Economics!26/12/14

By the end of the class today…

You should be able to Define economics

Identify and define the four types of economic systems

Know basic information about the economy in the United States

What is Economics? What does this term mean?

What are some related terms or ideas?

What are some examples of economic decisions people have to make?

How does economics affect people in their daily lives?

Who does economics affect?

Economics

“The study of how people make decisions in a

world where there are unlimited wants but limited resources.”

Wants & Needs What is a need?

Things that are required for survival

Food, water, clothing, shelter

What is a want? Things we would like to have

Wants & Needs Even in a country like the United States, with

vast resources and money, we cannot produce every single thing we want and need Must make decisions among the alternatives

Must answer 3 fundamental questions!

1. WHAT is produced? Both producers and consumers must decide

what should be reduced in a world of limited resources For example

With limited resources, should a local government use its money to build a school or fix a highway?

With limited resources, should a farmer produce cotton, soybeans or lettuce?

2. HOW is it produced?

Producers and consumers must decide how to produce something For example

How should we get oil for our energy needs?

How much pollution should a factory be allowed to give off?

How should animals be treated?

3. WHO consumes what is produced?

After goods/services are produced, society must decide how these goods will be distributed among members of society. For example

Who should receive the limited supply of flu vaccines?

Who should a shoe company market their product towards?

Who should attend a new school?

Who makes these decisions?

In the U.S. People (consumers)

Businesses (producers)

Government

But not every economic system is like this

What is an economic system? “a particular set of social institutions which deals

with the production, distribution, and consumption of goods and services in a particular society.”

There are four types of economic systems!

Traditional Tradition and custom govern economic

decisions

Decisions revolve around family, tribe

Resources are allocated based on inheritance

Farming, hunting, gathering stays the same over generations

Choices are determined by technology

Little/no technology

Traditional Advantages

Little competition= little friction between members

Clearly defined roles

System well understood by participants

Disadvantages Little growth or development

Slow to change

No technology

No social mobility

No control over environmental factors

Command Government makes all economic decisions

Individuals have little or no influence over economics

Government owns resources

No competition Businesses provide services and goods

Consumers have few choices

Government set prices of gods

Command Advantages

Stability (doesn’t follow business cycle)

Focus on equality, serving collectively

Distributes wealth

Products fulfill needs

Disadvantages Often insufficient resource distribution

Cannot determine consumer preferences like a market can

No personal freedom

Cannot easily adjust to change

Lack of incentives for innovation

Market Economic decisions are made by individuals

competing to earn profits based on supply and demand

Resources owned by individuals

Profit is motive

Competition determines prices and quality

Individual freedom is important (choices!)

Market Advantages

Competition determines prices, brings them down

Consumers can buy whatever they want

Little government intervention

Adjusts to change

Variety

Disadvantages Doesn’t always provide basic needs of everyone

Makes it difficult for gov’t to provide for needs

Market failures

People can make harmful decisions

Mixed Combines Command and Market economies

Individuals and the government share in economic decision making process

Government guides and regulates production of goods

Resources owned by individuals

Government tries to protect producers and consumers from unfair policies and practices

Mixed Advantages

Advantages of command and market

Combines focus on social welfare and individual liberties

Disadvantages Disadvantages of command and market

May not mean all resources are being used well

Government infringement may not always be good

Which type of economy?

On a piece of paper, write:

1. Type of economy: How do you know?:

Factors of Production There are four “ingredients of production”

Capital

Money or assets

Land

Labor

# of people in population

Willingness to work

Enterprise

Creativity

LABOR intensive vs. CAPITAL intensive

Words to know(and understand!)

Gross Domestic Product: value of all goods and services in one year Measure of economic activity, size of economy

GDP per capita= GDP divided by population

If GDP is the whole pie, GDP per capita is how big of a slice each person gets

The United States Economy

Type: Mixed Private individuals and businesses make most of

the decisions

The Government buys good in private sector

Advantages

Economic efficiency

Individual freedom

Most technologically advanced nation

Disadvantages

Difficult to enter home market

GDP per capita= $52,800

Government in US economy

Although the U.S. economy is based on capitalism and free enterprise and individualism, the government is still involved in some ways

The Government wants high employment and price stability Fiscal Policy

Taxes, spending

Monetary Policy

Supply of money

Government in US economy

Four ways 1. Provides services and goods like roads,

education, public safety, national defense

2. Social Security and Medicare

3. Collects taxes, borrows money

4. Regulates business activity

Food and Drug Administration

Working conditions

Pollution

Trade One of the most important parts of the

economy of the U.S.

Promotes growth, democracy, social stability

Since WWII A move to get rid of trade barriers

Free Trade agreements

Top 3 partners: Canada, Mexico, China

Competition and Small Businesses

Competition is a defining characteristic of the U.S. economy

Along with small businesses Account for majority of new U.S. jobs

“Shop owners and other small businesses account for more than half of the U.S. private-sector nonfarm economic output and work force.” –US Economy in Brief

Challenges 2009-10 Financial Crisis

Largest since the Great Depression in 1930s

Globalization Protecting industry at home

DEBT $18 trillion dollars