BASIC CHARACTERISTICS OF ECONOMIC SYSTEMS (FACTORS THAT HELP
CLASSIFY ECONOMIC SYSTEMS)
•
Property Rights – can private property be held and accumulated? Are private
property rights respected and protected in law?
•
Incentives – does the desire for individual or private profit stimulate economic
growth? Is personal profit based upon open and free markets allowed or
possible?
•
Economic Freedom – can individuals start their own business? Is
entrepreneurship allowed and/or encouraged? What barriers prevent or make
economic activity difficult?
•
Competition – the struggle among producers for the dollars of consumers – is
competition encouraged in order to meet supply and demand and to regulate
prices? Is competition with state-controlled industries allowed?
•
Role of Government – how involved is the government in economic activity? Does
the government own / control most or all major industries? Does the government
regulate industries to ensure quality and safe production?
ECONOMIC PHILOSOPHERS – INFLUENCES OF CURRENT
ECONOMIC SYSTEMS
•
Adam Smith
• John Maynard Keynes
• Friedrich Hayek
• Milton Friedman
PRODUCTION POSSIBILITIES FRONTIER
•
The production possibilities of an economy--the alternative combinations of two
goods that an economy can produce with given resources and technology.
•
A production possibilities curve (PPC) represents the boundary or frontier of the
economy's production capabilities, hence it is also frequently termed a production
possibilities frontier (PPF).
•
As a frontier, it is the maximum production possible given existing (fixed)
resources and technology.
•
Producing on the curve means resources are fully employed, while producing
inside the curve means resources are unemployed.
PPF CURVE, P. 13-14
EFFICIENCY
• Using resources in such a way as to maximize the production or
output of goods and services.
• No waste of resources.
PRINCIPLES OF FREE-ENTERPRISE
•
Property Rights – protections of private property rights are enshrined in the U.S. Constitution,
notably in the 5th Amendment (cannot be deprived of property without due process &
eminent domain protections) and 14th Amendment (due process expectation applied to
states).
•
Incentives – profit motive provides people with an incentive to expend energy and their
talents in order to make money. Innovative ideas and talent are rewarded in a free enterprise
system.
•
Economic Freedom – the United States has embraced the idea of open economic
opportunity, meaning that anyone who desires to can compete in the marketplace. Your
success (or failure) is yours to enjoy (or suffer).
•
Competition – Because producers and consumers are free to enter into contracts and do
business with whomever they choose, the U.S. free enterprise puts a great value on
competition in the market place. If a business can create a better product for less money, it
will benefit while its competitors suffer from less business and smaller profits.
•
Limited Role of Government – the U.S. government has a constitutional responsibility to
protect property rights, contracts, and other business activities. Without such protections,
incentive for innovation would be lost.
BENEFITS OF FREE-ENTERPRISE
•
Individual Freedom of Consumers – consumers are free to buy goods and
services as they see fit
•
Individual Freedom of Producers – producers are free to make and sell products
with a minimum of government regulation
•
Variety of Goods – because industry is responsive to consumer demand,
Americans are inundated with a variety of like goods of varying quality and price
•
Responsive Prices – prices reflect consumer demand
•
Investment Opportunities – Private enterprise requires investment, especially
when companies are newly forming. Anyone with capital can become an investor.
•
Creation of Wealth – profit motive and self-interest drives free-enterprise systems.
By investing money and time into an enterprise, individuals hope to make a profit.
FACTORS OF PRODUCTION
• Land - refers to the natural resources that are available and used
in the production of goods.
• Labor -refers to the human inputs of work to produce the goods
and services. For example, the training required for employees
• Capital - refers to the tools and machines that are required for
the production of the product. For example, when making cars,
the capital would include the factory and all the machinery in the
factory used in making the car.
• Entrepreneurship - refers to the economic motivation for an
individual to attempt to make a profit from an idea.
GOVERNMENT
Essential question: What is the appropriate role of government in
times of financial crisis?
ROLE OF GOVERNMENT
In an attempt to stave off what were dire predictions about the collapse of the U.S.
economy, the U.S. government did the following:
•
Placed Fannie Mae & Freddie Mac into conservatorship
•
Rescued American Insurance Group (AIG) and Citigroup
•
Supported massive fiscal policy plans implemented by the Federal Reserve Banks
•
Provided billions of dollars in economic stimulus programs
•
Rescued General Motors from bankruptcy
ECONOMIC GOALS
•
Economic Efficiency – maximizing resource and infrastructure potential to realize an
economy’s full potential
•
Economic Freedom – the ability / opportunity for individuals to make economic choices
without external interference
•
Economic Stability – keeping the economy stable and thereby maintaining consumer
and producer confidence in the economy and financial systems. Indicators of stability
are general price levels and health of the nation’s financial institutions.
•
Economic Security – reassurance that goods and services will be consistently available
to consumers and that a safety net exists for economically disadvantaged persons
•
Economic Equity – the decisions that determine how economic wealth will be divided
amongst society
•
Economic Growth & Innovation – prosperity cannot continue without continued
economic growth. Growth is not possible without planning and innovation.
CIRCULAR FLOW MODEL OF A FREE MARKET ECONOMY
Video - https://www.youtube.com/watch?v=_PKH2wtDT3E
THE CIRCULAR FLOW MODEL
•
Used to visualize the interdependent relationship of producers and consumers
within a market.
•
Money flows through the system one way – goods and services and factors of
production flow another.
•
It shows the 'big picture' – how key parts of the macro economy fit together.
Households (consumers) and government provide businesses with payments in
exchange for goods and services..
•
Business firms and government make payments to households (workers and
investors) in exchange for labor and other resources.
•
Governments provide public goods and services to households and businesses in
exchange for taxes.
