The American EconomyChapter 19

Economic Resources

Chapter 19

Goods

• Goods=Tangible products that we use to satisfy our wants and needs– Books and automobiles

Services

• Services= Work performed for someone else.– Haircuts, home repairs, and entertainment.

Factors of Production

• Factors of Production are resources necessary to produce goods and services.

1. Natural Resources

2. Labor

3. Capital

4. Entrepreneurs

Natural Resources

• “Gifts of Nature” that make production possible.

• Land, water, fish, animals, forests, and mineral deposits.

Labor

• Nations workforce

• Anyone who works to produce goods and services.

Capital

• Capital= manufactured goods used to make other goods and services.– Machines, buildings, and tools used to

assemble or make goods.– The result of production– Differ from consumer goods which directly

satisfy your wants (cloths, clocks, food, and radios).

– Capital goods satisfy wants indirectly.

Entrepreneurs

• Individuals who start a new business, introduces a new product, and improve processes.

• Take risks to make a profit.

Gross Domestic Product

• Used to measure the success of the economy.

• GDP= the total value, in dollars, of all the final goods and services produced in a country during a single year.– Do not calculate the intermediate goods that

go into making a product.– Sale of used goods is not counted in GDP

Measuring GDP

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• Multiply the price of each good by the quantity of goods produced.

• Then add the amounts.

How is GDP Used?• Economist study the GDP to analyze how

the economy is doing.

• Good indicator of Standard of Living= the quality of life based on the possession of necessities and luxuries that make life easier.

Weaknesses of GDP

• Not a measure of society’s well-being

• A country could be better off without raising GDP.– Reductions in crime or in drug and alcohol

abuse.

Quantity vs. Quality

• GDP measures quantity.

• Does not reflect improvements in the quality of products.

• Great difference in a computer that costs $1000 today and a computer that cost the same amount a few years ago.

Net Domestic Product

• Depreciation=the loss of value to durable goods, such as automobiles and refrigerators.

• Same applies to machinery and equipment

• NDP takes GDP and subtracts the total loss in value of capital goods caused by depreciation.

Economic Activity

Section 2

Economic Sectors and Circular Flow

• Market= The free and willing exchange of goods and services between buyers and sellers.

• Markets may be regional, local, national, or global.– Ex. Neighborhood market for services such as

paper delivery, snow shoveling, and babysitting.

Circular Flow of Economic Activity

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• The flow of resources, goods and services, and money.

1. Consumer Sector

2. Business Sector

3. Government Sector

4. Foreign Sectors

The Consumer Sector

• Consumers earn their incomes in factor markers= the markets where productive resources are bought and sold.

• Workers earn wages, salaries, and tips in exchange for labor.

• People who own land may loan it in return for a type of income called rent.

Business Sector• After individuals receive their incomes, they

spend them in product markets=markets where producers offer goods and services for sale.

• Receive payments in the product markets where they sell goods and services to consumers.

• Businesses use these payments to pay for the natural resources, labor, and capital they use.

• These resources are then used to manufacture additional products that are sold in the product markets.

Business Sector

• Business sector purchases tools, factories, and other goods needed for production.

• Business sector is smaller than the consumer sector.

The Government Sector

• Government receives revenue from the services it sells.

• It also receives revenue from taxes on businesses and individuals.

• Government uses its revenue to purchase final goods and services in the product market.

The Foreign Sector

• Represents all the countries in the world.

• We both sell products to and buy products from other countries.

Promoting Economic Growth

• Economic growth occurs when a nation’s total output of goods and services increases over time.

• It is important in raising people’s standard of living.

Productivity

• Productivity= The degree to which resources are being used efficiently to produce goods and services.

• Measured by the amount of output (good and services) produced by a given level of inputs (land, labor, capital, entrepreneurship) in a specific period of time.

• Ex. Farmers try to use the most fertile land for their crops.

Specialization

• Specialization takes place when people, businesses, regions, or even countries concentrate on goods or services that they can produce better than anyone else.

• As a result, nearly everyone depends on other to produce many of the things that he or she consumers.

• When people specialize they are more productive than if they do things by themselves.

Division on Labor• Division of labor is breaking down a job

into small tasks performed by different workers.

• Improves productivity.

Human Capital

• Productivity increases when businesses invest in human capital

• Employers are usually rewarded with higher-quality products and higher profits.

• Workers benefit from higher-pay, greater motivation, and more satisfaction with their work.

Economic Interdependence

• We rely on others, and other rely on us, to provide goods and services.

Capitalism and Free Enterprise

Section 3

Understanding Your Role in the Economy

• The United States has a market economy.

• Most economic decisions are not made by the government, but by individuals looking out for their own and their families’ self-interests.

Understanding Your Role in the Economy

• A market economy is participatory

• The choices you make as a consumer affect the products that businesses make and the prices they receive for their products.

• Likewise, the products offered and their prices affect the choices you make.

What kind of Economy does the United State Have?

• A market economy is based on capitalism, a system in which citizens own most of the means of production.

• It is also based on free enterprise–businesses compete for profit with a minimum of government interference.

What Makes Capitalism Work

• Business usually try to produce products that people want most.

• Consumer sovereignty= the consumer determines what products will be produced.

Private Property Rights

• We have the freedom to own and use our own property as we choose as long as we do not interfere with the rights of others.

• Private property rights give us the incentive to work, save, and invest because we know we can keep any gains that we might earn.

• People tend to take better care of things if they actually own them.

Competition

• Competition forces businesses to use society’s resources efficiently to produce goods and services people prefer and to produce quality products at low costs.

• Competition forces the least efficient produces out of business or into other industries.

Profit Motive

• Profit- the amount of money left over after all costs of production have been paid.

• Profit motive= the driving force that encourages individuals and organizations to improve their material well-being

Voluntary Exchange

• The act of buyers and sellers freely and willingly engaging in market transactions.

• Both buyer and seller are giving something up to gain something else.

History of Capitalism

• Adam Smith The Wealth of Nations.

• Laissez-faire economics or “to let alone”

• Government should not interfere in the marketplace