Chapter 1-Decisions and Systems
Needs & Wants
 Hardly a day goes by you don’t see a product or service you would like to have.
 You see these products on the Internet, at the mall or the grocery store
 Advertisements try to convince you that you need whatever is new
Needs are Essential
 You want many things but do you really need them?
 Determining which is which and what is important is part of making good
decisions
 Needs: things that are required in order to live
o Basic needs are:
1. Food
2. Clothing
3. Shelter
o Other needs in today’s economy are:
1. Good education
2. Employment
3. Safety
Wants Add to the Quality of Life
 Wants: things that add comfort and pleasure to your life
 You may believe you can’t live without the latest CD, latest fashion or newest movie
but you can and many people do
 Most of the time you can live in a small apartment but we would rather have the
large house or a vacation home.
 Also it would be possible to use public transportation but driving a nice care with
all the great options adds convenience and an image of success
Needs and Wants are Unlimited
 Your needs and wants are never ending
 You are limited by your imagination and what businesses make available for sale
 One want will lead to another and then it just snowballs
o A new video game player leads to wanting to a new set of games
o A new pair of shoes may require new accessories
 Wants are not the same for every person
Goods and Services
 You satisfy your needs and wants by purchasing and consuming good and services
 Goods: things that you can see and touch
 Services: activities that are consumed at that same time they are produced
Goods and Services for Businesses and Consumers
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Businesses and consumers both make purchases
Some purchases are unique for business or consumer use
Consumers buy watches, televisions, cell phones
They also eat at restaurants, go on vacation or take their car into get serviced
Businesses supply the goods and services that meet the business and consumers
needs and wants
The U.S. Economy
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The United States is the largest producer of goods and services in the world.
Americans consume more than any other country
America has twice as many shopping malls as it does high schools
The move to an industrialized economy resulted in high incomes which could be
spent on consumer products
However, with the increased consumption also leads to the production of more
garbage per person than the residents of any other country
American’s incur debt through loans and credit cards
Not all consumption is excessive and most of them purchase within their means
Some believe the high level of U.S consumer demand stems from the sheer quantity
of goods and services available and the amount of money businesses spend to
advertise
Spending opportunities happen daily and you have to decide carefully to make
sure future needs and wants can be met
Economic Resources
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Most people don’t make the products and services they consume
Economic resources: the means through which goods and services are produced
Economic resources are called factors of production
There are three kinds of economic resources:
1. Natural resources
2. Capital resources
3. Human resources
 Both businesses and individuals use these resources to produce goods and services
Natural Resources
 These are the resources supplied by nature
 Examples:
o Oil
o Minerals
 All products begin with one or more natural resource
 The supply of many natural resources are limited
 Increased consumption and destruction of the environment threatens many natural
resources
 However, conservation practices as well as the production of more efficient
products is helping preserve some resources
Human Resources
 These are the people who produce goods and services
 Examples:
o Farmers raise livestock and crops
o Factory workers and managers use equipment designed by engineers
o Truck drivers, sales people, advertisers and employees are involved in
production and availability of a product to consumers
 An entrepreneur is another example of a human resource.
o Entrepreneurs are the risk takers who use resources in an entirely new way
to create a new product
o Without entrepreneurs there would be fewer choices of good and services.
And also fewer employment opportunities
Capital Resources
 The products and money used in the production of good and services are called
capital resources
 Examples:
o Building
o Equipment
o Supplies
o Money
 Money is used to build the building, buy or lease vehicles, pay employees or buy
other goods and services needed to complete their product
 People will invest money in businesses so that the business will have the capital
needed to operate the business. These people expect they will make money from the
profits the company makes.
