Economics
Economics
-Economics
-the system that society uses to
produce and distribute goods and
services
-Why study economics???
-Why does the government pay so
much attention to the economy???
Wants and Needs
-Wants are the things which people
would like to have
-Needs are the things which people
need to survive
-Goods
-things that can be made or
manufactured
-Capital goods are the things used
to manufacture other goods
-consumer goods are goods meant
to be sold to consumers for use
-Services
-work that is done for someone
for a certain price
Limited Availability
-Goods and Services are produced
using resources
Natural Resources or Human
Resources
-Scarcity
-the economic problems of limited
goods and the unlimited wants of
society in general
-Scarcity limits the availability of
goods and services that people
desire or need.
-This scarcity gives goods and
services VALUE
Putting a Price on Things
-Price or VALUE is based on two
basic factors
Supply and Demand
-Supply
-the amount of a good or service
that is available for consumers to
buy
-Demand
-the amount of a good or service
that consumers are willing to buy
Determining Price
-Price is determined by comparing
the amount of demand to the
amount of supply and finding an
amount where they are equal
-Market or Equilibrium Price
-this is the point at which supply
and demand meet and price is
determined
Effects of Price
-Shortages
-when demand is greater than
supply
-What happens to price?
-Surplus
-When supply is greater than
demand
-What happens to price?
Law of Demand
DemandThe amount of a particular good or
service consumers want to buy
Law of demandas the price of a good increases
the amount demanded will decease
and as price decreases then
demand will increase
Diminishing Utility
-the law of demand says that a lower
price will increase demand but this
is limited
-diminishing utility
-the amount of satisfaction or
usefulness of a product decreases
as more and more are consumed.
-Ex.—You can only enjoy so many
soft drinks before you can’t drink
anymore no matter the price you
are paying
Elasticity
-Elasticity
-Is the degree to which a change
in price affects the demand for
the product
-Elastic Demand
-a change in the price does affect
the quantity demanded
-Inelastic demand
-change in the price does NOT
affect the quantity demanded
Income Level Changes
-The demand of many consumers is
based on their income level or
purchasing power
-A change in either direction to a
person’s purchasing power will
change their demand for goods
and services
-personal income
-disposable income
Change in Consumers
-The number of possible consumers
in an area affects demand
-Faster growth areas may face
higher levels of demand
-Areas of the country who are
losing population will face lower
demand for goods
Consumer Expectations
-Many consumers plan when making
economic choices and their
predictions for the future change
their demand
-a period of high unemployment or
economic boom can greatly change
the demand for certain goods
Consumer Tastes
-Because consumers have many
choices of where to spend their
money, the popularity of items will
change demand
-Advertisers spend billions every
year to shape the “tastes” of
consumers
-Some items become high demand
items for a short while and then
very little demand
Substitute Goods
-substitute goods are goods that can
be used in place of another
product
ex.—chicken or beef
-if a good experiences a price
change then the substitute good
will face a demand change
ex—chicken price increases,
demand for beef increases
Complementary Goods
-complementary goods are goods
that work with another product
ex-cd-roms and computers
-a change in the demand for one will
many times affect the demand for
the other as well
Law of Supply
-Supply
-the amount of a particular
good/service that producers will
supply at a given price
-Law of Supply
-as the price of a good/service
increases then producers will
supply more of the product and as
the price decreases they will
supply less.
