THE ECONOMY & POLITICSChapter 13

THE ECONOMIC INSTITUTION

Every society has certain wants and needs that must be met if their happiness and well being are to be assured

NEEDS: food, clothing, housing, safe environment are basic to survival

WANTS: new car, cell phones, fashion are not necessary for survival but add to the quality of life

All societies develop a system of roles and norms that govern the production, distribution, and consumption of goods and services…this system is called THE ECONOMIC INSTITUTION

FACTORS OF PRODUCTION

Resources needed to produce goods and services Land-soil, water, plants, sunlight Labor- human resources Capital- all the manufactured goods used in the

production process Entrepreneurship- organizational skills and risk taking

attitude

Technology is the use of science to produce new products or make process more efficient, a society’s ability to exploit the factors of production shapes their economic system

ECONOMIC SYSTEMS

All systems have 3 basic sectors Primary sector- extraction of raw

materials from the environment, fishing, hunting, mining, farming

Secondary sector-use of raw materials to manufacture goods

Tertiary sector- the provision of services

PREINDUSTRIAL ECONOMIC SYSTEMS Little technological development All economic activity is carried out using

human labor and animal power Labor concentrated in the primary sector Emphasis on providing food

INDUSTRIAL ECONOMIC SYSTEMS

Emphasis shifts to the secondary sector, made possible by advances in technology-machines and new sources of energy.

Agricultural production rises, allows for greater population who shift to urban living and manufacturing

Change nature of work, workers become specialized

ECONOMIC MODELS

Who owns the factors of production and how is economic activity regulated?

Most economies as mixed, no society is pure France, Sweden, Great Britain middle of spectrum with

government controlling certain essential services and industries such as health care, energy production, or production of certain goods

United States capitalist, but… China socialist, but…

CAPITALISM Factors of production are owned by individuals rather

than the government Profit and competition regulate economic activity Consumer purchases determine supply and demand Adam Smith, “invisible hand”, the forces that determine

economic choices Law of Supply: producers will supply more products when

they can charge higher prices and fewer at lower prices Law of Demand: consumers will demand more of a

product as the price of the product decreases Laissez-faire – let the people do as they choose, free-

enterprise system

SOCIALISM Factors of production are owned by government Government regulates economic activity What to produce is determined by social need, not by

consumer demand, regardless if it can be produced profitably

Central planners determine how to produce goods, what goods in what quantities

For whom to produce is determined by need rather than the ability to pay

Ultimate form communism a social political system in which all property is communally owned, Karl Marx, ideal never achieved in practice, instead totalitarian governments have imposed

AMERICAN ECONOMY Rise of corporate capitalism Corporation- a business organization that is owned by

stockholders and is treated by the law as if it were an individual person, can enter into contracts, issue stocks, and buy and sell goods

Only 20% of businesses, but 88% of business sales Oligopoly-a few large companies control an industry- US

oil, auto, breakfast cereals, control prices, stop new entrants into a market, exert pressure in the political arena

Protectionism- use of trade barriers to protect domestic manufacturers from foreign competition, quotas, surcharges, taxes

Globalization Larger corporations located in several nations,

multinational corporation Office in one nation, subsidiaries in others Can manufacture in one nation (factories in Mexico) from

materials from several others, finished product sold in countries worldwide

Walmart bigger economy than 160 countries Affect international affairs

Changing nature of work Shift from an industrial base to a service base Automation and efficiency have reduced the number of

workers needed for manufacturing Competition from newly industrialized countries, out-

sourcing Downsizing-cutting costs by reducing size of workforce Technological requirements not being met by educational

system

E-commerce Business conducted over the internet Not based on traditional factors of production but instead

based on information New way of doing business, resupplying and billing

automatically linked, package goods and services to meet individual requirements

Fears of loss of privacy Cyber Monday