major concepts major concepts what to produce? what to produce? how to produce it? how to produce...

• Major ConceptsMajor Concepts• What to Produce?What to Produce?

• How to Produce it?How to Produce it?

• For Whom to Produce it?For Whom to Produce it?

• Market EconomyMarket Economy

• Command EconomyCommand Economy

• Mixed EconomyMixed Economy

• Traditional EconomyTraditional Economy

• There are four types of economic There are four types of economic systems in the world todaysystems in the world today• These are traditional economies, market These are traditional economies, market

economies, command economies, and economies, command economies, and mixed economies.mixed economies.

• Each of these economies is involved with Each of these economies is involved with what is produced, how it is produced and what is produced, how it is produced and from whom it is produced.from whom it is produced.

• We will look at each one !!!We will look at each one !!!

• Traditional economiesTraditional economies are are economies based on doing things economies based on doing things the way they have always been the way they have always been done.done.• The decision of what is produced, how The decision of what is produced, how

it is produced and for whom it is it is produced and for whom it is produced is based on produced is based on customcustom..

• Whatever your relatives did for a living is Whatever your relatives did for a living is what you will do.what you will do.

• This type of economy provides a sense of This type of economy provides a sense of security since there is no unemployment security since there is no unemployment and a low crime rate.and a low crime rate.

• There is no competition and little money There is no competition and little money is given to the government in the form of is given to the government in the form of taxes.taxes.

• Traditional economies do not allow for Traditional economies do not allow for economic, does not take advantage of economic, does not take advantage of technology, has no incentives and leads technology, has no incentives and leads to a low standard of living. to a low standard of living.

• Market EconomiesMarket Economies are economies are economies where what is produced, how it is where what is produced, how it is produced and for whom it is produced produced and for whom it is produced is determined by is determined by private citizensprivate citizens..

• Decisions about what is produced and Decisions about what is produced and how much are a result of supply and how much are a result of supply and demand and the desire of busines demand and the desire of busines owners to owners to make a profit.make a profit.

• Consumers makes Consumers makes decisions about what to decisions about what to buy, prices are based on buy, prices are based on supply and demand and supply and demand and the consumers make the consumers make decisions based on decisions based on price.price.

• Command economiesCommand economies are are economies where individuals have economies where individuals have little influence.little influence.• The major economic decision (what is The major economic decision (what is

produced, how it is produced, and for produced, how it is produced, and for whom it is produced) is whom it is produced) is determined by determined by the government.the government.

• Production is owned and controlled by the Production is owned and controlled by the government and wealth is distributed equally government and wealth is distributed equally among all citizens -- among all citizens -- equityequity

• The government fixes the wages of all The government fixes the wages of all workers and set all prices.workers and set all prices.

• Command economies have planning Command economies have planning agencies that control all agriculture and agencies that control all agriculture and manufacturing and make all the decisions.manufacturing and make all the decisions.

• These economies are usually very inefficient These economies are usually very inefficient and grow more slowlyand grow more slowly• One reason is that workers and business really One reason is that workers and business really

don’t have any incentive to « get ahead » since don’t have any incentive to « get ahead » since their lives will not improve.their lives will not improve.

• Sometimes poor decision-making Sometimes poor decision-making causes surpluses of unwanted items causes surpluses of unwanted items and shortages of items such as food and shortages of items such as food that are needed daily.that are needed daily.• Cuba and North Korea are current-day Cuba and North Korea are current-day

examples of command economies.examples of command economies.• Neither country is doing wellNeither country is doing well

• Mixed EconomiesMixed Economies are economies that are economies that combine private ownership and individual combine private ownership and individual decision making with government regulations decision making with government regulations and intervention.and intervention.

• Most decisions are made by individuals Most decisions are made by individuals (prices determined by supply and demand or (prices determined by supply and demand or competition), but certain federal, state, and competition), but certain federal, state, and local laws regulate certain areas of the local laws regulate certain areas of the business such as environmental regulations business such as environmental regulations (minimum wage) and consumer regulations (minimum wage) and consumer regulations (product safety)(product safety)

• Major ConceptsMajor Concepts• Mixed Market EconomyMixed Market Economy• Economic Goals of the Free Economic Goals of the Free

Enterprise SystemEnterprise System

• TermsTerms• Private propertyPrivate property• Voluntary exchangeVoluntary exchange• CopyrightsCopyrights• Full employmentFull employment• EfficiencyEfficiency• ProductivityProductivity• SpecializationSpecialization• Division of LaborDivision of Labor• SecuritySecurity• EquityEquity• FreedomFreedom

• The United States is a mixed market economy The United States is a mixed market economy that includes a that includes a free enterprise free enterprise system.system.• It is called free enterprise because businesses It is called free enterprise because businesses

and individuals are allowed to produce and sell and individuals are allowed to produce and sell goods for a profit with a goods for a profit with a minimum interference minimum interference from the government.from the government.

• Businesses choose what they want to produce Businesses choose what they want to produce and sell and consumers decide what they want and sell and consumers decide what they want to buy.to buy.

• The main goal of business (the producers) is to The main goal of business (the producers) is to make goods that buyers (consumers) want to make goods that buyers (consumers) want to buy.buy.

• The main goal of the consumers is to buy what The main goal of the consumers is to buy what they want at a reasonable price.they want at a reasonable price.

This system of free This system of free enterprise generally enterprise generally works out well.works out well.

It is voluntary It is voluntary exchange of buyers and exchange of buyers and sellers freely engaging sellers freely engaging in transactions.in transactions.

• Another feature of the free enterprise Another feature of the free enterprise system is private property rights.system is private property rights.

• This means that all individuals and businesses This means that all individuals and businesses have the freedom to own, use, and dispose of have the freedom to own, use, and dispose of their own property as they so choose as long as their own property as they so choose as long as it does not interfere with the rights of othersit does not interfere with the rights of others

• By allowing ownership of property, this opens By allowing ownership of property, this opens up the way for someone to place a business on up the way for someone to place a business on his own property as long as it conforms to his own property as long as it conforms to proper zoning. proper zoning.

• This right encourages the individual to have a This right encourages the individual to have a business that will be productive and efficient.business that will be productive and efficient.

