Economics & The Consumer
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Economics is the study of choices
about using resources – Economist
Macroeconomics – global impacts
(government decisions)
 Microeconomics – Decisions by
individuals and businesses

The Basic Economic Problem is Scarcity

Limited resources with unlimited wants & needs
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Opportunity Cost
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Chapter 1
The value of the next best alternative foregone as
the result of making a decision
Each decision made has an opportunity cost &
opportunity benefit
Is the reward worth the cost?
Analyze the costs & benefits of getting a job right
out of high school vs. attending college
Slide 3
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1.
2.
3.
A society’s economic system is the combination
of social and individual decision making it uses
to answer the three basic economic questions
What to Produce?
 Country’s priorities / needs / resources / etc.
How to Produce?
 Resources of the country – labor / capital /
information / etc.
For Whom to Produce?
 Consumers have choices or is there equality
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Traditional Economy – production decisions
passed to generations (Tribes in remote areas)
Command Economy - the government owns
resources and makes most economic decisions
in the “BEST INTERESTS” of society (North
Korea)
Market Economy - people own the resources
and run the businesses – Entrepreneurship &
risk (Competition and Profit drive this system)
Mixed Economy – Combination of Market and
Command economies (United States)
Market
Economic
System
Command
Economic
System
Mixed
Economic
System
Traditional
Economic
System
What to
produce?
Consumers &
Producers
based on selfinterests
Government
decides – What
is “best” for
society
Combination
of consumer
and
government
decision
making
Based on
customs How
things have
always been
done
How to
produce?
Consumers &
Producers
based on selfinterests
Government
decides – What
is “best” for
society
Combination
of consumer
and
government
decision
making
Based on
customs How
things have
always been
done
What needs &
wants to
satisfy?
Consumers &
Producers
based on selfinterests
Government
decides – What
is “best” for
society
Combination of
consumer and
government
decision making
Based on
customs How
things have
always been
done
Chapter 1
Slide 7
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Individuals in the marketplace based on their
own best interests – selfish motivations
Consumers “vote” with their dollars – price &
quality is directly affected by these “votes”
Competition forces businesses to provide high
quality & low prices to attain market share &
maintain profitability
Profit drives how they answer the 3 basic
economic questions

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In a market economic system, the choices
individuals make determine how society’s scarce
resources will be used
Prices are determined by the natural forces of
supply and demand
Adam Smith – THE INVISIBLE HAND
Competition and “selfishness” are crucial to its
effectiveness

“It is not from the benevolence of the butcher,
the brewer, or the baker that we expect our
dinner, but from their regard to their own
interest. We address ourselves, not to their
humanity but to their self-love, and never talk
to them of our own necessities but of their
advantages.”

The invisible hand is a metaphor coined by the
economist Adam Smith. Once in The Wealth of
Nations and other writings, Smith
demonstrated that, in a free market, an
individual pursuing his own self-interest tends
to also promote the good of his community as a
whole through a principle that he called “the
invisible hand”. He argued that each
individual maximizing revenue for himself
maximizes the total revenue of society as a
whole, as this is identical with the sum total of
individual revenues.


Create a poem / story / song / etc.
representing your understanding of Adam
Smith’s Invisible Hand Theory.
Groups will present their “creation” – The best
group will receive extra credit
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Chapter 1
Private Property - Individuals in the marketplace
based on their own best interests – selfish
motivations
Freedom of Choice - Consumers “vote” with their
dollars – price & quality is directly affected by these
“votes”
Competition - Businesses provide high quality &
low prices to attain market share & maintain
profitability
Profit - Ultimately drives how the the 3 basic
economic questions are answered
Slide 13
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Land
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Labor

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Human factors - workers
Capital


Any “Natural” resource – raw materials
Previously produced goods used in production
(machinery / tools / factories / etc.)
Entrepreneurship
Ownership – organization
 Small Business Administration


Technology

Recently added “factor”

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The production output in relation to a unit
of input (a worker) - efficiency
Wages vs. Productivity
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As wages ↑, productivity must improve
Productivity can be improved through:
Improvements in technology
 Better equipment
 Training / management techniques

Chapter 2
Slide 15
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Individual (Sole) Proprietorship (1 owner)

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Partnership (2 or more owners)

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Negative = Unlimited Liability
Positive = Tax advantages
Negative = Unlimited Liability
Positive = Tax advantages
Corporation



