5 chap 2 economics

Questions about Chapter 1?

Questions about Chapter 2?

Chapter 2:

Economics

CHAP 2 ECONOMICS: LEARNING OBJECTIVES…

Explain the economic concepts of supply and demand, business cycles, and the four different degrees of competition.

Contrast capitalism, socialism, communism, and mixed economies.

Chapter 2 - Economics

Adam Smith Wealth of Nations 1776

•Freedom to own land/property and the right to keep the profits of a business is essential to economic survival.

•People will work hard if they believe they will be rewarded.

The INVISIBLE HAND THEORY?

• Self-directed gain leads to social and economic benefits for the whole community.

• As people improve their own situation in life, they help the economy prosper through the production of goods,

services and ideas.

Chapter 2 – Keynesian Economics

Believed if the economy was in a recession…

government should increase spending and cut taxes to stimulate economy.

If inflation…

government should decrease spending

and raise taxes to slow the economy

for a short term. John Maynard Keynes

(1936)

What kind of economy?

• Most basic businesses owned by government.

• Based on even distribution of wealth.

• Government carries out distribution of wealth.

Socialism

Examples?

France

Denmark

Greece

What kind of economy?

Communist

Examples?

Cuba

North Korea

Russia

• Government makes economic decisions.

• Government owns major factors of production.

• Significant government in personal choice.

What kind of economy?

Free market.

Examples?

• Decisions about what and how much to produce made by the market.

• Consumers send signals about what they like and how they like it.

• Price tells companies how much of a product they should produce.

Types of competition in free market economy…

• Perfect

Examples?

Agricultural products, i.e., corn, beans, fruit

• Many sellers none large enough to dictate price.

Types of competition in free market economy…

•Monopolistic competition.

Examples?

Soda

Computers

Hot dogs

•Many sellers produce similar products. Buyers perceive products as different.

Types of competition in free market economy…

•Oligopoly

Examples?

Automobiles

Aircraft

Utilities

•Few sellers who dominate market.

What kind of economy?

Mixed economy.

Examples?

Germany

Japan

United States

• Some resources allocated by market, some by government.

• Scarcity and excess supply can be caused by government.

• Some restrictions on social freedom.

Types of economies vs. types of competition?

• Perfect competition

• Monopolistic competition

• Oligopoly

• Socialism

• Communism

• Free market

• Mixed economy

Capitalism vs. mixed economy?

Figure 2.4, p. 45.

United States

Figure 2.4, p. 45.

Germanyvs.

Chapter 2 – Foundations of Capitalism?

How does capitalism create wealth?

Chapter 2 – Foundations of Capitalism?

Right to

Right to

Right to

Right to

Own private property.

Own a business, Keep profits.

Freedom of competition.

Freedom of choice.

• Economics -- The study of how society employs limited 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.

(GDP, Unemployment Rate, CPI, PPI)

• Microeconomics -- Concentrates on the behavior of people and organizations in markets for particular products or services.

• (Pricing, Supply/demand)

The MAJOR BRANCHES of ECONOMICS

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2-19

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• 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

Examples?

Economic POLICY

2-20

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• Monetary Policy -- The management of the money supply and interest rates by the Federal Reserve Bank (the Fed).

• The Fed’s most visible role is increasing and lowering interest rates.- 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.

Economic POLICY

2-21

Monetary Policy(Federal Reserve)

• Examples?

Federal Fund Rate

Prime Lending Rate.

• Supply -- The quantities of products businesses are willing to sell at different prices.

SUPPLY & DEMAND

2-23

• Demand -- The quantities of products consumers are willing to buy at different prices.

Supply and Demand activity

• Supply -- The quantities of products businesses are willing to sell at different prices.

SUPPLY CURVES

2-25

Has to do with producers.

• Demand -- The quantities of products consumers are willing to buy at different prices.

DEMAND CURVES

2-26

Has to do with buyers.

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• Market Price (Equilibrium Point) -- Determined by supply and demand, this is the negotiated price.

EQUILIBRIUM

2-27

Producers.Buyers.

Market (Product/Service) Price

• Is the price for a Product/Service always in equilibrium?

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• Business Cycles -- Periodic rises and falls that occur in economies over time.

• 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.

BUSINESS CYCLES

2-29

Typical Business Cycle…

WHAT IS…

GDP?

Monetary value of all finished goods and services produced in a country in a specific time period.

Gross Domestic Product•Measure of productivity.

•High GDP enables us to enjoy a high standard of living.

WHAT IS…

CPI?

Consumer Price Index

•Costs of goods and services (housing, food, apparel, medical care).

WHAT IS…

Consumer Price Index

Why is the CPI important?

•Indication of inflation/deflation.

What is your next assignment?