• ProfitsProfits will be made and the desire for will be made and the desire for higher profits will encourage innovations higher profits will encourage innovations in the business that will produce a in the business that will produce a product faster and more profitablyproduct faster and more profitably

• Innovation could include new machines that Innovation could include new machines that could perform two tasks-automationcould perform two tasks-automation

• Workers could become more specialized.Workers could become more specialized.• Dividing workers into teams where each is Dividing workers into teams where each is

specialized (does one task well) could increase specialized (does one task well) could increase production and quality and therefore be more production and quality and therefore be more efficient.efficient.

Free EnterpriseFree Enterprise

GovernmentGovernment does have a does have a limitedlimited role in the role in the free enterprise system.free enterprise system.– Must break up or regulate companies that Must break up or regulate companies that

appear to be developing too much power.appear to be developing too much power.– Also help protect the environment, set minimum Also help protect the environment, set minimum

wage, protects property rights and enforces wage, protects property rights and enforces patents, and copyrights.patents, and copyrights.

A A patentpatent is a set of exclusive rights given to is a set of exclusive rights given to the inventor for a specific amount of time.the inventor for a specific amount of time.

– For ex. = if a computer engineer designs and make For ex. = if a computer engineer designs and make a new mouse for a computer and gets a patent for a new mouse for a computer and gets a patent for his invention, no one else can duplicate this mouse his invention, no one else can duplicate this mouse


A A CopyrightCopyright is a set of exclusive rights is a set of exclusive rights regulating the use of a particular regulating the use of a particular expression, idea or information.expression, idea or information.– Copyrights apply to poems, plays, literacy Copyrights apply to poems, plays, literacy

works, movies, music, software, etc…works, movies, music, software, etc…– This power point should be have a This power point should be have a

copyright.copyright.Mr Tomlin owns it just like your parents own Mr Tomlin owns it just like your parents own

their car and house. their car and house.


There are advantages and There are advantages and disadvantages in the free enterprise disadvantages in the free enterprise system.system.

SupportersSupporters = feel that with the = feel that with the market controlling the production and market controlling the production and price, economic growth will occur.price, economic growth will occur.– With the resulting growth, the standard With the resulting growth, the standard

of living will improve and there will be a of living will improve and there will be a greater potential for individuals to raise greater potential for individuals to raise their incomes.their incomes.


OpponentsOpponents = Argue that there are = Argue that there are still unemployed workers, laid-off still unemployed workers, laid-off workers, and no guarantee of job workers, and no guarantee of job security.security.– If a market that was thriving suddenly If a market that was thriving suddenly

takes a “dive”, many well-paid workers takes a “dive”, many well-paid workers with a high standard of living may find with a high standard of living may find themselves out of work.themselves out of work.

Objective 8.03 = Explain the Objective 8.03 = Explain the circular flow of economic activities circular flow of economic activities

and how interactions determine and how interactions determine the prices of goods and servicesthe prices of goods and services

Objective 8.03 = Explain the circular flow of Objective 8.03 = Explain the circular flow of economic activities and how interactions economic activities and how interactions

determine the prices of goods and servicesdetermine the prices of goods and services Major ConceptsMajor Concepts

– Factor MarketFactor Market– Product MarketProduct Market

TermsTerms– Circular Flow of Economic ActivityCircular Flow of Economic Activity– WagesWages– SalariesSalaries– Economic InterdependenceEconomic Interdependence

Economic FlowEconomic Flow

Economists use a model called the a Economists use a model called the a Circular flow diagramCircular flow diagram to illustrate to illustrate how the market system works. It how the market system works. It showsshows the relationship between the relationship between money (income) and spending for the money (income) and spending for the economy as a whole. economy as a whole.

Households, businesses, and the Households, businesses, and the government make up this modelgovernment make up this model

Circular Flow DiagramCircular Flow Diagram


HouseholdsHouseholds are defined as people or are defined as people or individuals who live in a house, apartment, individuals who live in a house, apartment, trailer or condo.trailer or condo.

BusinessesBusinesses are groups or individuals that are groups or individuals that produce a particular good or service.produce a particular good or service.

GovernmentGovernment provides laws, order and provides laws, order and goods and services such as national goods and services such as national defense, health, education, and defense, health, education, and

housinghousing


Now, how does all of this income come Now, how does all of this income come together?together?– Households earn wages and salaries in Households earn wages and salaries in

exchange for their labor. exchange for their labor. – The labor provided by household provides The labor provided by household provides

businesses (FACTOR MARKETS) with the means businesses (FACTOR MARKETS) with the means to produce goods.to produce goods.

– The businesses offer their goods and services The businesses offer their goods and services for sale.for sale.

– Households and other businesses buy the Households and other businesses buy the goods in the PRODUCT MARKETgoods in the PRODUCT MARKET


The households and businesses pay The households and businesses pay taxes to the government.taxes to the government.

The government uses these taxes to The government uses these taxes to purchase goods and services such as purchase goods and services such as books and buses for schools, military books and buses for schools, military expenditures, law enforcement, etcexpenditures, law enforcement, etc……


Households , businesses and Households , businesses and government have a mutual need that government have a mutual need that is called is called economic interdependenceeconomic interdependence..

All three need each other to keep the All three need each other to keep the economy going.economy going.

This flow of money between This flow of money between households, businesses, and households, businesses, and government is called the government is called the Circular Circular Flow of Economic ActivityFlow of Economic Activity..

Objective 8.04 =Illustrate how Objective 8.04 =Illustrate how Supply and Demand affects Supply and Demand affects

PricePrice

Objective 8.04 =Illustrate how Supply Objective 8.04 =Illustrate how Supply and Demand affects Priceand Demand affects Price

Major ConceptsMajor Concepts– Law of DemandLaw of Demand– Law of SupplyLaw of Supply– Law of Supply and DemandLaw of Supply and Demand– Equilibrium Price / Market PriceEquilibrium Price / Market Price– Influences on Supply and DemandInfluences on Supply and Demand

Objective 8.04 =Illustrate how Objective 8.04 =Illustrate how Supply Supply and Demandand Demand affects Price affects Price

TermsTerms– Demand Curve / ScheduleDemand Curve / Schedule– Supply Curve / ScheduleSupply Curve / Schedule– Personal IncomePersonal Income– Disposal incomeDisposal income– Complimentary goodsComplimentary goods– Substitute goodsSubstitute goods

Supply & DemandSupply & Demand

SupplySupply refers to the refers to the QUANTITIESQUANTITIES of a good of a good or service that producers are willing to sell or service that producers are willing to sell at market price.at market price.