 People also receive income from selling their knowledge and skills to a business in
the form of labor
 Those special skills or knowledge of important business processes often command a
higher income than those with more common skills or knowledge
 **Look at Technology in Action (page 10)
Resources are Limited
 All resources are limited in supply
 Most resources can be used to make several different products
 Usually the resources that are needed to make a specific product will not be
available for something else
 Businesses and countries will compete for access to certain resources
 Those high demand resources or the ones that are limited with command a higher
price
 With the limit of certain resources comes the limit of how much of the good or
service that can be produced using that resource. That in turn will make the price
for that product even higher
 **Do assessment 1-1 on page 11(questions 1-4)
The Basic Economic Problem
 Basic Economic Problem: the mismatch of unlimited wants and needs and limited
resources
 Examples of this problem:
o Want to purchase a product but have limited money
o Schools have to cut back on staff, classes or extracurricular activities because
operating costs are increasing faster than annual budget
o A business wants to expand but doesn’t have access to adequate land for a larger
building
o A country can’t provide health care to all it citizens because it doesn’t have
enough doctors or hospitals
 The basic economic problem is because of scarcity
 Scarcity: not having enough resources to satisfy every need
 Scarcity affects everyone, but some people are affected more than others
 People who are on a limited or fixed income have choose very carefully the best way to
spend their money to meet their needs and wants
 Countries with few natural resources or people with limited education and low skills
may not be able to produce enough products and services for their citizens
Choices
 Individuals and families must decide how they want to spread their income to all
the things they want and need
 City, State and National governments must cope with the problem of providing the
services citizens demand using the tax dollars they collect
 In both of these cases someone has to make a difficult choice
 How do you decide which option is best?
 Usually you will choose the thing that you want most and can afford
 Example:
o Say you earn $75/week at a part time job. If you spend the money you
earned this week on a new pair of shoes you will not have enough money
left to spend on eating out or going out with your friends on Saturday night.
So you will have decide which want is greater, the shoes or a night out with
friends.
 There is a logical process that you can follow to help you make these types of
decisions
 Economic Decision-Making: the process of choosing which wants among several
options will be satisfied
Trade-Offs & Opportunity Costs
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Trade-off: when you give up something to have something else
From the example earlier you would trade going out with friend for the new shoes
The decisions making process will help you make the most satisfying choice
Opportunity cost: the value of the next best alternative that you did not choose
The benefit you get from your choice should be greater than the benefit from the
next choice
The Economic Decision Making Process
 There is a six steps to the decision making process
 Businesses and individuals will use this process for the best use of their limited
resources
o 6 steps
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2.
3.
4.
5.
6.
Define the problem
Identify the choices
Evaluate the pros and cons
Choose one
Act on choice-do what you chose to do
Review the decision
 Most of the time you will go through this process in your head, however bigger
decisions may be put to paper
 **Do assessment 1-2 on page 15 (questions 1-3)
The Three Economic Questions
 All nations of the world face the basic economic problem
 Each country must decide how to use available resources
 All nations must answer three economic questions
1. What goods and services will be produced?
2. How will the goods and services be produced?
3. What needs and wants will be satisfied with the goods and services produced?
 How these questions are answered indicated the type of economic system that exists in
each country
What to produce?
 Nations differ in the type and amount of resources they have available, just like
their individuals differ in their skills and abilities
 Some nations have rich soil and regular rains which make for great yields of food
supplies
 Other nations are rich in supplies of oil, coal and other energy sources
 So some nations will trade some of their resources, that they have plenty of, for ones
that they are scarce of
 Just as nations differ on the type an amount of resources they have they also differ
in their needs
 One nation may invest heavily in manufacturing, another in agriculture and a third
in security
 Some nations have many colleges and universities that produce a high number of
skilled experts
 Other nations have low literacy rates and many unskilled workers
 If a nation spends too much on one area, there may not be enough resources to meet
other needs
How to produce?
 Nations will decide how to combine their resources to best suit their circumstances
 Two centuries ago more than 80% of U.S. citizens were involved in agriculture, now
less than 3% of the U.S. population produces the food the country consumes
 The labor needs of the 21st century have required highly specialized health care
workers, financial managers, computers specialist and other highly skilled workers
What Needs & Wants to Satisfy?
