EconomicsEconomics

Chapter 2Chapter 2

DefinitionDefinition

EconomicsEconomics: study of how society : study of how society uses its resources to produce goods uses its resources to produce goods and services and how it distributes and services and how it distributes them to people who are competing them to people who are competing for those goods/services.for those goods/services.

Factors of ProductionFactors of ProductionLandLandLaborLaborCapitalCapitalEntrepreneurshipEntrepreneurship

Macro vs Micro EconomicsMacro vs Micro Economics

MacroeconomicsMacroeconomicsLooks at the operation of a nation’s Looks at the operation of a nation’s

economy as a wholeeconomy as a whole

MicroeconomicsMicroeconomicsLooks at the behavior of people and Looks at the behavior of people and

organizations in particular marketsorganizations in particular markets

Adam Smith Adam Smith

Scottish economist; one of the first people Scottish economist; one of the first people to imagine a system for creating wealth to imagine a system for creating wealth and improving the lives of EVERYONE.and improving the lives of EVERYONE.

Believed in creating MORE resources so Believed in creating MORE resources so that everyone could become wealthierthat everyone could become wealthier

1776: The Wealth of Nations1776: The Wealth of NationsBelieved that people would work hard if Believed that people would work hard if

they were to be rewarded for doing so.they were to be rewarded for doing so.Considered to be the father of economicsConsidered to be the father of economics

The Invisible HandThe Invisible HandUnder Adam Smith’s theory Under Adam Smith’s theory

businesspeople do not necessarily businesspeople do not necessarily want to help others but they want want to help others but they want profits and their own prosperityprofits and their own prosperity

As people try to improve their own As people try to improve their own situation in life, their efforts serve as situation in life, their efforts serve as an “invisible hand” that helps the an “invisible hand” that helps the economy groweconomy grow

Invisible HandInvisible HandTurns self-directed gain into social and Turns self-directed gain into social and

economic benefits for alleconomic benefits for all

Economic SystemsEconomic Systems

Capitalism (Free Market)Capitalism (Free Market)SocialismSocialismCommunismCommunismMixed EconomiesMixed Economies

Capitalism (Free Market)Capitalism (Free Market)

Economic system in which most of Economic system in which most of the factors of production are the factors of production are privately owned (not owned by the privately owned (not owned by the government) and are operated for a government) and are operated for a profit.profit.

No country is purely capitalistNo country is purely capitalistThe gov’t gets involved in determining The gov’t gets involved in determining

minimum wages and setting farm pricesminimum wages and setting farm pricesThe foundation of the US economic The foundation of the US economic

system is capitalismsystem is capitalism

5 Basic Rights under 5 Basic Rights under CapitalismCapitalism

1.1. The right to private propertyThe right to private property We can buy, sell, and use land, buildings, We can buy, sell, and use land, buildings,

machinery and other forms of property.machinery and other forms of property.2.2. The right to own a business and keep all The right to own a business and keep all

profitsprofits Profits = Revenues – ExpensesProfits = Revenues – Expenses

3.3. The right to freedom of competitionThe right to freedom of competition Individuals are free to compete with others Individuals are free to compete with others

by offering new products and promotionsby offering new products and promotions4.4. The right to freedom of choiceThe right to freedom of choice

People are free to choose where they will People are free to choose where they will work and what career they will have; also work and what career they will have; also where to live and what to buy or sellwhere to live and what to buy or sell

5.5. The right to limited role of government.The right to limited role of government.

Who wants to buy Who wants to buy their “A”???their “A”???

Supply and DemandSupply and Demand

Under the free market system, Under the free market system, decisions about what to produce and decisions about what to produce and how much to produce are made by the how much to produce are made by the market.market.

Prices are NOT determined by sellers; Prices are NOT determined by sellers; they are determined by buyers and they are determined by buyers and sellers negotiating in the marketplacesellers negotiating in the marketplace

How is a price determined that is How is a price determined that is acceptable to both buyers and sellers?acceptable to both buyers and sellers?We have to look at supply and demandWe have to look at supply and demand

SupplySupply

Quantity of products that owners are Quantity of products that owners are willing to sell at different prices at a willing to sell at different prices at a specific timespecific time

Generally speaking…the amount Generally speaking…the amount supplied will increase as the price supplied will increase as the price increases because sellers can make increases because sellers can make more $ with a higher pricemore $ with a higher price

Look at page 40Look at page 40

DemandDemand

Quantity of products people are Quantity of products people are willing to buy at different prices at a willing to buy at different prices at a specific timespecific time

Generally speaking…the quantity Generally speaking…the quantity demanded will increase as the price demanded will increase as the price decreases, because consumers will decreases, because consumers will want more of something if it is want more of something if it is cheaper.cheaper.

Look at page 40Look at page 40

Market PriceMarket Price

Market Price or Equilibrium PointMarket Price or Equilibrium PointWhere the supply and demand curve Where the supply and demand curve

intersectsintersectsQuantity demanded = quantity suppliedQuantity demanded = quantity supplied

What is the key factor in determining What is the key factor in determining the quantity demanded and the the quantity demanded and the quantity supplied?quantity supplied?