Diminishing Returns
-the law of supply says that
producers will supply more at a
higher price but this is limited
-diminishing returns
-the producer can only produce so
much of the product before its
cost is more than the profit
received from its sale
-Ex.—You can only increase
factory production so far until a
larger factory is needed which
may be more costly than its worth
Elasticity
-Elasticity
-Is the degree to which a change
in price affects the supply for
the product
-Elastic Supply
-a change in the price does
affect the quantity demanded –
easily able to produce more
-Inelastic Supply
-change in the price does NOT
affect the quantity demanded –
hard to produce more
Productivity
-Productivity
-the amount of a good/service
than can be produced in a given
time
-Increases in productivity allow
producers to make more of a
product in a given time and at the
same price which decrease cost
and increases profits
-better technology is a major focus
of increasing productivity
Cost of Resources
-The cost of the materials that go
into goods and services can affect
the production costs which affect
the amount which can be supplied
at each price level
-Examples
-higher wages lowers supply
-cheaper resources increase
Company Expectations
-Producers as well as consumers
make economic plans. A company
hat expects record sales or few
sales will adjust its supply levels
-Economic forecasts by the
government become very
important to large producers
Government Policy
-Governments can affect suppliers in
many ways
-More Regulations or fewer
regulations producers must follow
can affect supply levels
-Gov’t subsidies can help some
producers cut costs to increase
supply levels while fewer subsidies
cause production costs to rise
Taxation Policies
-Taxes—higher or lower taxes
affect the overall profit level
which determines supply
-lower taxes means greater profits
and more supply
-higher taxes means fewer profits
and less supply
Alternative Products
-Supply can also be affected by
other products that producers
could supply
-If price falls for one product then
they will supply less and shift
production to another type
product
Why Do We Participate in the Economic System???
Everything we do is connected to the economic
system in some fashion. Each day we go to work
because the work we provide is in demand in the and
the wages we receive enable us to get the the goods
and services we need to live.
Goods and Services are sold to Consumers
Money is exchanged for goods and services
Business and Gov’t pay individuals for labor
Individuals provide labor for businesses
and Gov’t
Government provides services to its citizens
Citizens pay taxes to their government
Participation in Economic Activity is circular in its
nature. Labor is provided for wages and wages are
exchanged for goods. However the wages earned
from labor are now gone and the process must begin
again. This process will continuously repeat itself
throughout your lifetime.
Economic Terms
Comparative Advantage
-Comparative Advantage
When one nation is better able to
produce a good or service than
another nation
-What causes the advantage???
Producing Goods
-Productivity is the amount of a good or
service that can be produced in a given
time
-What does Increased Productivity
do?
-What is the Effect of productivity on
Inflation???
-Specialization of Labor / Division of
Labor
-method of having workers do only a
part of a product but do it very
efficiently
-blue collar labor
-white collar labor
Producing Goods
-Labor Intensive Work- job that
required a lot of human effort
and physical contact
-Lower paying jobs
-Many labor intensive products
produced overseas
-Mechanization- using machinery to
make products or provide services
Machines sometimes take the
jobs of people
Increases Productivity
Producing Goods
-Interchangeable Parts
-Mass Production
-Assembly Line
Growing Businesses
-Economies of Scale
-the idea that a larger business is
more efficient than a smaller one
because of its ability to do things
in larger volume
-Law of Diminishing Returns
-economic law that states that the
level of return for additional labor
or work will decrease at some
point and continue to decrease
Economic Choices
-Opportunity Cost
-this is the benefit that you have
given up in order to pursue an
alternative
-Trade Off
-this is the choice that you make
when faced with economic
decisions where you have to
choose one thing over another
Economic Systems
Factors of Production
-Capital or Capital Goods---the
money or tools needed to produce
goods/services
-Land / Resources– the natural
resources needed to produce
goods/services
Factors of Production
-Labor– the work required to
produce goods/services
-Management—the decision making
process that is involved in
producing goods/services
Traditional Economy
-economy where people
supply most of the
goods and services
they use
-many things are done
by tradition
-usually in places of
little modern
technology
-
Advantages
-
Disadvantages
Command Economy
-economy where the
government controls
the factors of
production
-Government makes all
decisions
-
Advantages
-
Disadvantages
Market Economy
-individuals make all
economic decisions
according to supply
and demand
-laissez-faire
economics
-also called free
market, free
enterprise, or
capitalism
-competition and
supply and demand
determine the
economy-----the
“invisible hand”
-
Advantages
-
Disadvantages
Mixed Economy
-a mixing together of
market and command
systems
-individuals have
economic freedoms
-government retains
some control for
benefit of citizens
-
Advantages
-
Disadvantages
Types of Businesses
Sole Proprietorships
-business owned by a single person
or a married couple
-3/4 of all businesses are sole
proprietorships
-Advantages
-Disadvantages
Partnerships
-business owned by two or more
people
-Advantages
-pool resources and capital
-Disadvantages
Corporations
-business that has a great many
owners
-sell stocks to investors
-pay dividends to shareholders
Corporations
-Limited liability
-the ability of a corporation to
protect its shareholders by placing
only the amount of capital they
have invested at risk
-Incorporation---legal process of
forming a corporation through
state government
-Advantages
-Disadvantages
Non-Profit Organizations
-business that is organized to
provide a service and not to make
large profits for the owners
-many are charities or service
groups
-Advantages
-Disadvantages
Business Cycle
The periodic and cyclical ups and
downs of the economy
Expansion Period
-phase where the economy is growing
-amount of goods produced?
