $ for consumers and businesses
Business cycle will contract

42. the business cycle
peak
...
contraction
expansion
trough
trough

43. the business cycle ... peak peak peak trough
recession, 6 months of declining GDP
depression, high unemployment, low GDP, low CPI

44. business cycles, examples
...

45. Two major indicators...
GDP = Gross domestic product= total dollar value of all final goods and services produced in a country
CPI = Consumer Price Index= measure of change in price over time of specific goods/services