The quantity supplied varies according to The quantity supplied varies according to price.price.– When prices of goods rise the quantity of When prices of goods rise the quantity of

goods supplied will rise.goods supplied will rise.– When the price of goods falls the quantity of When the price of goods falls the quantity of

supplied goods will fallsupplied goods will fall This principle is called the This principle is called the Law of SupplyLaw of Supply

Supply & DemandSupply & Demand

The The supply schedulesupply schedule is a chart that show is a chart that show the quantity produced at a certain price.the quantity produced at a certain price.

The The supply curvesupply curve is a graph that shows the is a graph that shows the amount of a product supplied at certain amount of a product supplied at certain prices.prices.– Notice that the supply curve slope upward.Notice that the supply curve slope upward.– This shows that suppliers are more willing to This shows that suppliers are more willing to

offer more goods and services at a higher price offer more goods and services at a higher price and fewer at the lowest price.and fewer at the lowest price.

Supply CurvesSupply Curves

Supply and DemandSupply and Demand

DemandDemand is the desire and ability to is the desire and ability to buy certain goods and services.buy certain goods and services.

Consumers must want something, be Consumers must want something, be willing to buy it and must be able to willing to buy it and must be able to afford it. afford it. – This is the This is the law of demandlaw of demand

The law of demand can also be represented The law of demand can also be represented by numbers.by numbers.

Demand CurvesDemand Curves


The The Demand scheduleDemand schedule is a chart that is a chart that lists the quantities of products consumers lists the quantities of products consumers are willing to buy over a certain range of are willing to buy over a certain range of prices.prices.

A A Demand CurveDemand Curve is the a graph that is the a graph that shows the amount of product that will be shows the amount of product that will be bought at various prices.bought at various prices.– Notice that the demand curve slopes Notice that the demand curve slopes

downward. This is because people will buy less downward. This is because people will buy less of a product if the price is high and more of a of a product if the price is high and more of a product if the price is low.product if the price is low.


The The law of Supply and Demandlaw of Supply and Demand says that what is produced (Supply) says that what is produced (Supply) will be determined by what is bought will be determined by what is bought (Demand).(Demand).

Consumers are willing to buy if the Consumers are willing to buy if the price (What must be paid for goods) price (What must be paid for goods) is reasonable.is reasonable.

Of course, producers must make a Of course, producers must make a profit.profit.


Producers hope for an Producers hope for an equilibriumequilibrium or or market pricemarket price that will enable them to sell that will enable them to sell every unit that is produced.every unit that is produced.– Apple hopes to make exactly the number of Apple hopes to make exactly the number of

iPods it will ultimately sell.iPods it will ultimately sell. Since price is an important factor in supply Since price is an important factor in supply

and demand, this means income must be and demand, this means income must be assessed.assessed.

Personal incomePersonal income is all the money that is all the money that comes into a household from wages. comes into a household from wages.


Out of this income, necessities must first Out of this income, necessities must first be paid.be paid.

NecessitiesNecessities are rent (mortgage), utilities, are rent (mortgage), utilities, transportation costs, health care, etc.transportation costs, health care, etc.

The money that is left after paying for The money that is left after paying for necessities is called necessities is called disposable disposable incomeincome..

Disposable income is the money that Disposable income is the money that can can be used for entertainment, savings, or be used for entertainment, savings, or whatever one wishes to spend it on. whatever one wishes to spend it on.

Supply and DemandSupply and Demand This disposable income is usually what This disposable income is usually what

determines supply and demand. determines supply and demand. Whatever is left over after paying for Whatever is left over after paying for

“needs” is what will be spent on “wants”“needs” is what will be spent on “wants”

Another important factor in supply and Another important factor in supply and demand is demand is competitioncompetition..

When there is When there is moremore competition (more competition (more than one seller of a particular product) than one seller of a particular product) consumers have consumers have moremore choicechoice and usually and usually can get a product can get a product cheapercheaper..

Supply and DemandSupply and Demand Competition is good for consumers but can Competition is good for consumers but can

be bad for the sellers.be bad for the sellers. Some small businesses may not be able to Some small businesses may not be able to

compete with larger businesses in a “price compete with larger businesses in a “price war”war”

Larger businesses can usually sell Larger businesses can usually sell products cheaper because they can buy products cheaper because they can buy larger quantities of the product.larger quantities of the product.– When small businesses cannot compete they When small businesses cannot compete they

usually have to close.usually have to close. You can see this in cities where Wal-Mart has opened You can see this in cities where Wal-Mart has opened

stores. Nickel & Dime stores?stores. Nickel & Dime stores?


Larger businesses can purchase Larger businesses can purchase goods @ cheaper prices because of goods @ cheaper prices because of their volume.their volume.

Small local businesses can’t do this Small local businesses can’t do this and many time are forced to close.and many time are forced to close.


Supply and demand can also be affected Supply and demand can also be affected by substitute and complementary goods.by substitute and complementary goods.

SubstituteSubstitute goods are goods that can be goods are goods that can be consumed or used in place of one another.consumed or used in place of one another.

For example, coffee and tea are substitute For example, coffee and tea are substitute goods.goods.

The more substitute goods there are for a The more substitute goods there are for a certain product, the harder it is to get certain product, the harder it is to get consumers to purchase a particular one.consumers to purchase a particular one.


ComplementaryComplementary goods are goods goods are goods that are consumed with another that are consumed with another good. good.

Illustrating this would be taco filling Illustrating this would be taco filling and taco shells.and taco shells.

These two items are used together, These two items are used together, so when the demand for taco shells so when the demand for taco shells goes up so will the demand for taco goes up so will the demand for taco filling.filling.