-number of jobs produced?
-number of business starts
Peak Period
-phase where the economy has
reached its peak of growth
-amount of goods produced?
-number of jobs produced?
-number of business starts
Contraction Period
-phase where the economy is
starting to decline from its peak
activity
-amount of goods produced?
-number of jobs produced?
-number of business starts
Trough Period
-phase where the economy has
reached its lowest point
-amount of goods produced?
-number of jobs produced?
-number of business starts
Standard of Living
-Standard of Living
-a measure of how well a person
lives as wee as the amount of free
time they have
-Gross Domestic Product
-the value of all goods and services
produced in a nation in a given year
-Why do we compare GDP with
previous years?
Inflation Concerns
-Inflation
-a general increase in the cost of
goods and services
-Why is inflation a bad thing for the
economy?
-Consumer Price Index
-Controlling Inflation
The Government & Economy
-How a government taxes and
spends money
-Government Increases Spending
-Keynesian Economics
-Effect on the Economy
-Government Decreases Spending
-Effect on the Economy
-Government Increases Taxes
-Effect on the Economy
-Government Decreases Taxes
-Supply Side or Trickle Down Economics
-Effect on the Economy
-How the government regulates the amount of money in
circulation
-Regulated through the Federal Reserve System
-The supply of money can be described as tight monetary
policy or easy monetary policy according to the actions of
the government
-Gov’t controls a basic interest charge that is called the
discount rate---which is used by banks
-Raising Interest Rates (tight monetary policy)
-Lowering Interest Rates (easy monetary policy)
-Reserve Requirements are the amounts of money the gov’t
requires banks to keep as deposits
-Raising Reserve Requirements
-Lowering Reserve Requirements
-Government BUYS Bonds back from Consumers
-Government SELLS Bonds to Consumers
Business & Labor Interests
Laissez-Faire
-idea that the government will stay
out of the interests of people and
businesses-
Monopoly
-business which controls the supply
of a particular product
Merger / Trusts
-Merger-two or more companies join
to form one
-Trust- several business act as if
one
Regulation
-public call to regulate monopolies
-Sherman Act, 1890
-Clayton Act, 1914
Public Utilities
-some monopolies are allowed
-their prices are regulated by
government
Conglomerates
-business that supplies a large
variety of products
-may become too powerful
Deregulation
-Idea that the government should
reduce the amount of government
regulation
Cooperation
-Government also tries to help
business interests
Worker’s Conditions
-Working Conditions
Labor Unions
-Labor Unions are groups of workers
-Goal of Unions??
Collective Bargaining
-Collective Bargaining
-the ability of a group of workers
to bargain together as a group
-Advantages-
Labor Union Methods
-Collective Bargaining
-Strikes
-Picketing
-Sit-downs
-Slowdowns
Employer Methods
-Court Injunctions
-Blacklists
-Lockouts
NLRB
-National Labor Relations Board
-Made Union activity a right
-Government acts as mediator
between unions and employers
Union Limitations
Union Practices Banned
-Closed Shop—job where only union
members are allowed to work
-Featherbedding—practice of
keeping too many workers
Today’s Labor Unions
-Unions are weaker than in the past
-Right to Work Laws
Open Shop
Negotiations
-Mediation— 3rd party negotiation
where both parties are under no
obligation
-Arbitration— negotiations where
both sides are to bound to the 3rd
party decision
Government Revenue
Government Expenses
-Government Services
-Government Employees
-Revenue Sources
60% to 80% come from taxes
Politics of Taxation
-all citizens of all governments pay
taxes
-how much is enough???