Owned by 1 or multiple individuals – considered a
separate entity from owners (Limited Liability)
Private vs. Public Corporation (Stock – shareholders)
Negative = Double Taxation
DEMAND – SCHEDULES & CURVES
• Quantities of a good consumers are willing and able to
purchase at various prices during a given time period
Demand Schedule:
Price
$1
$2
$3
$4
$5
Quantity Demanded
1000
800
600
400
200
DEMAND CURVE
Price
$1
$2
$3
$4
$5
Quantity Demanded
1000
800
600
400
200
SUPPLY – SCHEDULES & CURVES
• The quantities firms are willing and able to make
available for sale at various prices
Supply Schedule:
Price
$1
$2
$3
$4
$5
Quantity Supplied
200
400
600
800
1000
SUPPLY CURVE
Price
$1
$2
$3
$4
$5
Quantity Supplied
200
400
600
800
1000
Market Price - Equilibrium
• Equilibrium Price - the price at which quantity
supplied equals quantity demanded
• GRAPH:
SHORTAGE IN THE MARKET
• If price is set below equilibrium a SHORTAGE will occur –
Prices should rise (Forced up)
• (quantity demanded > quantity supplied)
• GRAPH:
SURPLUS IN THE MARKET
• If price is set above equilibrium a SURPLUS will occur –
Prices should fall (Forced Down)
• (quantity demanded < quantity supplied)
• GRAPH:
1.
2.
3.
4.
Provide Public Goods
Redistribute Income
Regulating Business Activity
Ensuring Economic Stability
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National Defense
Police & Fire Protection
Courts
Parks
Highways & Roads
Public Education
Public Transportation

Social Security
Retirement Benefits
 Survivor Benefits
 Disability Benefits
 Medicare Benefits

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Unemployment Insurance
Public Assistance

Welfare (TANF, SSI, Food Stamps, Housing, etc.)
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Protecting the Environment (EPA)
Protecting Consumers – safety (CPSC)
Protecting Workers – safety & fairness
Promoting Competition (FTC)

Anti-Trust Laws to maintain fairness & competition
to ensure quality & fair prices
Fiscal Policy

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Policies regarding Taxes and Government Spending
Stimulus Plan / Bailouts of Banks
Monetary Policy

Interest Rates (Fed Fund Rate)

Public Goods and Services

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Redistribution of Income
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Wealthy individuals pay taxes at higher levels for
public assistance programs (welfare / etc.)
To influence behavior
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Education / Law Enforcement / Roads / etc.
“Sin Tax” – Alcohol & Tobacco taxed at higher rates
To stabilize the economy

“Fed Fund” rate is adjusted accordingly
Progressive Taxes (Income Tax):

The more you earn – the higher amount of tax comes
out of your pocket (Tax Brackets)
Regressive Taxes (SALES TAX):

Smaller share of income is collected as income grows
– SALES TAX is regressive – straight % for sales tax
Proportional Taxes (PROPERTY TAX):
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FLAT TAX – all members of a community pay the
same amount regardless of earnings or value
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Income Tax
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Social Security Tax (FICA)
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Certain goods (alcohol, tobacco, firearms, air travel)
Property Tax
Estate & Gift Tax
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Mandatory retirement savings program
Sales Tax
Excise Tax
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Wages / Interest income / etc.
Based on property values after death
Business (License) Tax
Customs Duties / Tariffs

Imported goods may have additional taxes
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Benefits principle
Ability-to-pay principle
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The benefits principle is the idea that people
should pay taxes based on the benefits they
receive from government services.
An example is a gasoline tax:


Tax revenues from a gasoline tax are used to finance
our highway system.
People who drive the most also pay the most toward
maintaining roads.
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The ability-to-pay principle is the idea
that taxes should be levied according to
an individual’s ability to shoulder the tax
burden.
Voluntary Compliance
Federal Income Tax Rates:
Schedule X – Single Person
If taxable income
is over--
But not
over--
The tax is:
$0
$7,825
10% of the amount over $0
$7,825
$31,850
$782.50 plus 15% of the amount
over 7,825
$31,850
$77,100
$4,386.25 plus 25% of the amount
over 31,850
$77,100
$160,850
$15,698.75 plus 28% of the
amount over 77,100
$160,850
$349,700
$39,148.75 plus 33% of the
amount over 160,850
$349,700
no limit
$101,469.25 plus 35% of the
amount over 349,700
Milton Friedman

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Supported a laissez-faire approach to government
involvement in economics
Government attempts to protect consumers usually
creates higher prices or lower product quality
John Kenneth Galbraith
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
Supports strong government involvement for
government in economic issues
Large corporations have too much influence on
modern society inhibiting the natural forces of
supply & demand (ex. advertising creates wants &
needs)

Research issues pertaining to strong
governmental involvement vs. less intrusive
policies & formulate an argument in favor of
the philosophy you feel is a more effective for
economic stability for a country.