CIRCULAR FLOW MODEL LIMITATIONS
While a useful model, it leaves out a number of relevant, real-world
factors, including:
• Household saving
• Presence of financial institutions (loans, capital gains, etc.)
• Presence of government (taxation, subsidies, etc.)
• Presence of overseas sectors (a global economy) resulting in
imports and exports
CIRCULAR FLOW MODEL: ROLE OF GOVERNMENT
•
The government can increase or decrease the
monetary and physical flow through taxation,
corporate laws, and stock market regulation (fiscal
policy)
• Government is expected to protect property rights,
contracts, businesses, and to keep the consumer safe
and informed.
TEAM ACTIVITY 1
• Draw and label a circular flow model of a given
industry and analyze the effects of government policy
in that industry.
• Example industries: automobile manufacturing,
clothing and textile manufacturing, electronics
manufacturing, construction and building
engineering, furniture manufacturing, etc.
ECONOMIC PERFORMANCE
Essential questions:
• What are the four types of unemployment and how are
they viewed by economists in a free market system?
• How is GDP used as an economic indicator?
UNEMPLOYMENT
Unemployment – the unemployment rate provides an important clue to
the health of the economy. The four types of unemployment are:
o Frictional – occurs when people take time to find a new job
o Structural – occurs when unemployed worker’ skills do not match
available jobs
o Seasonal – occurs when industries slow or shut down production for
a period, or because of harvest schedules or vacations
o Cyclical – follows the business cycle (unemployment rises during
recessions and falls during periods of economic growth)
Full employment occurs when there is no cyclical unemployment.
OBJECTIVES
•
Define cyclical, frictional unemployment, and structural
unemployment.
•
Interpret data tables from the Bureau of Labor Statistics.
•
Compare national and local unemployment data.
•
Identify major employers and industries in the local
community.
•
Analyze the effects of types and diversification of local industry
on changes in local unemployment rates.
TEAM ACTIVITY 2
• Video - https://www.youtube.com/watch?v=o6v8QkSkN3E
• Use the Bureau of Labor Statistics website to track
unemployment rates for the city of Arlington.
• http://www.bls.gov/web/metro/laummtrk.htm
• After researching information about the industrial makeup of the
community, explain whether local unemployment rates tend to
remain stable or tend to reflect changes in national economic
growth and recession.
OPPORTUNITY COST ASSESSMENT
Write a paragraph explaining the opportunity
costs of either going to college, joining the
work force, or going into the military after high
school.
GROSS DOMESTIC PRODUCT (GDP)
Gross Domestic Product (GDP) & Growth
•
Gross Domestic Product (GDP) – The dollar value of all final goods and services
produced within a country’s borders in a given year.
o
Real GDP – GDP expressed in constant, or unchanging, prices (does not reflect
inflation; gives a more accurate picture of economic growth)
o
The basic measure of a nation's economic growth rate is the percentage change
of real GDP over a given period of time.
o
Nominal GDP – GDP measured in current prices (reflects inflation)
•
GDP Per Capita = GDP/population
•
Inflation – a general increase in prices
ECONOMIC GROWTH
•
Productivity is the value of output from a production process.
The more productive a labor force, the greater the output
(production).
• Improved technology leads to increased productivity, which leads
to economic growth. Computerization and automation are two
leading technology trends.
• Increased trade will lead to an increase in economic growth and
production options.
SUPPLY AND DEMAND IN THE MARKET
Essential questions:
• What is the relationship between changes in price and
demand / supply?
• How could you predict the effect of a change in price
on the quantity demanded and quantity supplied?
WHAT IS SUPPLY/WHAT IS DEMAND
•
Supply is the amount of goods available in the marketplace.
• Demand is the desire to own something and the ability to pay for
it.
ACTIVITY
Video: https://www.youtube.com/watch?v=t1j3mjEd3wg
Write a paragraph that explains the law of supply as it
applies to a current music or clothing trend.
DEMAND READINGS
Read your assigned section and take notes for the main ideas.
1. The Law of Demand p. 79
2.
The Substitution effect p. 80
3.
The Income Effect p. 80
4. A Demand Schedule p. 81
5. The Demand Graph p. 82
LAW OF DEMAND
•
The Law of Demand – as prices increase demand falls, as prices decrease
demand rises.
o
Substitution Effect – takes place when a consumer reacts to a rise in the price of
a good by consuming less of that good and more of a substitute good.
o
Income Effect – takes place when rising prices are not accompanied by increases
in income, resulting in the inability to purchase the same quantity of goods and
services as before.
o
Demand schedule – a table that lists the quantity of a good that a person will
purchase at varying prices in a market. When the table is graphed, it becomes a
demand curve (see below).
WHAT DO YOU THINK?
What changes demand? P. 86
What causes a shift in demand? P. 86-87
LAW OF SUPPLY
•
The Law of Supply – as prices rise, supply will increase. As prices fall, supply will
decrease.
o
Quantity supplied – how much of a good is offered for sale at a specific price.
Producers seek to increase their profits, so if in a market a good sells at a high
price, firms will produce more of that good (the more they sell, the more money
they make)
o
Ceteris paribus – the Latin phrase for “all other things held constant,” ceteris
paribus is a key concept when examining supply and demand: it assumes that
changes in price are the only determinant of changes in supply and demand.
o
Supply schedule – a table that shows the relationship between price and quantity
supplied for a specific good. When graphed, the data becomes a supply curve
(see below).
ACTIVITY 2
Imagine it is homecoming or prom you need a
corsage/or prom outfit. Draw a demand and supply
curve. Which curve would shift first? What would
happen to price and quantity in this situation? Would
the other curve shift also? If so which way? What
would then happen to price and quantity?