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

Demand-

The amount of a particular good or service consumers want to buy

Law of demand-

as 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