The American Free Market System Unit 7a Economics Ms. Henry

The American Free The American Free Market SystemMarket System

Unit 7aUnit 7a

EconomicsEconomics

Ms. HenryMs. Henry

Sweet Tarts:Sweet Tarts: Factors of production Factors of production

Economic SystemEconomic SystemThe system of production, The system of production,

distribution and consumption.distribution and consumption.

ProductionProduction- Making goods and services- Making goods and servicesDistributionDistribution- Getting goods and services - Getting goods and services

to the consumerto the consumerConsumptionConsumption- Using goods and services- Using goods and services

Four Questions Four Questions All Economic All Economic

Systems Must Systems Must AddressAddress

1. What is produced?1. What is produced?

ProductionProduction Goods and services must

satisfy the consumers wants and desires

2. 2. HOW HOW should these should these goods be produced?goods be produced?

Factors of Factors of ProductionProduction

Capital Capital EntrepreneurshipEntrepreneurship

Land Land Labor Labor

Combine the factors of

production to make or

produce the goods and services

3. For 3. For WHOMWHOM are the goods are the goods and services produced?and services produced?

DistributionDistribution Getting the goods and

services from producer to consumer

4. 4. HOW MANYHOW MANY goods and goods and services should be services should be produced?produced?

ConsumptionConsumption Make enough to Make enough to have a large profit have a large profit

and still have and still have consumer consumer

demand. How demand. How many is many is

determined by determined by supply and supply and demand. demand.

GoodsAnything that can be grown or manufactured

SupplyThe degree of availability of an item

Producer

Someone who creates or manufactures a good or service through physical or mental effort

Services

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

Consumer A person who buys a good or service

Limited Resources

Items that are scarce in nature and cannot be renewed

Economics

The study of the production, distribution and the consumption of goods and services

Unlimited Resources

Materials that are endless and/or can be renewed

Demand The amount of a good or service that consumers are willing and able to buy

Scarcity A limited supply of resources in comparison to unlimited wants and needs

Market Price

The price that satisfies both producers for profit and consumers for value

Opportunity Cost

What you give up in order to get something.

Challenges in a Challenges in a Free Market:Free Market:ResourcesResourcesScarcity Scarcity Opportunity CostOpportunity Cost

GoodGood Anything that Anything that

can be grown or can be grown or manufactured manufactured (made)(made) FoodFood ClothesClothes Cars Cars

ServiceService Something a person Something a person

does for someone does for someone else in exchange for else in exchange for money or value.money or value. doctordoctor hairdresserhairdresser waiter waiter

ResourcesResources Natural Natural HumanHuman CapitalCapital

Combine to Combine to make goods and make goods and servicesservices

Our Basic Our Basic Economic Economic Problem:Problem:People havePeople have

Unlimited WantsUnlimited Wants

Food, clothing, Food, clothing, shelter, schools, shelter, schools, hospitals, cars, hospitals, cars, transportation transportation

But But ResourcesResources are are

LimitedLimited

Land, soil, Land, soil, minerals, fuels, minerals, fuels, people, money, people, money,

technologytechnology

Questions and choicesQuestions and choices

SCARCITYSCARCITYThe inability to satisfy all wants at the The inability to satisfy all wants at the

same time; the NEEDS are greater same time; the NEEDS are greater than the RESOURCES than the RESOURCES

Since resources are Since resources are LIMITEDLIMITED consumers and producers must consumers and producers must

make make CHOICESCHOICES

Process of productionProcess of production

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

decisions concerning what and how much to decisions concerning what and how much to produce, how goods and services will be produced produce, how goods and services will be produced

and who will get what is producedand who will get what is produced..

CHOICECHOICE:: selecting from selecting from a set of a set of alternativesalternatives

OPPORTUNITY OPPORTUNITY COSTCOST: what is : what is given up when given up when the choice is the choice is made. made.