In the long run the equilibrium price In the long run the equilibrium price will become the market pricewill become the market price

Supply and Demand Cont…Supply and Demand Cont…

Surplus: quantity supplied exceeds Surplus: quantity supplied exceeds quantity demandedquantity demandedThis signals sellers to lower their prices This signals sellers to lower their prices

to get rid of inventoryto get rid of inventoryShortage: quantity supplied is less Shortage: quantity supplied is less

than quantity demandedthan quantity demandedThis signals sellers to increase their This signals sellers to increase their

pricesprices

SocialismSocialism

Economic system based on the Economic system based on the premise that most basic businesses premise that most basic businesses (steel mills, coal mines, utilities) (steel mills, coal mines, utilities) should be owned by the government should be owned by the government so that profits can be easily so that profits can be easily distributed among the people.distributed among the people.

Socialist nations rely heavily on the Socialist nations rely heavily on the government to provide education, government to provide education, health care, retirement benefits and health care, retirement benefits and unemployment benefits.unemployment benefits.

CommunismCommunism

Economic system in which the Economic system in which the government makes almost ALL government makes almost ALL economic decisions and owns ALL economic decisions and owns ALL the major factors of productionthe major factors of production

More intrusive than socialismMore intrusive than socialismSome communist countries do not Some communist countries do not

allow you to practice certain religionsallow you to practice certain religionsCommunism is slowly disappearingCommunism is slowly disappearing

RecapRecap

Free Market: marketplace Free Market: marketplace determines what is produced, who determines what is produced, who gets it and how economy growsgets it and how economy growsCapitalismCapitalism

Command Economies: government Command Economies: government decides what is produced, who gets it decides what is produced, who gets it and how the economy growsand how the economy growsSocialism and CommunismSocialism and Communism

Mixed EconomiesMixed Economies

Some allocation of resources is Some allocation of resources is determined by the market and some determined by the market and some is determined by governmentis determined by government

Movement for free market systems to Movement for free market systems to go towards socialism and for socialist go towards socialism and for socialist systems to go towards capitalismsystems to go towards capitalismThis causes a mixed economyThis causes a mixed economy

The US is a mixed economyThe US is a mixed economy

The United StatesThe United States

3 Major indicators of economic 3 Major indicators of economic conditionsconditions

1.1. Gross domestic product (GDP)Gross domestic product (GDP)

2.2. Unemployment rateUnemployment rate

3.3. Price indexesPrice indexes

Economic IndicatorsEconomic Indicators

GDP: total value of goods and services GDP: total value of goods and services produced in a country in a given yearproduced in a country in a given year US GDP in 1999 was over $6 trillion!US GDP in 1999 was over $6 trillion!

Unemployment rate: refers to the # of Unemployment rate: refers to the # of people at least 16 years old who are people at least 16 years old who are unemployed and tried to find a job within unemployed and tried to find a job within the last four weeksthe last four weeks Any rate under 5% is very goodAny rate under 5% is very good US unemployment rate in 2000 was the lowest in US unemployment rate in 2000 was the lowest in

over 30 years…3.9%over 30 years…3.9% Price Indexes: Consumer Price Index (CPI); Price Indexes: Consumer Price Index (CPI);

monthly statistics that measure the pace of monthly statistics that measure the pace of inflation or deflation on about 400 different inflation or deflation on about 400 different goods/servicesgoods/services

4 Types of Unemployment4 Types of Unemployment

1.1. Frictional: people who have quit work b/c Frictional: people who have quit work b/c they didn’t like the job, boss, working they didn’t like the job, boss, working conditions and they haven’t found a new conditions and they haven’t found a new jobjob

2.2. Structural: caused by the restructuring of Structural: caused by the restructuring of firms or mismatch b/ skills of job seekers firms or mismatch b/ skills of job seekers and the requirements (location) of and the requirements (location) of available jobsavailable jobs

Example: coal miners in an area where mines Example: coal miners in an area where mines are closedare closed

3.3. Cyclical: occurs b/c of a recessionCyclical: occurs b/c of a recession Most serious type of unemploymentMost serious type of unemployment

4.4. Seasonal: demand for labor varies over Seasonal: demand for labor varies over the yearthe year

Example: harvesting of cropsExample: harvesting of crops

TermsTerms

1.1. Inflation: general rise in the prices of g/s over Inflation: general rise in the prices of g/s over timetime

2.2. Disinflation: condition where the increase in Disinflation: condition where the increase in prices is slowing (inflation rate is decreasing)prices is slowing (inflation rate is decreasing)

Occurs when countries produce so many goods Occurs when countries produce so many goods that people cannot afford to buy them allthat people cannot afford to buy them all

3.3. Recession: 2 or more consecutive quarters (3 Recession: 2 or more consecutive quarters (3 month periods) of decline in the GDPmonth periods) of decline in the GDP

4.4. Depression: severe recessionDepression: severe recession

Monetary and Fiscal PolicyMonetary and Fiscal Policy

Monetary Policy: management of the $ Monetary Policy: management of the $ supply and interest ratessupply and interest rates

Fiscal Policy: federal government’s efforts Fiscal Policy: federal government’s efforts to keep economy stable by increasing or to keep economy stable by increasing or decreasing taxes and/or government decreasing taxes and/or government spendingspending When the gov’t spends more than it raises in When the gov’t spends more than it raises in

taxes it creates a budget deficittaxes it creates a budget deficit The gov’t borrows $ to pay this deficit and The gov’t borrows $ to pay this deficit and

creates the national debt.creates the national debt. In 2000 the national debt was $5.6 trillion; over In 2000 the national debt was $5.6 trillion; over

$20,000 for every person in the US.$20,000 for every person in the US.