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Unit 7aEconomics
American Free Market System
Introduction
Challenges in a free market
Supply and Demand
Economic systems
The U.S. economy
Factors of Production
Business organizations
The Circular flow of Economics
Resources, goods and services and money flow continuously among households, businesses and the government in the U.S. economy.
The Circular flow of Economics Continued…
Individual households own the resources used in production; sell the resources and use the income to purchase products.
Businesses (producers) buy resources used in production; sell the resources and use the income to purchase products. Businesses provide households with income and goods and services.
Governments use tax revenue from individuals and businesses to provide public goods and services.
Households
supply
businesses with
labor
(workforce) and
payments for
goods and
services
Businesses
provide
households
with income
and goods
and services.
The government
supplies
businesses with
public goods and
services and
payments for
products
purchased.
Businesses provide the
government with taxes and
goods and services.
The government provides
households with income and public
goods and services.
Households
provide the
government
with labor
(workforce)
and taxes
Production, Consumption and Distribution
Four Questions all Economic Systems must Address
Four Questions All Economic Systems must address…
What is produced?*Production*
Goods and services must satisfy the consumers wants and desires
Four Questions All Economic Systems must address…
HOW should these goods be produced?
*Factors of Production*1. Capital
2. Entrepreneurship
3. Land
4. LaborCombine the factors of production to make or produce the goods and services
Four Questions All Economic Systems must address…
For WHOM are the goods and services produced?*Distribution*
Getting the goods and services from producer to consumer
Four Questions All Economic Systems must address…
HOW MANY goods and services should be produced?*Consumption*
Make enough to have a large profit and still have consumer demand. How many is determined by supply and demand.
Supply and Demand
Supply and Demand…
Scarcity is the inability to satisfy all wants at the same time due to limited resources
Choices must be made as to what to produce, how much to produce and who will receive what is produced.
PRICE: Mechanism to decide who gets goods and services. The amount that satisfies both producers for profit and consumers for value.
Scarcity
Choices
Price
Supply and Demand determine price through their interaction
DEMAND: is the amount of a good or service that consumers are willing and able to buy at a certain price
SUPPLY: is the amount of a good or service that producers are willing and able to sell at a certain price.
LAW OF SUPPLY :Businesses will provide more products
when they can sell them at higher prices
LAW OF DEMAND:Buyers will demand more products
when they can buy them at lower prices
Incentives
Incite or motivate Change economic behavior Something that spurs someone into
action: sale, coupons, etc.
Resources, Scarcity & Opportunity Cost
Good
Anything that can be grown or manufactured (made) Food Clothes Cars
Service
Something a person does for someone else in exchange for money or value.
Doctor Hairdresser waiter
Resources
Natural
Human
Capital
Combine to make goods and services
Our Basic Economic Problem…
People have Unlimited Wants
Food
Clothing
Shelter
Schools
Hospitals
Cars
Transportation
But Resources are Limited
Land
Soil
Minerals
Fuels
People
Money
Technology
Scarcity
The inability to satisfy all wants at the same time; the NEEDS are greater than the RESOURCES
Since resources are LIMITED consumers and producers must make CHOICES
CHOICE: selecting from a set of alternatives
OPPORTUNITY COST: what is given up when the choice is made.
*Scarcity forces us to choose which needs and wants to satisfy with available resources.
*Scarcity affects decisions concerning what and how much to produce, how goods and services will be produced and who will get what is produced
Production: (sellers)
*Combining resources to
make goods and
services.
*Available resources and
consumer preference
determine what is
produced
Consumption (buyers)
*Using goods and
services
*Consumer preference
and price determine
what is purchased
SELLER Buyer
Challenges in a Free Market: Terms
Scarcity
In English
You can't have everything
you want.
Lessons for life
Acceptance of scarcity will
help you make more
reasoned choices
Alternatives
In English
Different options from which you can choose
Lessons for Life
There are many different ways to allocate resources and to solve
problems
Yes….these are generic converse!
Choice
In English
Because you can't have everything you want, you have to make choices from a list of
alternatives
Lessons for life
When policy-makers decide on
a particular resource
allocation, recognize that a
choice had to be made due
to scarcity. You may not like
the alternative chosen, you
may question the choice, but
the villain is scarcity
Trade-off’s
In English
Choices involve giving up something to get something. All choices have consequences, both positive and negative
Lessons for Life
You are responsible for the consequences of your choices. Since you make choices, you can't be a victim.
Opportunity Cost
In English
What is given up when a choice is made
Lessons for Life
All choices have opportunity costs. A good idea is only a good idea if its value is greater than the value of its opportunity cost. Voters must always identify the opportunity cost of a particular policy
Economic Systems
Command Economy
The central government makes decisions and determines how resources will be used.
The central government owns property and resources.
Businesses are not run for profit.
Businesses are not run for profit.
No competition
Lack of consumer choice
The government sets the prices of goods and services.
China, North Korea, Cuba
Mixed Economy
Most common type of economic system Government and individuals share the decision
making process Individuals and businesses make decisions for
the private sector Individuals own the means of production Government makes plans for the public sector
Government guides and regulates production of goods and services offered.
A greater government role than in a free market economy
Most effective economy for providing goods and services
U.S. and most Western European countries are mixed economies
Free Market Economy
Also known as capitalism or free enterprise Private ownership of property and resources
(owned by individuals) Individuals and businesses make profits Individuals and businesses compete
Economic decisions are made by supply and demand
Profit is a motivator for productivity No government involvement Consumer sovereignty: buyers determine
what is produced
The U.S. economy is
a MIXED
ECONOMYPRIVATE
PROPERTY
FREE
MARKETS
PROFIT
COMPETITION
CONSUMER
SOVEREIGNTY
Markets are
allowed to operate
without undue
interference from
the government.
Money, goods and
services flow
continuously
among individual
households,
businesses and
the government
Consumers
determine
what goods
and
services are
produced
by what
they buy
Money left
over after
all business
expenses
have been
paid.
Rivalry
between
businesses
for the
same
customers;
results in
better
quality Individuals can
own the means
of production &
property without
undue
government
interference
Factors of Production
anything that goes into the making of a good or service
Factors of Production
Capital
Ex: tools, machinery, money and technology
Entrepreneur
Business owner and risk
taker combines the
factors of production
Factors of production cont…
Land
Natural Resources
Labor
Workers and their time and energy
Business Organizations
The 15 million businesses in the U.S. fall into three categories: sole proprietorships, owned by a single individual,
partnerships, with more than one owner sharing the risks and profits and corporations, owned by their stockholders.
Sole Proprietorship
1 owner
The owner takes all the risks Supplies capital, hires help, pays taxes The owner makes all the profits The owner is solely responsible for losses
Partnership
More than one owner (2+)
Risks are shared amongst the owners Profits are shared amongst the owners Often more successful than sole proprietorships Responsibilities are shared
Corporation
Owned by stockholders
Authorized to act as a legal person regardless of the number of owners Owners share the profits Liability is limited to investment (you can only loose as much as you put in) Raise money by selling stocks No one is responsible for corporation’s debt if it fails
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