-citizen revolts
Taxation Limits
-all tax bills must begin in House of
Representatives
-uniformity of taxes
-can’t tax interstate trade or
exports
Taxation Principles
-Adam Smith
Wealth of Nations
-Based on Ability to Pay
-Progressive Tax
-Regressive Tax
Income Taxes
-Personal Income Tax
-Provides most of Federal Revenue
-Taxes based on Taxable Income
Exemptions
Deductions
Tax Returns
-Corporate Income Tax
Property Taxes
-Property Tax
-Primary revenue for local
governments
-Based on estimated value
-Stable source of revenue
Sales Taxes
-Sales Tax
-Most sales taxes go to state
government
-Easy to collect
-Sales Taxes are Regressive
-Excise taxes
Other Taxes
-Social Security Taxes
-Estate Taxes
-Gift Taxes
-Tariffs
Non-Tax Revenue
-Intergovernmental Revenue
-Selling Excess Land or Property
-Tolls
-Fines
-Fees, Licenses, Disposal, Permits
-Lotteries
Revenue Scarcity
-Revenue is limited, so government
must make choices about spending
-setting priorities
-Political Party goals
Budgets
-Budgets are a plan for spending the
government’s money
-Revenue or receipts
-Expenditures
-Most budgets are one year budgets
-fiscal year
Drafting a Budget
-drafting a budget is a long process
-executive branch prepares most of
the budget
-expenditures are often based upon
the President, Governor, or local
leader’s goals
Approving a Budget
-Budgets must be passed by the
legislative branch
-serves as a check on the
government’s spending power
-Goals of Congressmen may conflict
with budget proposals
-Final version is often a series of
compromises
State & Local Budgets
-Similar budget process as Federal
Government
-May be of a much smaller scale
-May be more important to citizens
of the community than federal
budget
Expenditures
-Expenses change each year
-Most larges expenses change very
little
Social Security, National Defense,
Medicare, and Interest on
National Debt
-Local and State Governments
Education, Social Services,
Transportation, and Public Safety
Budget Deficits
-Limited Revenues, but unlimited
places to spend money
-Some spending is actually borrowed
money to pay for expenses
Bonds
-Effects of National Debt
Balancing Budgets
-Federal Government has balanced
the budget since the mid 1990’s
-Gramm-Rudman-Hollings Act of
1985
Mandatory spending reductions
-Most states and local government
are required to balance their
budgets
Revenue Sharing
-Governments sometimes help one
another with funding problems
-Intergovernmental Revenue
-Governments can receive grants to
help solve problems
-Federal Grant-In-Aid
-Federal mandated programs and
funding
US & the World
Foreign Trade
-Exports
-Goods sent out of the nation
-Imports
-Goods brought into the nation
-Balance of Trade
-the amount of exports compared
to the amount of imports
-Trade Deficits
-when imports exceed exports
Foreign Trade
-Tariffs
-A tax on goods brought into a
nation
-Free Trade
-NAFTA
-North American Free Trade
Agreement
-European Union
Humanitarian Aid
-Food Programs
-Military Assistance
-Peace Corp
World Health
-WHO
-World Health Organization
-AIDS
-Vaccinations
-Research
Environment
-Greenhouse Effect
-Ozone
-Smog
-Acid Rain
-Resources
United Nations
-General Assembly
-Security Council
-Gulf War
-War on Terrorism
Personal Finance
Banking
-Types of Banks
-Banks
-Savings Banks
-Credit Unions
Banking
-Banking Services
-Deposits
-Checking Accounts
-Loans
-Interest
-Collateral
Banking
-Government and Banking
-Federal Reserve
-FDIC
Savings
-Why should people save???
-Banks
-Investing
-CD’s
Investing
-Stocks
-Wall Street
-Bear Market
-Bull Market
-Mutual Funds
-Bonds
Credit
-Credit Rating
-Loans
-Interest Rates
Credit
-Collateral
-Principal
-Credit Cards
-Bankruptcy