 A nation must decided what needs and wants are the most critical and meet those
first
 Most of the needs and wants will remain unmet
 Some nations will invest in capital goods, some nations will respond to those citizens
who have the most money or political power
 In the U.S. goods and services are plentiful
 What needs and wants you satisfy depends on how much money you have to spend
and how you choose to spend or save
 The amount of money you have to spend depends greatly on your education and
ability and how you decide to use them to earn income
Types of Economic Systems
 Economic System: a nations plan for answering the three economic questions
 The type of system is based on how involved the government is in the marketplace
 There are several types of economic systems operating in the world today, each is based
on one of these three main types
Command Economy
 Command economy: the resources are owned and controlled by the government
 The government decides how goods are produced and how they will be distributed
and shared
 They decide how much and what resources will be used to produce the goods and
services
 Command economies will decide to build a superior military, or a world class
education but they decide
 Some command economies are so strict that they may assign people to specific
schools or even career paths
 Personal economic freedom is limited in a command economy
Market Economy
 Market economy: the resources are owned and controlled by the people of the
country
 The three economics questions are answered by individuals through buying and
selling of goods and services in the marketplace
 Marketplace: anywhere that goods and services exchange hands
 This includes the supermarket, Internet, a business office or even a flea market
 The government has limited involvement in a market economy
 Consumers and businesses make decisions based on their own self-interests
 Every time you buy something in the marketplace you placing a “vote” in dollars
 This directs the businesses in the consumers buying, which influences how they will
use their resources
 When businesses offer products and services consumers want they are rewarded
with profits
Traditional Economy
 Before complex economic systems developed, some operated according to tradition
or customs
 In this type of economy things are produced the way they have always been done
 This type of economy in countries that are less developed and not currently
participating in the global economy
 How to produce things is handed down generation to generation
 They will use the natural resources available to them and hand tools that they have
made
Mixed Economies
 Most of world economies can be classified as mixed economies, a combination of
command and market economies
 Various degrees of government involvement exist in these marketplaces
 During the past decade several Eastern European nation have moved from a
command economy to a mixed economy
 More than 1.3 billion Chinese citizen have a communist government, however the
economy of China is adopting elements of a market economy for a number of
economic decisions
 Many traditional economies will adopt the mixed economy
The U.S. Economic System
 The U.S. operates on a market economy
 Another name for a market economy is Capitalism
 Capitalism: private ownership of resources by individuals rather than by the
government
 The U.S. economy is based on 4 very important principles
1. Private property: you can use, own, or dispose of things of value
2. Freedom of Choice: you make choices freely but also accept their consequences
3. Profit: why business operate
 Profit: the money left from sales after all costs of operations have been
paid
 Profit is the heart of private enterprise
4. Competition: this forces businesses to keep costs low, have effective customer
service and search for new ideas
 **Do Assessment 1-3 page 22 (questions 1,2,3, & 5)
Participating in a Market Economy
 In a market economy buyers and sellers use the marketplace to make purchases
 Consumer: a person who buys and uses goods and services
 Consumers have a big impact on a market economy, because they decide what to buy,
who to buy from and what price they are willing to pay
 Producers: individuals and organizations that determine what products and services
will be available for sale
 Producers invest resources and take risks
 Producers also determine what products and services will be available
Consumers set Demand
 Demand: the quantity of a good or service that consumers are willing and able to
buy
 Businesses can prosper or fail depending on how they react to consumer demand
 Example:
o A new restaurant opens and the service is slow, the food is poor and the
noise levels are high people will be unlikely to come back unless changes are
made
Producers establish Supply
 Supply: the quantity of a good or service that a business is willing and able to
provide
 If consumers are seeking a popular product and willing to pay a high price for it
businesses will provide the product to meet the need
 On the other hand with heavy competition for a product or people are getting tired
of the product the price is going to go down,
Determining Price
 Why is the price of a hotel in Arizona higher in the winter than in the summer?
 Why do the prices do the prices of many of the products sold by farmers remain low?
 Prices are affected by the relationship between supply and demand and other factors
Factors influencing Demand
 When consumers want (demand) for a particular product, its price will tend to go
up
 People want to vacation in Phoenix during the winter so the demand for rooms goes
and then the price for the rooms goes up
 In the hot summer months in Phoenix there isn’t as much demand for rooms so the
price for the rooms will go down.
 Customers are willing to switch from one product to another if the price of one is
much higher than the others
 However, if a good substitute can’t be found customers will be willing to pay a little
more, even if the price is high
Factors influencing Supply
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Supply can also affect the price
Supply of certain items is always high so the price will remain low
Competitors: businesses offering very similar products to the same customers
With more competitors the supply will go up, so a business will not be able to raise
it prices as easily.
 They will have to keep an eye on what their competitors are pricing their products
at
 If you live a community where there is only one supermarket the prices at that store
will often be higher due to lack of competition
 If a natural disaster interrupts the supply of a product it will send the price up as
well.
Determining Market Price
 Market price: the point where supply and demand are equal
 **Look at the example chart on page 26
 **Do assessment 1-4 on page 26 (questions 1,2,3 & 5)