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You’ve successfully managed your
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Up next…..
Up Coming Stuff
• Bonus Work Chapter 4 Thursday, October 6, 2005.
• Quiz Chapter 4 Thursday October 6, 2005.
• Bonus Work Chapter 5 Thursday, October 13,
2005.
• Quiz Chapter 5 Thursday, October 13, 2005.
• Test Date this unit Tuesday, October 18, 2005.
Chapters: 4-5-6-7-8-9-10-11-12
•
•
•
•
•
•
•
Consumers (C) / Households
Businesses (I) / Capital Expenditure
Government (G) / Government Purchases
Exports (X)
Net of Exports
Imports (M)
Balance of Payments
C + I + G + X – M = GDP = $10.6 Trillion
Again we need to ask how we deal with those
limited resources and unlimited wants.
• This chapter adds in the idea that government can,
does and should play a role in dealing with that
basic economic question!
I. Evolution of Economics?
• A. 3 basic systems answer 3 basic question (what,
how and for who).
•
1. Traditional
•
2. Market
•
3. Command
• B. How did we evolve from one system to the
next?
•
Also how can we create a decent society and
continue to improve life for all in society??
I. Evolution cont…
• C. Traditional
•
1. Due to travel and increase in populations
this inefficient economic system gave way to free
markets.
•
2. Barter proves to be difficult – double
coincidence of wants – the need to match-up with
who is wanting what you’re selling.
•
3. Money is created as a medium of exchange.
I. Evolution cont…
• D. Market
• 1. Adam Smith – “The Wealth of Nations”
(1776) Father of Economics.
• 2. Not only concerned about creating free
markets but also constructing a decent society.
• 3. Government should play a role but a limited
one.
• 4. Liberal versus Conservative views.
I. Evolution cont…
• E. Command
•
1. Developed out of the writings of Karl
Marx. Communist Manifesto (1848).
•
2. Marx’s ideal was to have the working
class rise up and take control in a violent
revolution.
•
3. Government was needed to ensure
that all in society were taken care of.
Marx’s ultimate vision!
•
•
•
•
Utopia.
No government.
No money.
When all needs are satisfied people will focus on
the gifts they can contribute to society.
• “To each according to his needs, from each
according to his ability.”
• What is he missing?
Pure Capitalism
and the Market
System
CHAPTER FOUR
II. CAPITALIST IDEOLOGY
A. PRIVATE
PROPERTY
1. Property is owned by individuals
and firms not government.
2. The private ownership of capital
is what gives capitalism its name.
3. To be able to own your own property
provides incentive.
II. CAPITALIST IDEOLOGY
PRIVATE
PROPERTY
B. FREEDOM OF
ENTERPRISE
& CHOICE
1. Private businesses are free to acquire resources and organize
those resources to their liking.
2. Business is free to decide what to do with resources and
individuals can decide what lines of work to enter into.
3. Consumer is the most free – they ultimately decide what is to be
produced.
II. CAPITALIST IDEOLOGY
PRIVATE
PROPERTY
FREEDOM OF
ENTERPRISE
& CHOICE
C. ROLE OF
SELF-INTEREST
1. Individuals and businesses will make decisions based on
what will benefit them the most.
II. CAPITALIST IDEOLOGY
PRIVATE
PROPERTY
FREEDOM OF
ENTERPRISE
& CHOICE
ROLE OF
SELF-INTEREST
D. COMPETITION
1. In pure capitalism the numbers of producers and buyers are
large enough that individuals would be unable to “rig” the system.
2. Given a large enough market individuals will have no impact
on price.
3. The diffusion of economic power controls and limits the potential
abuse of that power.
4. Freedom to enter and exit, expand or contract allows businesses to
remain competitive and efficient.
CAPITALIST IDEOLOGY
PRIVATE
PROPERTY
FREEDOM OF
ENTERPRISE
& CHOICE
ROLE OF
SELF-INTEREST
COMPETITION
LARGE
NUMBERS
CAPITALIST IDEOLOGY
PRIVATE
PROPERTY
LARGE
NUMBERS
ROLE OF
SELF-INTEREST
ENTRY
EXIT
&
FREEDOM OF
ENTERPRISE
& CHOICE
COMPETITION
I. CAPITALIST IDEOLOGY
PRIVATE
PROPERTY
FREEDOM OF
ENTERPRISE
& CHOICE
ROLE OF
SELF-INTEREST
COMPETITION
E. MARKETS
& PRICES
1. Markets are the basic organizing
force of a capitalist economy.
2. It is where all of the previous
factors are brought together
and decisions are made.