Objective 8.05 =Predict how prices Objective 8.05 =Predict how prices change when there is either a change when there is either a

shortage or a surplus shortage or a surplus

Objective 8.05 =Predict how prices change Objective 8.05 =Predict how prices change when there is either a shortage or a surpluswhen there is either a shortage or a surplus

Major ConceptsMajor Concepts– Influences on PricesInfluences on Prices

TermsTerms– SurplusSurplus– ShortageShortage– Consumer TastesConsumer Tastes– Minimum WageMinimum Wage– Inflation Inflation – DeflationDeflation– Wage and price controlWage and price control– Interest RatesInterest Rates– Trickle-down effectTrickle-down effect– Supply-side EconomicsSupply-side Economics

PricesPrices

Economic Decisions are formed on the Economic Decisions are formed on the basis of basis of pricesprices..

This, in turn affects supply and demand.This, in turn affects supply and demand. Prices are also affected by Prices are also affected by consumer consumer

tastestastes – the products that consumers – the products that consumers prefer.prefer.– A good example is the iPod.A good example is the iPod.

Consumers liked Apple’s new technology which Consumers liked Apple’s new technology which enabled them to listen to more kinds of music enabled them to listen to more kinds of music because of easier access.because of easier access.

Apple had come up with a better product, so Apple had come up with a better product, so consumers bought it.consumers bought it.

PricesPrices

Sometimes prices cause a shortage.Sometimes prices cause a shortage. A A shortageshortage occurs when the price of a occurs when the price of a

product is too low and there are not product is too low and there are not enough products available.enough products available.– When Cabbage Patch dolls were first When Cabbage Patch dolls were first

introduced, there were not enough dolls to introduced, there were not enough dolls to meet the high demand. meet the high demand.

People were furious.People were furious.

– Prices increased because of the demand and Prices increased because of the demand and people were willing to pay more because of the people were willing to pay more because of the shortage.shortage.

PricesPrices Sometimes prices cause a Sometimes prices cause a surplussurplus ( (excess excess

supplysupply).). If prices are If prices are too hightoo high, people will not buy , people will not buy

the product and producers will the product and producers will not be able not be able to sellto sell all that they have. all that they have.

After a period of time, supply and demand After a period of time, supply and demand will be balanced and an will be balanced and an equilibrium priceequilibrium price will be achieved.will be achieved.– At this price there will not be a shortage or At this price there will not be a shortage or

surplus.surplus.– The price will usually stay the same until there The price will usually stay the same until there

is a change in supply or demand again is a change in supply or demand again

PricesPrices

Prices and wages can also be Prices and wages can also be affected by government.affected by government.

It does this through wage and price It does this through wage and price controls.controls.

The The minimum wageminimum wage is set by the is set by the government. government. (Price Floor)(Price Floor)

It is the lowest hourly wage that can It is the lowest hourly wage that can be paid to workers and was be paid to workers and was increased in July 2007 to $5.85/hourincreased in July 2007 to $5.85/hour

PricesPrices

Government can also set the price of Government can also set the price of a product when it feels that the a product when it feels that the forces of supply and demand are forces of supply and demand are unfair.unfair.

It can set a It can set a price ceilingprice ceiling, which is the , which is the maximum price that can be charged maximum price that can be charged for goods.for goods.– Some large cities have price ceilings, Some large cities have price ceilings,

called rent controlcalled rent control, on rent to ensure , on rent to ensure housing for families with lower incomes.housing for families with lower incomes.

PricesPrices

The government can also set a price The government can also set a price floor.floor.

A A price floorprice floor is the minimum price is the minimum price that can be charged for goods and that can be charged for goods and services. services.

Price floors prevent prices from Price floors prevent prices from dropping too low.dropping too low.

Minimum wage is an example of a Minimum wage is an example of a price floorprice floor..

PricesPrices Prices can also be affected by government Prices can also be affected by government

policies.policies. Supply-side economics were pushed by Supply-side economics were pushed by

President Ronald Reagan.President Ronald Reagan. Supply-side economicsSupply-side economics promised an promised an

“across the board” reduction in income tax “across the board” reduction in income tax rates and a reduction in capital gains tax rates and a reduction in capital gains tax rates.rates.

These tax cuts would help businesses by These tax cuts would help businesses by allowing them to take the money saved allowing them to take the money saved from the cuts and using it for production from the cuts and using it for production and labor.and labor.

PricesPrices

ReaganReagan believed that allowing believed that allowing businesses to spend more on businesses to spend more on production and labor would have a production and labor would have a trickle-down effect.trickle-down effect.

This This trickle-down effecttrickle-down effect or more or more people working with more income to people working with more income to spend would benefit everyone spend would benefit everyone because more jobs would be formed.because more jobs would be formed.

PricesPrices Remember, that in a market economy like ours, Remember, that in a market economy like ours,

the economy and society are affected by prices.the economy and society are affected by prices. When there is a sustained increase in the level of When there is a sustained increase in the level of

prices we have prices we have inflationinflation.. Inflation hurts the economy by reducing the Inflation hurts the economy by reducing the

purchasing power of money and changing the purchasing power of money and changing the way people spend money.way people spend money.– Especially hard on people who have fixed incomes Especially hard on people who have fixed incomes

(people on pensions)(people on pensions)– When businesses have an increase in production costs, When businesses have an increase in production costs,

the consumer pays more.the consumer pays more.– Corrected by Gov’t dispersing less moneyCorrected by Gov’t dispersing less money

PricesPrices

The opposite occurs when there is The opposite occurs when there is deflation.deflation.

Deflation is a decrease in the general Deflation is a decrease in the general price level over a period of time.price level over a period of time.

During deflation, the purchasing During deflation, the purchasing power of money goes up, but power of money goes up, but businesses make less profit so they businesses make less profit so they may lay off or fire workersmay lay off or fire workers

PricesPrices

Interest Rates (money paid for the Interest Rates (money paid for the use of money usually calculated as a use of money usually calculated as a yearly percentage) can also steer yearly percentage) can also steer prices.prices.

When interest rates on bank When interest rates on bank accounts, savings accounts and accounts, savings accounts and certificates of deposit (CDs) are high, certificates of deposit (CDs) are high, most people want to put money in most people want to put money in their savings accountstheir savings accounts

PricesPrices

Therefore, producers will lower prices Therefore, producers will lower prices on goods to try to convince on goods to try to convince consumers to spend their money consumers to spend their money rather than save it.rather than save it.

