1. The American Free Market System Unit 7a Economics Ms. Henry

2. Sweet Tarts: Factors of production

3. Economic System The system of production, distribution and consumption. Production- Making goods and services Distribution- Getting goods and services to the consumer Consumption- Using goods and services

4. Four Questions All Economic Systems Must Address

5. 1. What is produced? Production Goods and services must satisfy the consumers wants and desires

6. 2. HOW should these goods be produced? Factors of Production  Capital Entrepreneurship  Land  Labor Combine the factors of production to make or produce the goods and services

7. 3. For WHOM are the goods and services produced? Distribution Getting the goods and services from producer to consumer

8. 4. HOW MANY goods and services should be produced? Consumption Make enough to have a large profit and still have consumer demand. How many is determined by supply and demand. Make enough to have a large profit and still have consumer demand. How many is determined by supply and demand.

9. Goods Anything that can be grown or manufactured Supply The degree of availability of an item

10. Producer Someone who creates or manufactures a good or service through physical or mental effort Services Something that a person does for someone else in exchange for money or value Consumer A person who buys a good or service

11. Limited Resources Items that are scarce in nature and cannot be renewed Economics The study of the production, distribution and the consumption of goods and services Unlimited Resources Materials that are endless and/or can be renewed

12. DemandThe amount of a good or service that consumers are willing and able to buy ScarcityA limited supply of resources in comparison to unlimited wants and needs

13. Market Price The price that satisfies both producers for profit and consumers for value Opportunity Cost What you give up in order to get something.

14. Challenges in a Free Market:  Resources  Scarcity  Opportunity Cost

15. Good  Anything that can be grown or manufactured (made)  Food  Clothes  Cars

16. Service  Something a person does for someone else in exchange for money or value.  doctor  hairdresser  waiter

17. Resources  Natural  Human  Capital  Combine to make goods and services

18. Our Basic Economic Problem: People have Unlimited Wants Food, clothing, shelter, schools, hospitals, cars, transportation But Resources are Limited Land, soil, minerals, fuels, people, money, technology

19. Questions and choices

20. SCARCITY The inability to satisfy all wants at the same time; the NEEDS are greater than the RESOURCES Since resources are LIMITED consumers and producers must make CHOICES

21. Process of production

22. Scarcity forces us to choose which needs and wants to satisfy with available resources. Scarcity affects decisions concerning what and how much to produce, how goods and services will be produced and who will get what is produced. CHOICE: selecting from a set of alternatives OPPORTUNITY COST: what is given up when the choice is made.

23. Good and services

24. Production(Sellers)  Combining resources to make goods and services. Available resources and consumer preference determine what is produced

25. Consumption(Buyers)  Using goods and services  Consumer preference and price determine what is purchased.

26. Economic Proposition In EnglishLesson for Life Scarcity You can't have everything you want. Acceptance of scarcity will help you make more reasoned choices.

27. Economic Proposition In EnglishLesson for Life Alternatives Different options from which you can choose. There are many different ways to allocate resources and to solve problems.

28. Economic Proposition In EnglishLesson for Life Choice Because you can't have everything you want, you have to make choices from a list of alternatives. When policy- makers decide on a particular resource allocation, recognize that a choice had to be made due to scarcity. You may not like the alternative chosen, you may question the choice, but the villain is scarcity.

29. Economic Proposition In EnglishLesson for Life Trade-offs Choices involve giving up something to get something. All choices have consequences, both positive and negative. You are responsible for the consequences of your choices. Since you make choices, you can't be a victim.

30. Economic Proposition In EnglishLesson for Life Opportunity Cost What is given up when a choice is made. All choices have opportunity costs. A good idea is only a good idea if its value is greater than the value of its opportunity cost. Voters must always identify the opportunity cost of a particular policy.

31. Concept: Public Good What's wrong with this picture? Concept: Public Good What's wrong with this picture? Sunsets are a non-excludable good, in that non-payers can't be prevented from enjoying them. Other examples of non- excludable goods are national defense, fireworks, and lighthouses. Private firms tend to under produce non- excludable goods because customers have little incentive to pay for them. Public goods are both non-excludable and non- rival. Sunsets are a non-excludable good, in that non-payers can't be prevented from enjoying them. Other examples of non- excludable goods are national defense, fireworks, and lighthouses. Private firms tend to under produce non- excludable goods because customers have little incentive to pay for them. Public goods are both non-excludable and non- rival.