Good and servicesGood and services

ProductionProduction

(Sellers) (Sellers)

Combining Combining resources to make resources to make goods and goods and services. Available services. Available resources and resources and consumer consumer preference preference determine what is determine what is produced produced

ConsumptionConsumption

(Buyers) (Buyers)

Using goods Using goods and servicesand services

Consumer Consumer preference and preference and price determine price determine what is what is purchased.purchased.

Economic Proposition

In English Lesson for Life

Scarcity You can't have

everything you want.

Acceptance of scarcity

will help you make more reasoned choices.



Alternatives Different options

from which you can choose.

There are many

different ways to allocate

resources and to solve

problems.



Choice Because you can't have

everything you want, you have to make choices

from a list of alternatives.

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-offs Choices involve giving up

something to get something. All choices have

consequences, both positive and negative.

You are responsible for the

consequences of your choices. Since you make choices,

you can't be a victim.



Opportunity Cost

What is given up when a

choice is made.

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.

ConceptConcept: : Public GoodPublic Good What's wrong with this picture?What's wrong with this picture?

Sunsets are a non-excludable good, in that non-payers can't Sunsets are a non-excludable good, in that non-payers can't be prevented from enjoying them. Other examples of non-be prevented from enjoying them. Other examples of non-excludable goods are national defense, fireworks, and excludable goods are national defense, fireworks, and lighthouses. Private firms tend to under produce non-lighthouses. Private firms tend to under produce non-excludable goods because customers have little incentive to excludable goods because customers have little incentive to pay for them. Public goods are both non-excludable and non-pay for them. Public goods are both non-excludable and non-rival. rival.

ConceptConcept: : Opportunity costOpportunity cost What's wrong with this picture?What's wrong with this picture?

Most of the homes on this lakefront are expensive Most of the homes on this lakefront are expensive and built close to each other, so it's likely that the and built close to each other, so it's likely that the lakefront lots are highly valued. This, in turn, lakefront lots are highly valued. This, in turn, suggests that the opportunity cost of living in the suggests that the opportunity cost of living in the shack is high. We rarely see shacks on expensive shack is high. We rarely see shacks on expensive lots because the owners usually conclude that they'd lots because the owners usually conclude that they'd do better by selling their property and buying a do better by selling their property and buying a nicer house on a less desirable lot. nicer house on a less desirable lot.

ConceptConcept: : Economies of scale Economies of scale What's wrong with this picture? What's wrong with this picture?

It's hard to imagine that Mark and Sally will make a profit with It's hard to imagine that Mark and Sally will make a profit with their business. Suppose a customer asks them to deliver a their business. Suppose a customer asks them to deliver a small package to a city 200 miles away. Unless they have small package to a city 200 miles away. Unless they have many other packages going to the same city, they'd have to many other packages going to the same city, they'd have to charge a lot just to cover their variable costs--labor, gas, and charge a lot just to cover their variable costs--labor, gas, and depreciation. They wouldn't be able to compete against depreciation. They wouldn't be able to compete against companies like UPS and FedEx, which can keep their costs companies like UPS and FedEx, which can keep their costs down by handling a huge volume of parcels. . down by handling a huge volume of parcels. .

ConceptConcept: : Equilibrium, law of one priceEquilibrium, law of one price What's wrong with this What's wrong with this picture? picture?

The more expensive gas station probably won't The more expensive gas station probably won't get many customers and will be forced to lower its get many customers and will be forced to lower its prices. The Law of One Price says that identical prices. The Law of One Price says that identical goods in efficient markets must have only one goods in efficient markets must have only one price in equilibrium. price in equilibrium.

ConceptConcept: : Opportunity costOpportunity cost What's wrong with this picture? What's wrong with this picture?

People offer this service in less developed People offer this service in less developed countries, but they don't in richer countries. Most countries, but they don't in richer countries. Most Americans have scales at home (a substitute for Americans have scales at home (a substitute for public scales), so the demand for this service is public scales), so the demand for this service is small. It's unlikely that this man would get small. It's unlikely that this man would get enough customers to cover the opportunity cost of enough customers to cover the opportunity cost of his time. his time.