II. CAPITALIST IDEOLOGY
PRIVATE
PROPERTY
FREEDOM OF
ENTERPRISE
& CHOICE
ROLE OF
SELF-INTEREST
COMPETITION
MARKETS
& PRICES
F. LIMITED
GOVERNMENT
1. The need for gov’t will remain small due to the efficiency of capitalism
II. CAPITALIST IDEOLOGY
G. Other Characteristics all have
1. Extensive Use of Capital Goods
- Opportunity for technological advancement is more pronounced.
- Acquiring capital and technology leads to greater efficiency.
- Capital can be used to produce consumer goods more effectively.
- However, keep in mind there still is a trade off and opportunity cost.
II. CAPITALIST IDEOLOGY
G. Other Characteristics all have
1. Extensive Use of Capital Goods
2. Specialization and Efficiency
-
Self-sufficiency breeds inefficiency.
Division of labor – human specialization.
Geographic – what are the resources best suited for?
Results in greater total output.
II. CAPITALIST IDEOLOGY
G. Other Characteristics all have
1. Extensive Use of Capital Goods
2. Specialization and Efficiency
3. Use of Money
- facilitates the exchange of goods and services.
CAPITALIST IDEOLOGY
Extensive Use of Capital Goods
TECHNOLOGICAL ADVANCE
CAPITALIST IDEOLOGY
Extensive Use of Capital Goods
TECHNOLOGICAL ADVANCE
ROUNDABOUT PRODUCTION
CAPITALIST IDEOLOGY
Specialization and Efficiency
ROLE OF
SPECIALIZATIO
N
CAPITALIST IDEOLOGY
Specialization and Efficiency
DIVISION OF LABOR
CAPITALIST IDEOLOGY
Specialization and Efficiency
GEOGRAPHIC
SPECIALIZATION
Use of Money
Medium of Exchange
Use of Money
Medium Difficulties
of Exchange
NOTES:
in a barter
system Coincidence
of wants
III. THE COMPETITIVE MARKET
SYSTEM
A.The Five Fundamental Questions....
1. How much to produce?
THE COMPETITIVE MARKET SYSTEM
The Five Fundamental Questions....
How much to produce?
2. What is to be produced?
THE COMPETITIVE MARKET SYSTEM
The Five Fundamental Questions....
How much to produce?
What is to be produced?
3. How is the output to be produced?
THE COMPETITIVE MARKET SYSTEM
The Five Fundamental Questions....
How much to produce?
What is to be produced?
How is the output to be produced?
4. Who is to receive the output?
THE COMPETITIVE MARKET SYSTEM
The Five Fundamental Questions....
How much to produce?
What is to be produced?
How is the output to be produced?
Who is to receive the output?
5. Can the system adapt to change?
Economic (opportunity) Costs
Profits to an
Economist
Profits to an
Accountant
Economic
Profits
Implicit costs
(including a
normal profit)
Explicit
Costs
Copyright McGraw-Hill, Inc. 1999
Accounting
Profits
Total
Revenue
Accounting
costs (explicit
costs only)
B. How do we decide what to
produce?
• 1. Common sense dictates you will produce when
profit exceed costs.
• 2. Compare TR vs.TC; total revenue vs. total
costs.
• 3. TR = P X Q(produced/supplied).
• 4. TR – TC = profits or losses.
• 5. TR>TC industry will expand.
• 6. TR<TC industry will contract or find ways to
lower costs in the production process.
B. What cont…
• 7. In economics costs are measured differently.
• 8. Economic costs give payments to the 4 factors
of production CELL vs. WPiR.
• 9. Accountants typically include WiR but not the
P as a cost.
• 10. Economic costs include those payments to the
entrepreneur also known as normal profits.
• 11. Normal profits indicate that a resource is
being used.
Economic Costs
Economic Costs or
Opportunity Costs
Forgoing the
opportunity
to produce alternative
Explicit
Costs
goods and
services
Implicit Costs
Normal Profits
Normal Profits
• Treated as a cost
Normal Profits
• Treated as a cost
• Required to attract & retain resources
Normal Profits
• Treated as a cost
• Required to attract & retain resources
Economic or Pure Profits
Normal Profits
• Treated as a cost
• Required to attract & retain resources
Economic or Pure Profits
Economic
profit
Total
revenue
Opportunity cost
of all inputs
Profits to an
Economist
Profits to an
Accountant
Total
Revenue
Copyright McGraw-Hill, Inc. 1999
Profits to an
Economist
Profits to an
Accountant
Total
Revenue
Explicit
Costs
Copyright McGraw-Hill, Inc. 1999
Accounting
costs (explicit
costs only)
Profits to an
Economist
Profits to an
Accountant
Accounting
Profits
Total
Revenue
Explicit
Costs
Copyright McGraw-Hill, Inc. 1999
Accounting
costs (explicit
costs only)
Economic (opportunity) Costs
Profits to an
Economist
Implicit costs
(including a
normal profit)
Explicit
Costs
Copyright McGraw-Hill, Inc. 1999
Profits to an
Accountant
Accounting
Profits
Total
Revenue
Accounting
costs (explicit
costs only)
Economic (opportunity) Costs
Profits to an
Economist
Profits to an
Accountant
Economic
Profits
Implicit costs
(including a
normal profit)
Explicit
Costs
Copyright McGraw-Hill, Inc. 1999
Accounting
Profits
Total
Revenue
Accounting
costs (explicit
costs only)
B. What cont…
• 12. A product will be produced when
TR=TC.
