Learning Objectives
1. Explain basic economics.
2. Explain what capitalism is and how free markets work.
3. Compare socialism and communism.
4. Analyze the trend toward mixed economies.
5. Describe the economic system of the United States, including the significance of key e
Economics
The study of how society employs resources to produce goods and services for consumption among various groups and individuals.
Macroeconomics
Concentrates on the operation of a nation's economy as a whole.
Microeconomics
Concentrates on the behavior of people and organizations in markets for particular products or services.
Resource Development
The study of how to increase resources and create conditions that will make better use of them.
Examples of resource development
-Hydrogen fuel
-Hydroponics
-Nanotechnology
Who was THOMAS MALTHUS?
Malthus believed that if the rich had most of the wealth and the poor had most of the population, resources would run out. This belief led the writer Thomas Carlyle to call economics "The Dismal Science.
Neo-Malthusians
they believe there are too many people in the world and believe the answer is radical birth control (contrary to Malthus, some economists believe a large population can be a resource.)
What did ADAM SMITH, the FATHER of ECONOMICS, stand for?
-people will work hard if they know they will be rewarded.
-As people improve their own situation in life, they help the economy prosper through the production of goods, services and ideas.
invisible hand
When self-directed gain leads to social and economic benefits for the whole community.
How does the invisible hand create wealth for a country?
the invisible hand will reward those who benefit society because people will buy their products, and vice versa those who don't serve the people will be in financial straits
Capitalism
All or most of the land, factories and stores are owned by individuals, not the government, and operated for profit.
Countries with capitalist foundations
United States
England
Australia
Canada
State capitalism
When the state, rather than private owners, run some businesses.
Well-known countries practicing state capitalism
Russia and China
-These countries have experienced some success using capitalistic principles, but the future is still uncertain.
CAPITALISM'S FOUR BASIC RIGHTS
-The right to own private property.
-The right to own a business and keep all that business's -profits.
-The right to freedom of competition.
-The right to freedom of choice.
How the Free Market works
-Decisions about what and how much to produce are made by the market.
-Consumers send signals about what they like and how they like it.
what does PRICE tell companies?
Price tells companies how much of a product they should produce.
-If something is wanted but hard to get, the price will rise until more products are available.
Supply
The quantities of products businesses are willing to SELL at different prices.
Demand
The quantities of products consumers are willing to BUY at different prices.
Market Price (Equilibrium Point)
Determined by supply and demand, this is the negotiated price.
Perfect competition
such as a farmer's market where goods are indistinguishable. Today, however, there are no good examples of perfect competition.
Monopolistic competition
such as fast-food restaurants where products are similar but consumers perceive the products to be different. Product differentiation is key.
Oligopoly
a situation where just a few major producers dominate a market such as tobacco, gasoline, automobiles, etc. A few sellers dominate because the initial investment to enter such a market is significant.
Monopoly
situation where only one producer exists in a market. U.S. law prohibits monopolies.
FREE MARKET BENEFITS
-It allows for open competition among companies.
-Provides opportunities for poor people to work their way out of poverty.
FREE MARKET LIMITATIONS
People may start to let greed drive them.
Socialism
An economic system based on the premise that some basic businesses, like utilities, should be owned by the government in order to more evenly distribute profits among the people.
factors of socialism
-Entrepreneurs run smaller businesses.
-Citizens are highly taxed.
-Government is more involved in protecting the environment and the poor.
BENEFITS of SOCIALISM
-Social equality
-Free education
-Free healthcare
-Free childcare
-Longer vacations
-Shorter work weeks
-Generous sick leave
NEGATIVES of SOCIALISM
-FEW INCENTIVES for business to take risks.
-BRAIN DRAIN: Some of a country's best and brightest workers move to capitalistic countries.
-FEWER INVENTIONS OR INNOVATIONS (reward not as great as in capitalistic countries)
Communism
An economic and political system in which the government makes almost all economic decisions and owns almost all the major factors of production.
consequences of communism
-Prices don't reflect demand which may lead to shortages of items, including food and clothing.
-Most communist countries today suffer severe economic depression and citizens fear the government.
Free-Market Economies
The MARKET largely determines what goods and services are produced, who gets them, and how the economy grows.
Command Economies
The GOVERNMENT largely determines what goods and services are produced, who gets them, and how the economy will grow.
Mixed Economies
Some allocation of resources is made by the market and some by the government. (Neither free-market nor command economies have created sound economic conditions so countries use a mix of the two economic systems.)
Gross Domestic Product (GDP)
Total value of final goods and services produced in a country in a given year. As long as a company is within a country's border, their numbers go into the country's GDP (even if they are foreign-owned).
-When the GDP changes, businesses feel the effect.
Gross Output (GO)
A measure of the total sales volume at all stages of production.
Unemployment Rate
The percentage of civilians at least 16 years old who are unemployed and tried to find a job within the prior four weeks.
Four Types of Unemployment
-Frictional - quit or new
-Structural - firm/industry
-Cyclical - economic downturn
-Seasonal - farming/ holidays
inflation
the general rise in the prices of goods and services over time.
disinflation
When the price increases are slowing (inflation rate declining).
Deflation
Prices are declining because too few dollars are chasing too many goods.
Stagflation
Economy is slowing, but prices are going up.
Consumer Price Index (CPI)
Monthly statistics that measure the pace of inflation or deflation.
-government computes the costs of goods and services (housing, food, apparel, medical care, etc.) to see if they are going up or down.
-wages, rent/leases, tax brackets, government benefi
Producer Price Index (PPI)
An index that measures prices at the wholesale level.
PRODUCTIVITY
risen in US due to technological advances making it faster and easier
How does increased productivity affect the market?
the higher the productivity, the lower the costs of producing goods and services. This helps lower prices.
How does new technology affect the service sector?
New technology adds to the QUALITY of the services provided, but not to the WORKER'S output.
How is Productivity developing in the service sector?
-grows more slowly bc of fewer techonologies
Business Cycles definition
Periodic rises and falls that occur in economies over time.
What new measurement needs to be created for the service sector?
-A new form of measurement which accounts for the
QUALITY
as well as the
QUANTITY
of output
What are the Four Phases of Long-Term Business Cycles?
1)
Economic Boom
2)
Recession
- Two or more consecutive quarters of decline in the GDP.
3)
Depression
- A severe recession.
4)
Recovery
- When the economy stabilizes and starts to grow. This leads to an Economic Boom.
Fiscal Policy
The federal government's efforts to keep the economy stable by increasing or decreasing taxes or government spending.
Tools of fiscal policy
-Taxation
-Government Spending
National Deficit
The amount of money the federal government spends beyond what it gathers in taxes.
National Debt
The sum of government deficits over time (national debt has reached $18 trillion!)
National Surplus
When government takes in more than it spends.
Monetary Policy
The management of the money supply and interest rates by the Federal Reserve Bank (the Fed).
The Fed's most visible role... (Federal Reserve)
-When the economy is booming, the Fed tends to increase interest rates.
-When the economy is in a recession, the Fed tends to decrease the interest rates.