People often profess outrage when corporations put profits People often profess outrage when corporations put profits ahead of safety, as evidenced by a jury's $4.9 billion verdict ahead of safety, as evidenced by a jury's $4.9 billion verdict against General Motors after a design flaw led to a fiery crash. against General Motors after a design flaw led to a fiery crash. But ordinary people cut corners on safety, too. We could make But ordinary people cut corners on safety, too. We could make ourselves safer, for example, by wearing helmets when we ourselves safer, for example, by wearing helmets when we drive. But almost nobody takes this precaution except for race drive. But almost nobody takes this precaution except for race car drivers. It appears that most of us are quite willing to car drivers. It appears that most of us are quite willing to sacrifice safety in order to keep our hair looking nice.sacrifice safety in order to keep our hair looking nice.

ConceptConcept: : Risk and Opportunity cost Risk and Opportunity cost What's wrong with this What's wrong with this picture? picture?

Supply and Supply and DemandDemand

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.

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 SUPPLYBusinesses will provide

more products when they can sell them at higher

prices

LAW OF DEMANDBuyers will demand more products when they can buy them at lower prices

INCENTIVESIncite or motivateChange economic behaviorSomething that spurs someone into action: sale, coupons, etc.

Supply The degree of availability of an item; What PRODUCERS want to sell.

Law of Supply

Producers are in business to make a profit so they will supply more if the price is HIGH.

If price is….

Supply is…

If price is….

Supply is…

THE LAW OF SUPPLYTHE LAW OF SUPPLY

Demand The amount of a good or service that CONSUMERS are willing and able to buy; what CONSUMERS want.

Law of Demand

As price DECREASES the amount consumers want to buy INCREASES. Buyers want to buy it at a low price.

THE LAW OF DEMANDTHE LAW OF DEMAND

If price is….

Demandis…

If price is….

Demandis…

Economic SystemsEconomic SystemsCommandCommandMixedMixedFree MarketFree Market

Economic SystemsEconomic Systems

The type of economy a country has is The type of economy a country has is based on the amount of government based on the amount of government involvement in economic decisions.involvement in economic decisions.

Command EconomyCommand Economy The central government makes The central government makes

decisions and determines how decisions and determines how resources will be used.resources will be used.

The central government owns The central government owns property and resources.property and resources.

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

goods and services.goods and services. China, North Korea, Cuba China, North Korea, Cuba

Free Market Free Market EconomyEconomy Also known as capitalism or free Also known as capitalism or free

enterpriseenterprise Private ownership of property and Private ownership of property and

resources (owned by individuals)resources (owned by individuals) Individuals and businesses make Individuals and businesses make

profitsprofits Individuals and businesses competeIndividuals and businesses compete Economic decisions are made by Economic decisions are made by

supply and demandsupply and demand Profit is a motivator for productivityProfit is a motivator for productivity No government involvementNo government involvement Consumer sovereigntyConsumer sovereignty: buyers : buyers

determine what is produced determine what is produced

Mixed EconomyMixed Economy Most common type of economic Most common type of economic

systemsystem Government and individuals share the Government and individuals share the

decision making processdecision making process Individuals and businesses make Individuals and businesses make

decisions for the private sectordecisions for the private sector Individuals own the means of Individuals own the means of

productionproduction Government makes plans for the Government makes plans for the

public sectorpublic sector Government guides and regulates Government guides and regulates

production of goods and services production of goods and services offered. offered.

A greater government role than in a A greater government role than in a free market economyfree market economy

Most effective economy for providing Most effective economy for providing goods and servicesgoods and services

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

Who owns the resources and how are they allocated?

Who makes the decisions about what

to make and sell?

Technology How are prices determined?

