Unit 7aEconomics

American Free Market System

Introduction

Challenges in a free market

Supply and Demand

Economic systems

The U.S. economy

Factors of Production

Business organizations

The Circular flow of Economics

Resources, goods and services and money flow continuously among households, businesses and the government in the U.S. economy.

The Circular flow of Economics Continued…

Individual households own the resources used in production; sell the resources and use the income to purchase products.

Businesses (producers) buy resources used in production; sell the resources and use the income to purchase products. Businesses provide households with income and goods and services.

Governments use tax revenue from individuals and businesses to provide public goods and services.

Households supply

businesses with labor

(workforce) and payments for

goods and services

Businesses provide

households with income and goods

and services.

The government supplies

businesses with public goods and

services and payments for

products purchased.

Businesses provide the government with taxes and

goods and services.

The government provides households with income and public

goods and services.

Households provide the government with labor

(workforce) and taxes

Production, Consumption and Distribution

Four Questions all Economic

Systems must Address

Four Questions All Economic Systems must address…

What is produced?*Production*

Goods and services must satisfy the consumers wants and desires

Four Questions All Economic Systems must address…

HOW should these goods be produced?

*Factors of Production*1. Capital

2. Entrepreneurship3. Land4. Labor

Combine the factors of production to make or produce the goods and services

Four Questions All Economic Systems must address…

For WHOM are the goods and services produced?

*Distribution* Getting the goods and services from

producer to consumer

Four Questions All Economic Systems must address…

HOW MANY goods and services should be produced?

*Consumption*Make enough to have a large profit and still have consumer demand. How many is determined by supply and demand.

Supply and Demand

Supply and Demand…

Scarcity is the inability to satisfy all wants at the same time due to limited resources

Choices must be made as to what to produce, how much to produce and who will receive what is produced.

PRICE: Mechanism to decide who gets goods and services. The amount that satisfies both producers for profit and consumers for value.

Scarcity

Choices

Price

Supply and Demand determine price through their interaction

DEMAND: is the amount of a good or service that consumers are willing and able to buy at a certain price

SUPPLY: is the amount of a good or service that producers are willing and able to sell at a certain price.

LAW OF SUPPLY :Businesses will provide more products

when they can sell them at higher prices

LAW OF DEMAND:Buyers will demand more products

when they can buy them at lower prices

Incentives

Incite or motivate Change economic behavior Something that spurs someone into action:

sale, coupons, etc.

Resources, Scarcity & Opportunity Cost

Good

Anything that can be grown or manufactured (made)

Food Clothes Cars

Service

Something a person does for someone else in exchange for money or value.

Doctor Hairdresser waiter

Resources

Natural Human Capital Combine to make goods and services

Our Basic Economic Problem…

People have Unlimited Wants

Food Clothing Shelter Schools Hospitals Cars Transportation

But Resources are Limited

Land Soil Minerals Fuels People Money Technology

Scarcity

The inability to satisfy all wants at the same time;

the NEEDS are greater than the RESOURCES

Since resources are LIMITED consumers and producers must make CHOICES

CHOICE: selecting from a set of alternatives OPPORTUNITY COST: what is given up when the choice is made.

*Scarcity forces us to choose which needs and wants to satisfy with available resources.

*Scarcity affects decisions concerning what and how much to produce, how goods and services will be produced and who will get what is produced

Production: (sellers)

*Combining resources to make goods and services.

*Available resources and consumer preference determine what is produced

Consumption (buyers)

*Using goods and services

*Consumer preference and price determine what is purchased

SELLERBuyer

Challenges in a Free Market: Terms

Scarcity

In EnglishYou can't have everything you want.

Lessons for life

Acceptance of scarcity will help you make more reasoned choices

Alternatives

In English

Different options from which you can choose

Lessons for Life

There are many different ways to allocate resources and to solve problems

Yes….these are generic converse!

Choice

In English

Because you can't have everything you want, you have to make choices from a list of alternatives

Lessons for life

When policy-makers decide on a particular resource allocation, recognize that a choice had to be made due to scarcity. You may not like the alternative chosen, you may question the

choice, but the villain is scarcity

Trade-off’s

In English

Choices involve giving up something to get something. All choices have consequences, both positive and negative

Lessons for Life

You are responsible for the consequences of your choices. Since you make choices, you can't be a victim.

Opportunity Cost

In English

What is given up when a choice is made

Lessons for Life

All choices have opportunity costs. A good idea is only a good idea if its value is greater than the value of its opportunity cost. Voters must always identify the opportunity cost of a particular policy

Economic Systems

Command Economy

The central government makes decisions and determines how resources will be used.

The central government owns property and resources.

Businesses are not run for profit.

Businesses are not run for profit. No competition Lack of consumer choice The government sets the prices of goods and

services. China, North Korea, Cuba

Mixed Economy

Most common type of economic system Government and individuals share the decision making

process Individuals and businesses make decisions for the

private sector Individuals own the means of production Government makes plans for the public sector

Government guides and regulates production of goods and services offered.

A greater government role than in a free market economy

Most effective economy for providing goods and services

U.S. and most Western European countries are mixed economies

Free Market Economy

Also known as capitalism or free enterprise Private ownership of property and resources

(owned by individuals) Individuals and businesses make profits Individuals and businesses compete

Economic decisions are made by supply and demand

Profit is a motivator for productivity No government involvement Consumer sovereignty: buyers determine what is

produced

The U.S. economy is a MIXED

ECONOMY PRIVATE PROPERTY

FREE MARKETS

PROFIT

COMPETITION

CONSUMER SOVEREIGNTY

Markets are allowed to operate

without undue interference from the government.

Money, goods and services flow continuously

among individual households,

businesses and the government

Consumers determine

what goods and

services are produced by what

they buy

Money left over after

all business expenses have been

paid.

Rivalry between

businesses for the same

customers; results in

better

quality Individuals can own the means of production & property without

undue government interference

Factors of Production

anything that goes into the making of a

good or service

Factors of Production

Capital

Ex: tools, machinery, money and technology

Entrepreneur

Business owner and risk taker combines the factors of production

Factors of production cont…

Land

Natural Resources

Labor

Workers and their time and energy

Business Organizations

The 15 million businesses in the U.S. fall into three categories: sole proprietorships, owned by a single individual,

partnerships, with more than one owner sharing the risks and profits and corporations, owned by their stockholders.

Sole Proprietorship

1 owner

The owner takes all the risks Supplies capital, hires help, pays taxes The owner makes all the profits The owner is solely responsible for

losses

Partnership

More than one owner (2+)

Risks are shared amongst the owners Profits are shared amongst the owners Often more successful than sole

proprietorships Responsibilities are shared

Corporation

Owned by stockholders

Authorized to act as a legal person regardless of the number of owners

Owners share the profits Liability is limited to investment (you can only

loose as much as you put in) Raise money by selling stocks No one is responsible for corporation’s debt if

it fails