When interest rates are low at banks, When interest rates are low at banks, consumers usually tend to spend consumers usually tend to spend more and prices will rise.more and prices will rise.

Objective 8.06 = Explain how changes in the level Objective 8.06 = Explain how changes in the level of competition can affect price and output levelsof competition can affect price and output levels

Major ConceptsMajor Concepts– Market BasicsMarket Basics

TermsTerms– Buyers and SellersBuyers and Sellers– MonopolyMonopoly– OligopolyOligopoly– MergersMergers– ConglomeratesConglomerates

Market CompetitionMarket Competition

Perfect competitionPerfect competition is an is an economic model where no producer economic model where no producer or consumer has the market power or consumer has the market power to influence price.to influence price.

For perfect competition you must For perfect competition you must have a market where there is a large have a market where there is a large number of small producers and there number of small producers and there are consumers who have no impact.are consumers who have no impact.

Prices are set by the marketPrices are set by the market

Market CompetitionMarket Competition Goods and services are perfect Goods and services are perfect

substitutes.substitutes. All consumers and producers known the All consumers and producers known the

prices that have been set by all, all prices that have been set by all, all producers have access to technology and producers have access to technology and any producers can enter or leave the any producers can enter or leave the market as it wishes.market as it wishes.

Perfect competition only fits one market in Perfect competition only fits one market in the real world – agriculture.the real world – agriculture.

No single farmer can influence how high or No single farmer can influence how high or how low the prices for their crops will be.how low the prices for their crops will be.


In the real world, markets work best In the real world, markets work best when they are large numbers of when they are large numbers of buyers and sellers. buyers and sellers.

This competitive market would be This competitive market would be based on supply and demand and based on supply and demand and what buyers are willing to pay.what buyers are willing to pay.

In smaller markets, sometimes In smaller markets, sometimes monopolies can corner the market on monopolies can corner the market on certain goodscertain goods


A A monopolymonopoly is the one-and-only provider is the one-and-only provider of a good or service.of a good or service.

When there is no competition, a monopoly When there is no competition, a monopoly can charge any price it wants.can charge any price it wants.

Microsoft has been considered a Microsoft has been considered a monopoly.monopoly.

There have been several lawsuits against There have been several lawsuits against Microsoft concerning its software Microsoft concerning its software programs. programs.

Market CompetitionMarket Competition Oligopolies are markets that are dominated by a Oligopolies are markets that are dominated by a

small number of producers.small number of producers. They are usually found in car sales, consumer They are usually found in car sales, consumer

goods sales, and steel production.goods sales, and steel production. The oligopolies must be careful and observe the The oligopolies must be careful and observe the

actions of their competition.actions of their competition.– For example, if there are three Toyota dealerships in an For example, if there are three Toyota dealerships in an

area, when one dealership lowers prices the other will area, when one dealership lowers prices the other will lose business. lose business.

The dealership that lowers prices also will lose profit. The dealership that lowers prices also will lose profit. Some dealers will neither raise more lower prices and Some dealers will neither raise more lower prices and

depend on the reputations to sell cars.depend on the reputations to sell cars. They always must be aware of what each other is doingThey always must be aware of what each other is doing

Market CompetitionMarket Competition When two or more companies combine to When two or more companies combine to

form a single business, it is called a form a single business, it is called a conglomerateconglomerate..

This process of companies joining together This process of companies joining together is called a is called a mergermerger..

Mergers threaten competition and Mergers threaten competition and sometimes government will step in to sometimes government will step in to prevent the merger.prevent the merger.

Vertical mergersVertical mergers occur when one company occur when one company buys out another company that was once buys out another company that was once it supplier.it supplier.


A A horizontal mergerhorizontal merger is when two is when two companies that are competing in the same companies that are competing in the same market merge and joint together.market merge and joint together.– A good example was the merger of Daimler-A good example was the merger of Daimler-

Benz, the German manufacturer of Mercedes Benz, the German manufacturer of Mercedes Benz, and Chrysler automobile.Benz, and Chrysler automobile.

– When mergers are made that form When mergers are made that form conglomerates which include companies in conglomerates which include companies in other countries this is called a other countries this is called a multinational multinational conglomerate.conglomerate.

Economic InstitutionsEconomic Institutions

The most common form of business is the The most common form of business is the sole proprietorship.sole proprietorship.

This is a business that is owned and This is a business that is owned and operated by a single individual.operated by a single individual.– A lot of businesses in your hometowns are sole A lot of businesses in your hometowns are sole

proprietorships.proprietorships. These types of businesses are easy to set These types of businesses are easy to set

up and provide flexibility for the owners.up and provide flexibility for the owners.– The owners own the business, receive all the The owners own the business, receive all the

profits, make their own decisions and do not profits, make their own decisions and do not have a boss to consult on any matters.have a boss to consult on any matters.


There are disadvantages though. There are disadvantages though. The financial responsibilities and all of the The financial responsibilities and all of the

problems related to the business are the problems related to the business are the responsibility of the owner.responsibility of the owner.

This is called This is called uunnlliimmiitteedd l liiaabbiilliittyy.. If something goes wrong in the business If something goes wrong in the business

and the business loses money, the owner and the business loses money, the owner will have to pay even if some of his will have to pay even if some of his possessions have to be sold to settle the possessions have to be sold to settle the debt.debt.

Economic InstitutionsEconomic Institutions Sometimes it is hard to raise the money needed Sometimes it is hard to raise the money needed

to start or enlarge a sole proprietorship.to start or enlarge a sole proprietorship. Owners sometimes get loans (financial capital) Owners sometimes get loans (financial capital)

through banks or run up debt on credit cards.through banks or run up debt on credit cards. Employees are also hard to find.Employees are also hard to find. Sole proprietorships may not be able to offer Sole proprietorships may not be able to offer

large salaries with benefits (health insurance, large salaries with benefits (health insurance, retirement, paid sick leave, and vacation) retirement, paid sick leave, and vacation)

Sole proprietorships also have Sole proprietorships also have limited lifelimited life.. This means that when the owner retires of dies, This means that when the owner retires of dies,

the business usually ceases unless it is sold to the business usually ceases unless it is sold to another owner.another owner.

