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Economics!26/12/14
By the end of the class today…
You should be able to Define economics
Identify and define the four types of economic systems
Know basic information about the economy in the United States
What is Economics? What does this term mean?
What are some related terms or ideas?
What are some examples of economic decisions people have to make?
How does economics affect people in their daily lives?
Who does economics affect?
Economics
“The study of how people make decisions in a
world where there are unlimited wants but limited resources.”
Wants & Needs What is a need?
Things that are required for survival
Food, water, clothing, shelter
What is a want? Things we would like to have
Wants & Needs Even in a country like the United States, with
vast resources and money, we cannot produce every single thing we want and need Must make decisions among the alternatives
Must answer 3 fundamental questions!
1. WHAT is produced? Both producers and consumers must decide
what should be reduced in a world of limited resources For example
With limited resources, should a local government use its money to build a school or fix a highway?
With limited resources, should a farmer produce cotton, soybeans or lettuce?
2. HOW is it produced?
Producers and consumers must decide how to produce something For example
How should we get oil for our energy needs?
How much pollution should a factory be allowed to give off?
How should animals be treated?
3. WHO consumes what is produced?
After goods/services are produced, society must decide how these goods will be distributed among members of society. For example
Who should receive the limited supply of flu vaccines?
Who should a shoe company market their product towards?
Who should attend a new school?
Who makes these decisions?
In the U.S. People (consumers)
Businesses (producers)
Government
But not every economic system is like this
What is an economic system? “a particular set of social institutions which deals
with the production, distribution, and consumption of goods and services in a particular society.”
There are four types of economic systems!
Traditional Tradition and custom govern economic
decisions
Decisions revolve around family, tribe
Resources are allocated based on inheritance
Farming, hunting, gathering stays the same over generations
Choices are determined by technology
Little/no technology
Traditional Advantages
Little competition= little friction between members
Clearly defined roles
System well understood by participants
Disadvantages Little growth or development
Slow to change
No technology
No social mobility
No control over environmental factors
Command Government makes all economic decisions
Individuals have little or no influence over economics
Government owns resources
No competition Businesses provide services and goods
Consumers have few choices
Government set prices of gods
Command Advantages
Stability (doesn’t follow business cycle)
Focus on equality, serving collectively
Distributes wealth
Products fulfill needs
Disadvantages Often insufficient resource distribution
Cannot determine consumer preferences like a market can
No personal freedom
Cannot easily adjust to change
Lack of incentives for innovation
Market Economic decisions are made by individuals
competing to earn profits based on supply and demand
Resources owned by individuals
Profit is motive
Competition determines prices and quality
Individual freedom is important (choices!)
Market Advantages
Competition determines prices, brings them down
Consumers can buy whatever they want
Little government intervention
Adjusts to change
Variety
Disadvantages Doesn’t always provide basic needs of everyone
Makes it difficult for gov’t to provide for needs
Market failures
People can make harmful decisions
Mixed Combines Command and Market economies
Individuals and the government share in economic decision making process
Government guides and regulates production of goods
Resources owned by individuals
Government tries to protect producers and consumers from unfair policies and practices
Mixed Advantages
Advantages of command and market
Combines focus on social welfare and individual liberties
Disadvantages Disadvantages of command and market
May not mean all resources are being used well
Government infringement may not always be good
Which type of economy?
On a piece of paper, write:
1. Type of economy: How do you know?:
Factors of Production There are four “ingredients of production”
Capital
Money or assets
Land
Labor
# of people in population
Willingness to work
Enterprise
Creativity
LABOR intensive vs. CAPITAL intensive
Words to know(and understand!)
Gross Domestic Product: value of all goods and services in one year Measure of economic activity, size of economy
GDP per capita= GDP divided by population
If GDP is the whole pie, GDP per capita is how big of a slice each person gets
The United States Economy
Type: Mixed Private individuals and businesses make most of
the decisions
The Government buys good in private sector
Advantages
Economic efficiency
Individual freedom
Most technologically advanced nation
Disadvantages
Difficult to enter home market
GDP per capita= $52,800
Government in US economy
Although the U.S. economy is based on capitalism and free enterprise and individualism, the government is still involved in some ways
The Government wants high employment and price stability Fiscal Policy
Taxes, spending
Monetary Policy
Supply of money
Government in US economy
Four ways 1. Provides services and goods like roads,
education, public safety, national defense
2. Social Security and Medicare
3. Collects taxes, borrows money
4. Regulates business activity
Food and Drug Administration
Working conditions
Pollution
Trade One of the most important parts of the
economy of the U.S.
Promotes growth, democracy, social stability
Since WWII A move to get rid of trade barriers
Free Trade agreements
Top 3 partners: Canada, Mexico, China
Competition and Small Businesses
Competition is a defining characteristic of the U.S. economy
Along with small businesses Account for majority of new U.S. jobs
“Shop owners and other small businesses account for more than half of the U.S. private-sector nonfarm economic output and work force.” –US Economy in Brief
Challenges 2009-10 Financial Crisis
Largest since the Great Depression in 1930s
Globalization Protecting industry at home
DEBT $18 trillion dollars