• 13. Industry will expand when TR>TC.
• 14. Economic profit is what lures other
producers into the industry because the
producers have to consider the opportunity
cost of what they are giving up.
THE COMPETITIVE MARKET
The Market System At Work....
Revenues & Costs
THE COMPETITIVE MARKET
The Market System At Work....
Revenues & Costs
Normal Profit
Economic or Pure Profit
THE COMPETITIVE MARKET
The Market System At Work....
Revenues & Costs
Normal Profit
Economic or Pure Profit
Expanding & Declining Industries
THE COMPETITIVE MARKET
The Market System At Work....
Revenues & Costs
Normal Profit: TR = TC
Economic or Pure Profit: TR>TC
Expanding & Declining Industries
15.“Dollar Votes” - Consumer Sovereignty
Consumers ultimately decide “what” with
their demand.
THE COMPETITIVE MARKET
NOTES:
The Market
System At Work....
Circular Flow
Revenues & Costs
Normal Profit
Economic or Pure Profit
Expanding & Declining Industries
“Dollar Votes” - Consumer Sovereignty
THE COMPETITIVE MARKET
NOTES:
The Market
System At Work....
Circular Flow
Revenues & Costs
Normal Profit
Economic
orDemand
Pure –Profit
16. Derived
Demand for resources
are&
dependent
on Industries
Expanding
Declining
Demand for the
ultimate
product. Sovereignty
“Dollar Votes”
- Consumer
The Circular Flow!
THE COMPETITIVE MARKET
C. Organizing Production....
Production & Profits
Least Cost Production
Work Sheet on Least Cost
1. Producers will employ the least cost technique to produce their
products.
2. If resources or technology change, how those resources
may be used will change.
Total Revenue = P x Q
-Total Cost = (Q x Land + Q x Labor + Q x Capital + Q x Entre.)
+ Total Profit
0 Breakeven
- Total Loss
Total Revenue = P x Q
-Total Cost = (Q x Land + Q x Labor + Q x Capital + Q x Entre.)
+ Total Profit
0 Breakeven
- Total Loss
Total Revenue = P x Q
-Total Cost = (Q x Land + Q x Labor + Q x Capital + Q x Entre.)
+ Total Profit
0 Breakeven
- Total Loss
THE COMPETITIVE MARKET
Organizing Production....
Production & Profits
Least Cost Production
Distributing Total Output
THE COMPETITIVE MARKET
C. Organizing Production....
Production & Profits
Least Cost Production
Distributing Total Output
3. Accommodating Change
THE COMPETITIVE MARKET
Organizing Production....
Production & Profits
Least Cost Production
Distributing Total Output
Accommodating Change
- Guiding Role of Prices
Consumers send signals to the producers through changes in demand.
As the demand curve shifts prices change and producers respond by
reorganizing their resources.
THE COMPETITIVE MARKET
Organizing Production....
NOTES:
Initiating Progress
Production & Profits
Least Cost Production
Distributing Total Output
Accommodating Change
Guiding Role of Prices
THE COMPETITIVE MARKET
Organizing Production....
NOTES:
Initiating Progress
Production & Profits
Least Cost Production
Distributing
Total
Output
Capital
Accumulation
Accommodating
Change
Guiding Role of Prices
D. THE INVISIBLE HAND
1.The Case for the Market System
- Efficiency
- Incentives
- Freedom
Circular Flow Model
$ COSTS
$ INCOMES
WPiR
RESOURCE
MARKET
INPUTS:
CELL
RESOURCES
CELL
$
$
HOUSEHOLDS
BUSINESSES
GOODS &
$
SERVICES
$ REVENUE
GOODS &
SERVICES
PRODUCT
MARKET
$
$ CONSUMPTION
Chapter
Conclusions
private property
freedom of enterprise
freedom of choice
self-interest
competition
roundabout production
specialization
division of labor
medium of exchange
barter
money
Five Fundamental Questions
economic costs
normal profit
economic profit
expanding industry
declining industry
consumer sovereignty
dollar votes
derived demand
guiding function of prices
“invisible hand”
THE MIXED ECONOMY:
PRIVATE & PUBLIC SECTORS
Chapter 5