Economic InstitutionsEconomic Institutions Another type of business is the Another type of business is the partnershippartnership.. A partnership is a business that is owned by two A partnership is a business that is owned by two

or more people.or more people. When a partnership is made, a legal agreement is When a partnership is made, a legal agreement is

drawn up that states how much money each drawn up that states how much money each partner will contribute and what role each partner partner will contribute and what role each partner will play in the business.will play in the business.

It explains how profits and losses will be shared It explains how profits and losses will be shared and describes how partners may be added or how and describes how partners may be added or how to close the business if needed. to close the business if needed.

This document is called the Articles of PartnershipThis document is called the Articles of Partnership


Partners usually raise money by Partners usually raise money by borrowing from banks or by adding borrowing from banks or by adding more partners.more partners.

Partners usually have specific talents Partners usually have specific talents so each partner can oversee certain so each partner can oversee certain aspect of the business, depending on aspect of the business, depending on their expertise.their expertise.


Of course, there are some Of course, there are some disadvantages to partnerships.disadvantages to partnerships.

Every time a new partner is deleted Every time a new partner is deleted or added, a new legal agreement or added, a new legal agreement must be made (Articles of must be made (Articles of Partnership).Partnership).

If a partner dies, the other partners If a partner dies, the other partners would gave to deicide whether to would gave to deicide whether to keep the business open or to close it. keep the business open or to close it.


Partnerships also have unlimited Partnerships also have unlimited liability.liability.

Each owner is fully responsible for all Each owner is fully responsible for all the debts of the partnership.the debts of the partnership.

If for some reason the other partners If for some reason the other partners could not pay part of their debt, the could not pay part of their debt, the others who have money would have others who have money would have to pay.to pay.


Corporations Corporations are businesses that have are businesses that have the same rights in law as those of a the same rights in law as those of a person.person.

When someone want to start a When someone want to start a corporation, they must get a corporation, they must get a chartercharter (a (a government document granting them government document granting them permission to organize)permission to organize)– This charter specifies the name, the purpose This charter specifies the name, the purpose

and the features of this corporationand the features of this corporation– It also specifies how much It also specifies how much stockstock (ownership (ownership

shares of the corporation)shares of the corporation) will be issued. will be issued.


The people who buy the stock are called The people who buy the stock are called shareholdersshareholders..

Shareholders become the owners of the Shareholders become the owners of the corporation and can, by the shares corporation and can, by the shares increasing in value or by getting regular increasing in value or by getting regular payouts called payouts called dividendsdividends, increase their , increase their wealth. wealth.

The The $$ received by the company from received by the company from selling stock is used to set up and run the selling stock is used to set up and run the business.business.


A board of directors is elected by the A board of directors is elected by the shareholders to hire managers to run the shareholders to hire managers to run the business.business.

An advantage of corporations is their An advantage of corporations is their ability to raise ability to raise $$. .

One way One way corporations raise corporations raise $$ is by selling is by selling their stocktheir stock on the on the stock marketstock market (a place (a place where stocks are bought or sold for where stocks are bought or sold for various companies)various companies)

Economic InstitutionsEconomic Institutions Another way for a corporation to raise money is Another way for a corporation to raise money is

by selling by selling bondsbonds.. Bonds are like a loan.Bonds are like a loan. A person will loan a certain amount of money (by A person will loan a certain amount of money (by

bond) to the corporation and after a given bond) to the corporation and after a given amount of time cash in the bond for the amount amount of time cash in the bond for the amount plus the interest that has accrued.plus the interest that has accrued.

Another advantage is that ownership can easily Another advantage is that ownership can easily be transferred.be transferred.

It a shareholder no longer wants ownership in a It a shareholder no longer wants ownership in a particular corporation, he can sell the stock and particular corporation, he can sell the stock and buy stock in another corporationbuy stock in another corporation


Limited liability is the best advantage of a Limited liability is the best advantage of a corporation.corporation.

The The corporation, not the owners, is corporation, not the owners, is responsible for any debts in the responsible for any debts in the corporation.corporation.

If a corporation fails, the shareholder If a corporation fails, the shareholder would lose what he had invested in the would lose what he had invested in the corporation, but would not be responsible corporation, but would not be responsible for paying off the corporation’s debt.for paying off the corporation’s debt.


Corporations also have Corporations also have unlimited lifeunlimited life.. Unlike closing of businesses when Unlike closing of businesses when

owners die in proprietorships or owners die in proprietorships or partnerships, the corporation will live partnerships, the corporation will live on forever.on forever.

Some of the disadvantages of Some of the disadvantages of corporations are corporations are double taxationdouble taxation and and internal conflictsinternal conflicts..


Double taxationDouble taxation means that share means that share holder are paying taxes twice holder are paying taxes twice because the corporation pay taxes because the corporation pay taxes on its profits and then the on its profits and then the shareholders must pay taxes on their shareholders must pay taxes on their dividend (earnings from the dividend (earnings from the corporation)corporation)


Internal conflict may arise when Internal conflict may arise when there are disagreement between the there are disagreement between the shareholders an management over shareholders an management over how the corporation should be run, how the corporation should be run, or how profits are to be paid out.or how profits are to be paid out.

Many time these conflict result in a Many time these conflict result in a change in management.change in management.

Economic InstitutionsEconomic Institutions Development of Organized Labor.Development of Organized Labor.

– From 1930 until WWII the U.S. was in the midst From 1930 until WWII the U.S. was in the midst of the Great Depression.of the Great Depression.

– Workers were lucky to have any jobs.Workers were lucky to have any jobs.– During the ’30s, act of Congress gave unions During the ’30s, act of Congress gave unions

the right to organize and owners were no the right to organize and owners were no longer able to close out unions.longer able to close out unions.

– The The NATIONAL LABOR RELATIONS ACTNATIONAL LABOR RELATIONS ACT of ’35 of ’35 marked the end of the repression of union marked the end of the repression of union activities.activities.