Free Market Economy

Resources own privately; allocated

according to price

Consumer and producers

Advanced Supply and demand

Mixed Economy

Private individuals and the government

Consumers and producers for the

private sector; government for the public sector

Advanced Competition or set by

government

Command Economy

Central government

owns and allocates

Central Government

Advanced or developing

Set by government

The U.S. EconomyThe U.S. Economy

The U.S. Economy is a The U.S. Economy is a MIXED economy where MIXED economy where individuals, businesses and individuals, businesses and the government make the government make economic decisions.economic decisions.

The U.S. Economy is a

MIXED Economy

ProfitMoney left over after

all business expenses have been

paid.


MIXED Economy

CompetitionRivalry between

businesses for the same customers; results in

better quality.


MIXED Economy

Private Property

Individuals can own the means of production & property without undue government interference.


MIXED Economy

Consumer Sovereignty

Consumers determine what goods and services are produced by what they buy.


MIXED Economy

Free Markets

Markets are allowed to operate without undue interference from the government. Money, goods and services flow continuously among individual households, businesses and the government

The Circular Flow The Circular Flow of the Economyof the Economy

The Circular Flow of The Circular Flow of EconomicsEconomics Resources, goods and services Resources, goods and services

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

The Circular Flow of The Circular Flow of EconomicsEconomics

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


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


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

Households supply businesses with labor (workforce) and payments for goods and services

Unit 7a: Unit 7a: Economics Economics

Vocabulary Vocabulary

GOODSGOODS

Anything that can be grown Anything that can be grown or manufacturedor manufactured

SUPPLY SUPPLY

The degree of availability of The degree of availability of an iteman item

ProducerProducer

Someone who creates or Someone who creates or manufactures a good or manufactures a good or service through physical or service through physical or mental effortmental effort

ServicesServices

Something that a person Something that a person does for someone else in does for someone else in exchange for money or exchange for money or valuevalue

ConsumerConsumer

A person who buys a A person who buys a good or servicegood or service

Limited ResourcesLimited Resources

Items that are scarce in Items that are scarce in nature and cannot be nature and cannot be renewedrenewed

EconomicsEconomics

The study of the The study of the production, distribution production, distribution and the consumption of and the consumption of goods and servicesgoods and services

Unlimited ResourcesUnlimited Resources

Materials that are Materials that are endless and/or can be endless and/or can be renewedrenewed

Demand Demand

The amount of a good or The amount of a good or service that consumers are service that consumers are willing and able to buywilling and able to buy

Scarcity Scarcity

A limited supply of A limited supply of resources in comparison to resources in comparison to unlimited wants and needsunlimited wants and needs

Market PriceMarket Price

The price that satisfies The price that satisfies both producers for profit both producers for profit and consumers for valueand consumers for value

Opportunity CostOpportunity Cost

What you give up in What you give up in order to get somethingorder to get something

The Factors of The Factors of ProductionProductionAnything that goes into the Anything that goes into the making of a good or servicemaking of a good or service

CapitalCapital

toolstoolsmachinery machinery moneymoneytechnology technology

EntrepreneurEntrepreneur

Business Business owner and owner and risk taker risk taker

combines the combines the factors of factors of

productionproduction

LandLandNatural Natural resourcesresources

LaborLaborWorkers Workers and their and their time and time and energy energy

Business Business OrganizationsOrganizationsThe 15 million businesses in the U.S. fall into The 15 million businesses in the U.S. fall into three categories: three categories: sole proprietorshipssole proprietorships, owned , owned by a single individual, by a single individual, partnershipspartnerships, with more , with more than one owner sharing the risks and profits than one owner sharing the risks and profits and and corporations,corporations, owned by their owned by their stockholders.stockholders.

Sole Proprietorship Sole Proprietorship

1 owner 1 owner The owner takes all the risksThe owner takes all the risks

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

losseslosses

PartnershipPartnership

More than one owner (2+) 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

CorporationCorporation Owned by stockholdersOwned by stockholders

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

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

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

failsfails

resourcesresources

Documents

The American Free Market System Unit 7a Economics Ms. Henry