32. Concept: Opportunity cost What's wrong with this picture? Concept: Opportunity cost What's wrong with this picture?  Most of the homes on this lakefront are expensive and built close to each other, so it's likely that the lakefront lots are highly valued. This, in turn, suggests that the opportunity cost of living in the shack is high. We rarely see shacks on expensive lots because the owners usually conclude that they'd do better by selling their property and buying a nicer house on a less desirable lot.

33. Concept: Economies of scale What's wrong with this picture? Concept: Economies of scale What's wrong with this picture? It's hard to imagine that Mark and Sally will make a profit with their business. Suppose a customer asks them to deliver a small package to a city 200 miles away. Unless they have many other packages going to the same city, they'd have to charge a lot just to cover their variable costs--labor, gas, and depreciation. They wouldn't be able to compete against companies like UPS and FedEx, which can keep their costs down by handling a huge volume of parcels.. It's hard to imagine that Mark and Sally will make a profit with their business. Suppose a customer asks them to deliver a small package to a city 200 miles away. Unless they have many other packages going to the same city, they'd have to charge a lot just to cover their variable costs--labor, gas, and depreciation. They wouldn't be able to compete against companies like UPS and FedEx, which can keep their costs down by handling a huge volume of parcels..

34. Concept: Equilibrium, law of one price What's wrong with this picture? Concept: Equilibrium, law of one price What's wrong with this picture? The more expensive gas station probably won't get many customers and will be forced to lower its prices. The Law of One Price says that identical goods in efficient markets must have only one price in equilibrium. The more expensive gas station probably won't get many customers and will be forced to lower its prices. The Law of One Price says that identical goods in efficient markets must have only one price in equilibrium.

35. Concept: Opportunity cost What's wrong with this picture? Concept: Opportunity cost What's wrong with this picture? People offer this service in less developed countries, but they don't in richer countries. Most Americans have scales at home (a substitute for public scales), so the demand for this service is small. It's unlikely that this man would get enough customers to cover the opportunity cost of his time. People offer this service in less developed countries, but they don't in richer countries. Most Americans have scales at home (a substitute for public scales), so the demand for this service is small. It's unlikely that this man would get enough customers to cover the opportunity cost of his time.

36.  People often profess outrage when corporations put profits ahead of safety, as evidenced by a jury's $4.9 billion verdict against General Motors after a design flaw led to a fiery crash. But ordinary people cut corners on safety, too. We could make ourselves safer, for example, by wearing helmets when we drive. But almost nobody takes this precaution except for race car drivers. It appears that most of us are quite willing to sacrifice safety in order to keep our hair looking nice. Concept: Risk and Opportunity cost What's wrong with this picture? Concept: Risk and Opportunity cost What's wrong with this picture?

37. Supply and Demand

38. Scarcity is the inability to satisfy all wants at the same time due to limited resources Choices must be made as to what to produce, how much to produce and who will receive what is produced. PRICE: Mechanism to decide who gets goods and services. The amount that satisfies both producers for profit and consumers for value.

39. Supply and Demand determine price through their interaction. DEMAND: is the amount of a good or service that consumers are willing and able to buy at a certain price SUPPLY: is the amount of a good or service that producers are willing and able to sell at a certain price. LAW OF SUPPLY Businesses will provide more products when they can sell them at higher prices LAW OF DEMAND Buyers will demand more products when they can buy them at lower prices INCENTIVES Incite or motivate Change economic behavior Something that spurs someone into action: sale, coupons, etc.

40. Supply The degree of availability of an item; What PRODUCERS want to sell. Law of Supply Producers are in business to make a profit so they will supply more if the price is HIGH.

41. If price is…. Supply is… If price is…. Supply is… THE LAW OF SUPPLY

42. DemandThe amount of a good or service that CONSUMERS are willing and able to buy; what CONSUMERS want. Law of Demand As price DECREASES the amount consumers want to buy INCREASES. Buyers want to buy it at a low price.

43. THE LAW OF DEMAND If price is…. Demand is… If price is…. Demand is…

44. Economic Systems  Command  Mixed  Free Market

45. Economic Systems  The type of economy a country has is based on the amount of government involvement in economic decisions.