The National Labor Relations Ac also established the The National Labor Relations Ac also established the National Labor Relations Board (NLRB) to supervise National Labor Relations Board (NLRB) to supervise union election at plants.union election at plants.


The National Labor Relation Act The National Labor Relation Act guaranteed workers the right to organize guaranteed workers the right to organize unions and engage in collective unions and engage in collective bargaining.bargaining.– Designed to regulate and control unions.Designed to regulate and control unions.

The Fair Standards ActThe Fair Standards Act was passed in Jan. was passed in Jan. ’38.’38.– It se the first federal guideline for minimum It se the first federal guideline for minimum

wage and maximum hours.wage and maximum hours. 11stst minimum wage was .25 cents per hour minimum wage was .25 cents per hour


The government has helped unions, and it The government has helped unions, and it has also hurt them.has also hurt them.

In ’47, the government passed the In ’47, the government passed the Taft-Taft-Hartley Act (EOC Term), which closed Hartley Act (EOC Term), which closed shops (A worker had to belong to the shops (A worker had to belong to the union in order to be hired by a union in order to be hired by a company.)company.)– It became illegal for any company that made It became illegal for any company that made

goods to sell them in states other than the goods to sell them in states other than the state to which the company was located. state to which the company was located.


Organized Labor Disputes.Organized Labor Disputes.– The union’s job is to carry out collective The union’s job is to carry out collective

bargaining for its members. bargaining for its members. – Collective bargaining involves union official Collective bargaining involves union official

and the company management meeting to and the company management meeting to discuss terms of a contract.discuss terms of a contract.

– This contract usually lasts for several year and This contract usually lasts for several year and must be negotiated each time it is up for must be negotiated each time it is up for renewal.renewal.

– The negotiation concerns wages and benefits, The negotiation concerns wages and benefits, holidays and hour/days worked.holidays and hour/days worked.


Sometimes the union representatives and Sometimes the union representatives and the company cannot agree on certain the company cannot agree on certain terms of the contract.terms of the contract.– Mediation Mediation is one of the options.is one of the options.

Mediation means Mediation means bringing in a third partybringing in a third party to try to to try to help them reach and agreement.help them reach and agreement.

This mediator meets with both sides and This mediator meets with both sides and attempts to attempts to reach reach compromisecompromise..

– Another option is Another option is arbitrationarbitration.. In arbitration, a In arbitration, a third party hears both sides and third party hears both sides and

decides how to settle the disagreement.decides how to settle the disagreement. (Both parties (Both parties have agreed to accept whatever the arbitrator have agreed to accept whatever the arbitrator decides)decides)


Outside help is not always asked for.Outside help is not always asked for. In some cases, labor and In some cases, labor and

management use other ways to try management use other ways to try to come up with an agreement.to come up with an agreement.

Workers can called for a Workers can called for a strikestrike (when (when workers do not go to work) when no workers do not go to work) when no agreement is reached.agreement is reached.

Workers usually Workers usually picketpicket (walk or (walk or march in front of the company)march in front of the company)


Owners may try to settle the Owners may try to settle the disagreement by a lockout.disagreement by a lockout.

A A lockoutlockout is when the company does is when the company does not allow the workers to come into not allow the workers to come into the building until they accept the the building until they accept the contract terms.contract terms.

The company hopes that the lack of The company hopes that the lack of income will force the workers to give income will force the workers to give in tot their terms. in tot their terms.

MoneyMoney

In early civilizations, bartering was used to In early civilizations, bartering was used to obtain goods.obtain goods.– Bartering Bartering means directly trading or means directly trading or

exchanging products that they had for exchanging products that they had for products they needed.products they needed.

This system did not work well because it was hard to This system did not work well because it was hard to determine the relative values.determine the relative values.

– Now we have a Now we have a medium of exchangemedium of exchange.. This means we trade money for products and This means we trade money for products and

services.services. Money established a value to a good or service.Money established a value to a good or service.

MoneyMoney

A soda costs $.75, a cheeseburger A soda costs $.75, a cheeseburger $3.00, and a CD is $10.00.$3.00, and a CD is $10.00.

Today coins and currency are they Today coins and currency are they types of money that are used.types of money that are used.– CoinsCoins are money made for metal. are money made for metal.– CurrencyCurrency includes both coins and paper includes both coins and paper

notes (Dollar bills)notes (Dollar bills)

BankingBanking

Individual spend money daily.Individual spend money daily.– The money spent can be in different The money spent can be in different

forms.forms.– Currency is one way to purchase Currency is one way to purchase

products.products.– Another way would be by using the Another way would be by using the

services that a services that a financial institutionfinancial institution offers.offers. Individuals open checking accountsIndividuals open checking accounts

– These accounts are called These accounts are called demand depositsdemand deposits b/c b/c the money is available at their demand.the money is available at their demand.

BankingBanking A check can be written for the cost of the product, A check can be written for the cost of the product,

and that amount will be taken from the checking and that amount will be taken from the checking account and given to the business where you account and given to the business where you purchase the product.purchase the product.

Debit cardsDebit cards are another service provided by a are another service provided by a financial institution.financial institution.

A debit card is used exactly like a check.A debit card is used exactly like a check. The card is swiped through a special machine, the The card is swiped through a special machine, the

cost of the product will be deducted form your cost of the product will be deducted form your checking account and funds are given to the checking account and funds are given to the business where you purchased the product. business where you purchased the product.

BankingBanking

Credit CardsCredit Cards are another way to pay for are another way to pay for products.products.

These cards are also offered by a financial These cards are also offered by a financial institution.institution.

Credit cards are very different from debit Credit cards are very different from debit cards or checks.cards or checks.

Credit cards are actually a way for the Credit cards are actually a way for the consumer to buy items with borrowed consumer to buy items with borrowed money to be paid back at a later date.money to be paid back at a later date.

This is called buying on credit.This is called buying on credit.

BankingBanking

Another service offered by financial Another service offered by financial institution is institution is time depositstime deposits..

Time deposits are a form of savings Time deposits are a form of savings accounts that individuals can cash in only accounts that individuals can cash in only after a set amount of time. after a set amount of time.

