INTRO TO ECONOMICS. Economics – the study of value and how and why it is produced, used, and traded by individuals and nations. Value is produced in either of two ways : Goods – items that are grown or manufactured (food, clothes, cars, etc)
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Economics – the study of value and how and why it is produced, used, and traded by individuals and nations.
Value is produced in either of two ways:
Goods – items that are grown or manufactured (food, clothes, cars, etc)
Services – jobs or chores people do for other people. (doctor, waiter, etc).
Goods & Services are created or performed by Producers and bought by Consumers
ALL PEOPLE AND NATIONS ARE BOTH PROD. AND CONS.
I‘M GOING TO GIVE SOMEONE THE PEN. WRITE DOWN SOMETHING IN YOUR LIFE THAT YOU VALUE THE MOST AND WE WILL DETERMINE IF IT IS A “GOOD” OR A “SERVICE”…I KNOW, EXCITING STUFF!!
WE GET TO PASS THE PEN AROUND AGAIN! WRITE DOWN ONE THING YOU THINK IS A NEED AND ONE YOU THINK IS A WANT.
Each country produces goods and services using two types of resources:
Natural Resources – items that exist on earth (water, air)
Human Resources – people and their abilities: including labor, skills, knowledge.
All countries, and people, lack some resource – this is called Scarcity* - a shortage of or total absence of a resource
The PRICE of a good or service, which affects scarcity, is determined by 3 factors:
Supply 2. Demand 3. Competition
Supply and Demand are the most important concepts in economics and are interdependent in how they function
Supply – amount of a good or service available * Supply is controlled by producers (want to make $)
Demand – amount of a good or service that consumers are willing/able to buy * Demand is controlled by consumers (want to save money)
When the supply of a good or service is LOW and the demand is HIGH, the price is the HIGHEST
When the supply of a good or service is HIGH and the demand is LOW, the price is the LOWEST
When the supply of a good or service is LOW and the demand is LOW, the price will be LOWER
When the supply of a good or service is HIGH and the demand is HIGH, the price will be HIGHER
Generally, as the price goes up, the demand goes down/ as the price goes down the supply goes down.
Market Price – the balance that usually exists between what consumers will pay and what producers will charge
When shown on a demand curve, it is known as the equilibrium point because supply and demand are equal. This is usually the price consumers pay for the good or service.
A shortage (lack of good or service) may cause prices to rise while a surplus (overabundance of a good or service) may cause prices to fall.
Inelastic Demand – demand remains constant regardless of price (i.e. medicine)
How does Price affect Demand?
Changes in price also usually affect demand for complimentary items, such as sugar and cream for coffee
Changes in price may also affect demand for substitute items, or items that take the place of other items. Example – tea may be a sub for coffee if price of coffee is too high.
We are able to see these in Supply and Demand Curves:
Competition – forces producers to produce higher quality goods and services at the lowest possible price, since consumers have a scarcity of money and make purchases based upon price more than any other factor.
COMPETITION IS GOOD FOR CONSUMERS!
Producers sell a product at the lowest possible price, assuming they make the profit they determined beforehand. They do this in order to sell the most product. When they stop making profit, they stop producing.
A consumer may buy Coke over Pepsi if the price is lower and vice versa depending on their scarcity of money. They may still buy Pepsi at higher price if they prefer taste, but most consumers today buy the cheapest with competitive products
Four elements or factors in the production of a good or service:
Capital/Capital goods – capital is $ used to purchase capital goods, which are machines, tools, buildings, etc. used to produce goods and services
Land/Natural Resources – the resources exist on earth, like trees, soil, water, and electricity needed to produce goods and services
Labor – the human resource provided by humans in the form of workers. –
Division of Labor – used by companies to make more profit; workers focus on a specific job or task.
Productivity – the measurement of a producer’s ability to produce greater quantities in better, faster, and cheaper ways.
4. Management – supervises and plans the production of goods and services. Management utilizes the skill and knowledgelevels of human resources.
Producers attempt to raise output by increasing factors of production – i.e. buy more machines, hire more workers.
Law of Diminishing Returns – the amount of extra output created by an increase in a factor of production, begins to decrease. Forces producers to make cost effective decisions about production.
Entrepreneurs – the people that own the business, risk their own money in hopes profits.
Profit – money after all bills and taxes are paid; profit is always lower than gross income for the business
Gross Income – total amount of money before taxes and bills are paid. Producers want to raise gross income to raise profits
Marketing – the “selling” of a good or service, from creation to final sale – includes packaging, distribution, placement and advertising.
Determines the “message” of the product – purpose is to increase demand for the product
Marketing is usually one of the highest expenses
Wholesalers (a.k.a. “Middleman”)– businesses that buy goods directly from producers, store them in warehouses, and sell them to retailers (stores) at a later time.
Retailers – are the stores where consumers usually purchase products at a retail price, making a profit for the retailer.
Usually producers make a profit from the wholesalers, who make a profit from retailer, who make a profit from you, the consumer.
4 Types of Economic Systems
Command Economy – an economic system in which the gov’t is the primary decision maker and controls the means of production. Commonly found in communist countries: I.E. Cuba, North Korea, China.
Advantages: Low prices for consumers; everyone has a job
Disadvantages: No competition means low quality goods and few choices
2. Traditional Economy – economic decisions are based upon tradition and tradition establishes the answers to the basic economic questions. Commonly found in many poor African and Asian countries, sometimes called “Third World” – I.E. Laos and Ghana
Advantages – Sense of Community; general lack of greed and crime
Disadvantages – Lacks modern technology; lacks ability to handle obstacles
Production is labor-intensive – over usage of workers to produce a good or service
3. Socialist Economy – the government owns the nation’s major industries (banks, airlines, railroads, power plants) and individuals own the other, generally smaller business. Found in countries with socialist governments. Very common in Europe, I.E. France and Sweden.
Advantages: Stability among important national industries; lower prices for consumers
Disadvantages: Options for going into business and making profit are limited; taxes placed upon citizens are very high
4. Market Economy – economic decisions are determined by individual buyers and sellers, and the means of production is controlled by the individuals, both buyers and sellers.
Often referred to as capitalism.
Capital-Intensive – economies use machines and technology to produce goods and services faster, better, and more profitably (I.E. U.S., Japan, Germany)
Advantages: High quality products at lowest possible price; opportunity to determine one’s worth and profit.
Disadvantages: Little protection from high prices; no guarantee of employment for workers
*NO country is 100% communist, socialist, or capitalist*
The U.S. is primarily a market economy, but does have government regulation demonstrated via taxes and regulations.
U.S. is also said to have a free enterprise system meaning: The people have the right to own property, compete with others, go into business for profit, and buy the best products at the lowest prices.
ALL countries have mixed economies (free enterprise and government control).
***In recent years, United States workers have lost thousands of jobs to workers in foreign countries, mostly in Asia and Latin America. Jobs have been moved to these countries due to much lower labor costs. The United States has a minimum wage for its workers, and regulations for producers, while most of these countries do not. Corporations have moved production of goods to these countries to lower labor costs, and increase profits.***
U.S. - $7.25
China - $0.57
Mexico - $2.48
India - $2.90
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In a market economy, producers generally choose from 3 Business organizations when establishing “for-profit”:
Single/Sole Proprietorship – business owned/operated by one person (proprietor) – 75% of businesses in the US are this
Partnership – business owned and operated by 2 individuals. – About 2 million in US (7%). Often doctors, lawyers, etc.
Advantages – more capital to start business; workload shared
Disadvantage – Disagreements #1 problem; financial risk
3. Corporation – large business, with ownership divided into many parts, called shares of stock.