46. Command Economy  The central government makes decisions and determines how resources will be used.  The central government owns property and resources.  Businesses are not run for profit.  No competition  Lack of consumer choice  The government sets the prices of goods and services.  China, North Korea, Cuba

47. Free Market Economy  Also known as capitalism or free enterprise  Private ownership of property and resources (owned by individuals)  Individuals and businesses make profits  Individuals and businesses compete  Economic decisions are made by supply and demand  Profit is a motivator for productivity  No government involvement  Consumer sovereignty: buyers determine what is produced

48. Mixed Economy  Most common type of economic system  Government and individuals share the decision making process  Individuals and businesses make decisions for the private sector  Individuals own the means of production  Government makes plans for the public sector  Government guides and regulates production of goods and services offered.  A greater government role than in a free market economy  Most effective economy for providing goods and services  U.S. and most Western European countries are mixed economies.

49. Who owns the resources and how are they allocated? Who makes the decisions about what to make and sell? TechnologyHow are prices determined? Free Market Economy Resources own privately; allocated according to price Consumer and producers AdvancedSupply and demand Mixed Economy Private individuals and the government Consumers and producers for the private sector; government for the public sector AdvancedCompetition or set by government Command Economy Central government owns and allocates Central Government Advanced or developing Set by government

50. The U.S. Economy  The U.S. Economy is a MIXED economy where individuals, businesses and the government make economic decisions.

51. The U.S. Economy is a MIXED Economy Profit Money left over after all business expenses have been paid.

52. The U.S. Economy is a MIXED Economy Competition Rivalry between businesses for the same customers; results in better quality.

53. The U.S. Economy is a MIXED Economy Private Property Individuals can own the means of production & property without undue government interference.

54. The U.S. Economy is a MIXED Economy Consumer Sovereignty Consumers determine what goods and services are produced by what they buy.

55. The U.S. Economy is a MIXED Economy Free Markets Markets are allowed to operate without undue interference from the government. Money, goods and services flow continuously among individual households, businesses and the government

56. The Circular Flow of the Economy

57. The Circular Flow of Economics  Resources, goods and services and money flow continuously among households, businesses and the government in the U.S. economy.

58. The Circular Flow of Economics  Individual households own the resources used in production; sell the resources and use the income to purchase products.

59. The Circular Flow of Economics  Businesses (producers) buy resources used in production; sell the resources and use the income to purchase products. Businesses provide households with income and goods and services.

60. The Circular Flow of Economics  Governments use tax revenue from individuals and businesses to provide public goods and services.

63. Businesses provide households with income and goods and services.

64. The government supplies businesses with public goods and services and payments for products purchased.

65. Businesses provide the government with taxes and goods and services.

66. The government provides households with income and public goods and services.

67. Households provide the government with labor (workforce) and taxes

68. Households supply businesses with labor (workforce) and payments for goods and services

70. Unit 7a: Economics Vocabulary

71. GOODS

72. Anything that can be grown or manufactured

73. SUPPLY

74. The degree of availability of an item

75. Producer

76. Someone who creates or manufactures a good or service through physical or mental effort

77. Services

78. Something that a person does for someone else in exchange for money or value

79. Consumer

80. A person who buys a good or service

81. Limited Resources

82. Items that are scarce in nature and cannot be renewed

83. Economics

84. The study of the production, distribution and the consumption of goods and services

85. Unlimited Resources

86. Materials that are endless and/or can be renewed

87. Demand

88. The amount of a good or service that consumers are willing and able to buy

89. Scarcity

90. A limited supply of resources in comparison to unlimited wants and needs

91. Market Price

92. The price that satisfies both producers for profit and consumers for value

93. Opportunity Cost

94. What you give up in order to get something

95. The Factors of Production Anything that goes into the making of a good or service

96. Capital  tools  machinery  money  technology

97. Entrepreneur Business owner and risk taker combines the factors of production

98. Land Natural resources

99. Labor Workers and their time and energy

100. Business Organizations The 15 million businesses in the U.S. fall into three categories: sole proprietorships, owned by a single individual, partnerships, with more than one owner sharing the risks and profits and corporations, owned by their stockholders.

101. Sole Proprietorship  1 owner The owner takes all the risks  Supplies capital, hires help, pays taxes  The owner makes all the profits  The owner is solely responsible for losses

102. Partnership More than one owner (2+) Risks are shared amongst the owners Profits are shared amongst the owners Often more successful than sole proprietorships Responsibilities are shared

103. Corporation Owned by stockholders  Authorized to act as a legal person regardless of the number of owners  Owners share the profits  Liability is limited to investment (you can only loose as much as you put in)  Raise money by selling stocks  No one is responsible for corporation’s debt if it fails

104. resources