They earn interest (money paid to you by They earn interest (money paid to you by banks) based on how much money is banks) based on how much money is deposited.deposited.

The money in these accounts grows larger The money in these accounts grows larger the longer you leave it in the bank.the longer you leave it in the bank.

Financial InstitutionsFinancial Institutions

Commercial Banks : Commercial Banks : Offers full banking Offers full banking services such as collecting deposits from services such as collecting deposits from and loaning money to consumers and and loaning money to consumers and businesses.businesses.– They make their profits by loaning money to They make their profits by loaning money to

consumers and businesses. (consumers and businesses. (In business to In business to make $$$$$$$$$$make $$$$$$$$$$))

– The banks charge interest on the amount of The banks charge interest on the amount of money that they loan.money that they loan.

– Most commercial banks require some type of Most commercial banks require some type of collateralcollateral before a loan is made to a consumer before a loan is made to a consumer or a business.or a business.


Collateral is anything of value that Collateral is anything of value that could be used to cover the value of could be used to cover the value of the loan in the consumer or business the loan in the consumer or business is unable to repay the loan.is unable to repay the loan.– When you buy a house, the house is When you buy a house, the house is

usually the collateral.usually the collateral.– If you cannot pay your mortgage If you cannot pay your mortgage

payment, the bank would foreclose on payment, the bank would foreclose on your house, sell your house and that your house, sell your house and that money would be used to pay your loan. money would be used to pay your loan.


Savings and Loans AssociationsSavings and Loans Associations::– The savings and loan associations (S&Ls) are The savings and loan associations (S&Ls) are

financial institutions that were opened to loan financial institutions that were opened to loan money to people purchasing homes. money to people purchasing homes.

– They also take deposits and perform many They also take deposits and perform many activities similar to commercial banks.activities similar to commercial banks.

– There are not as many savings and loan There are not as many savings and loan associations today due to their merging with associations today due to their merging with commercial banks.commercial banks.


Credit UnionsCredit Unions::– Credit unions are cooperatives that Credit unions are cooperatives that

serve certain businesses, labor unions, serve certain businesses, labor unions, or government institutions.or government institutions.

– They are open only to their members They are open only to their members and are a low cost not-for-profit and are a low cost not-for-profit operation.operation.

– The credit unions provide the same The credit unions provide the same services as a commercial bank.services as a commercial bank.

Protection of Money and InvestmentsProtection of Money and Investments

The Federal Reserve System serves as the United The Federal Reserve System serves as the United State’s centralized banking system.State’s centralized banking system.

A bill was passed in 1913 to establish this system A bill was passed in 1913 to establish this system and it was given more strength in the 1930’s.and it was given more strength in the 1930’s.

The Federal Reserve supervises member banks The Federal Reserve supervises member banks and serves the federal government as a fiscal and and serves the federal government as a fiscal and banking agent.banking agent.

It holds government funds, sells government It holds government funds, sells government securities and issues reserve notes (United States securities and issues reserve notes (United States Paper Bills.)Paper Bills.)

The FED also encourages healthy growth and The FED also encourages healthy growth and helps regulate inflation.helps regulate inflation.


The country is divided into 12 Federal The country is divided into 12 Federal Reserve Districts, each served by its own Reserve Districts, each served by its own Federal Reserve Bank, called “bankers Federal Reserve Bank, called “bankers banks.” banks.”

All banks chartered by the national All banks chartered by the national government are members of the Federal government are members of the Federal Reserve.Reserve.

All of these members must join the Federal All of these members must join the Federal Deposit Insurance Corporation, which Deposit Insurance Corporation, which insures single deposits up to $250,000.insures single deposits up to $250,000.


The FED policy is set by a Board of The FED policy is set by a Board of Governors consisting of seven members Governors consisting of seven members who serve 14-year terms and are who serve 14-year terms and are appointed by the president and confirmed appointed by the president and confirmed by the Senate.by the Senate.

One is chose to serve as the chairman for One is chose to serve as the chairman for a term of your years.a term of your years.

The present chairman is Ben Bernanke.The present chairman is Ben Bernanke. These posts are meant to be independent These posts are meant to be independent

and not subject to political pressureand not subject to political pressure


The Federal reserve has the power to The Federal reserve has the power to set member banks’ set member banks’ reserve ratioreserve ratio..– This increases or decreases the amount This increases or decreases the amount

of money available for loan.of money available for loan.– A bank can only loan so much money A bank can only loan so much money

depending upon how large their depending upon how large their deposits are.deposits are.

– This protects the consumer.This protects the consumer.


The FED also lends money to member The FED also lends money to member banks which the member banks then use banks which the member banks then use to make loans to consumers for cars, etc…to make loans to consumers for cars, etc…

The amount of interest they charge for The amount of interest they charge for their loans to member banks is called the their loans to member banks is called the discount ratediscount rate..– When the discount rate is raised, banks then When the discount rate is raised, banks then

raise their interest rates.raise their interest rates.– Discount rates are used to control the Discount rates are used to control the

economy.economy.


High discount rates mean high High discount rates mean high interest rate that slow the growth of interest rate that slow the growth of the economy.the economy.

The opposite effect is achieved by The opposite effect is achieved by lowering the rates.lowering the rates.

This also make the “FED” an This also make the “FED” an important and powerful part of our important and powerful part of our government.government.


The federal Reserve Banks buy and sell The federal Reserve Banks buy and sell government securities.government securities.

When they sell securities to their member When they sell securities to their member banks, the member banks decrease their banks, the member banks decrease their cash reserve and therefore their ability to cash reserve and therefore their ability to make loans.make loans.

The opposite effect is achieved by buying The opposite effect is achieved by buying securities – it increases reserves and more securities – it increases reserves and more money can be put into the economy.money can be put into the economy.


All of these All of these fiscal policyfiscal policy tools are tools are means used by the FED to attempt to means used by the FED to attempt to fine-tune our economy.fine-tune our economy.

The FED’S most important The FED’S most important function is to control the function is to control the nation’s money supply.nation’s money supply.

major concepts major concepts what to produce? what to produce? how to produce it? how to produce...

Documents

market economies

traditional economies

wellmixed economies

government regulations

equitythe government

individuals prices

major economic decision

individual decision