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  2. Scarcity and its effects • All resources are scarce • Productive resources (factors of production) • Land • Labor • Capital • entrepreneurship • Scarcity leads to 3 questions: • What to produce • How to produce • For whom to produce

  3. Scarcity and its Effects Cont’d • Different economic systems answer the three basic economic questions differently • Command Economy – government makes all decisions (North Korea) • Free-Market Economy – producers and consumers make the decisions (no true free market systems in existence) • Mixed-Market Economy – producers and consumers make the decision with guidance (regulation) from the government (United States)

  4. Role of Government in a Market (U.S.) Economy • Provide public goods and services • Redistribute income to meet needs of poor • (collect money through taxes and redistribute through welfare programs) • Resolve market failures • Use of Fiscal Policy (taxes and spending) • Use of Monetary Policy (actions by the Federal Reserve) • Regulations to protect property rights of citizens • Deregulation – allow businesses to operate in free market

  5. Fundamental Concepts Cont’d • Scarcity forces us to make choices • Results in opportunity costs, trade-offs or engaging in voluntary trade • used when parties feel that will benefit (gain) from the trade • Basis of U.S. economy • Rational Decision Making Model • Define the problem • List the alternatives • Evaluate the alternatives (compare opportunity costs and benefits) • Make a rational decision

  6. Production Possibility Curve (Production Frontier) • shows production efficiency (b,c,d) underutilization (a) and impossibilities (x)

  7. Fundamental Concepts • Specialization, division of labor, increased labor force and investment in education, training, technology, and resources increases productivity and improves efficiency • All of these lead to economic growth and improved standards of living

  8. Fundamental Concepts Review Questions • trees, minerals and the real estate on which a company builds its main manufacturing center are all __________. • Following a massive storm, people buy up all the flashlights and bottled water in the area faster than the producers can resupply them. The people in the area now face _________ regarding the flashlights and bottled water? • Paying for an employee’s health insurance is a way of investing in _________ __________ to increase production possibilities. • Using a production possibility curve, a company can determine the ______________ _________ of increasing production of one product over another


  10. Circular Flow Model • Three economic actors: households (individuals), businesses (firms) and government • Individuals provide labor and other factors of production to businesses in exchange for money (wages/income) • Businesses provide goods and services to households in exchange for money (revenue) • Government uses taxes from households and businesses to provide services and money (transfer payments/subsidies) to households and businesses

  11. DEMAND Resource Market SUPPLY $$$ Costs $$$ $$$ Income $$$ Resources Resources (Factors of Production) Individuals Businesses Goods and Services Goods and Services $$$ Spending $$$ $$$ Revenue $$$ SUPPLY DEMAND Product Market 11

  12. MICROECONOMIC CONCEPTS • Product Market where consumers purchase final goods/products • Factor Market where businesses hire their labor and buy the goods needed to produce their products

  13. Microeconomic Concepts Cont’d • Fiat Money – represents value – has value because the government says it does • The Role of Money • Medium of exchange • Standard of value • Includes paper and coins • Includes transactions such as online transactions, debit card transactions, online stock trades

  14. Microeconomic Concepts Market Influences

  15. Supply • Supply – willingness and ability of a producer to provide goods/services to consumers (aggregate supply) • Law of Supply – As price increases, quantity supplied increases • Represented by an outward and upward shaped curve on a graph

  16. Supply • Shift in supply refers to the change in total supply, not the quantity supplied

  17. Shifters of Supply • Availability of resources • Number of sellers • Technology • Government action (excise tax/subsidy) • Opportunity cost of alternate product • Expectations for future products

  18. Demand • Consumers willingness and ability to purchase a product (aggregate demand) • Law of Demand: as price decreases, quantity demanded will increase • Represented by a downward and outward sloping curve

  19. Shifters of Demand • Shift in demand refers to a total change in demand, not just quantity demanded

  20. Shifters of Demand • Number of Consumers • Tastes and Preferences • Price of Related Goods (substitutes/complements) • Income (normal & inferior goods) • Future Expectations • Changes in PRICE don’t shift the curve. It only causes movement along the curve

  21. Supply and Demand

  22. Price • Equilibrium Price • Quantity demanded equals quantity supplied • Also known as Market Clearing Price • Prices below equilibrium will result in a shortage • Prices above equilibrium will result in a surplus • Price Elasticity • Sensitivity to price • Price elastic – demand changes as price changes • Price inelastic – demand does not change significantly as price changes (steep almost vertical demand curve)

  23. Inflation and Interest Rates • Inflation – general rise in prices throughout the economy • Increased productions costs • Increased prices • Decreased demand • Decreased supply • Interest Rates • Amount paid to borrow money • High interest rates • Fewer loans • Decreased demand

  24. Government Action Wage and Price Controls • Wage Controls • Minimum wage – lowest wage employers can pay their employees • Pros and Cons • Price Controls • Price Ceiling – highest price producers can charge • Set below equilibrium • Causes shortages • Price Floor – lowest price producers can charge • Set above equilibrium • Causes surpluses

  25. Microeconomic Concepts Competition

  26. Market Competition • Spectrum of competition – one end has no competition and the other is VERY competitive

  27. Competition in a Free Market Perfect Monopolistic Perfect Competition Competition Oligopoly Monopoly

  28. Pure Competition • Large number of sellers • Identical products • No barriers to entering market • Free exchange of price information/but market controls price

  29. Monopolistic Competition • many sellers • Similar but differentiated products • Producers have more control over price • Examples: fast food chains

  30. Oligopolies • Only a few producers • More control over prices than monopolistic competition – conspire with competitors to control prices • Example: breakfast cereals, auto manufacturers

  31. Monopolies • One producer • No adequate substitutes • High barriers to entry • Produce less and charge higher prices

  32. Business Organizations • Sole Proprietorship • Individual owner • Most common type of business • Accounts for small percentage of revenue in economy • Owner has unlimited liability • Business has limited life • Partnership • Two or more owners • Share liability • Pool resources

  33. Business Organizations • Corporation • Owned by shareholders (stockholders) • Limited liability for shareholders • Unlimited life • Profits are taxed twice • Franchise • Sole proprietors purchase local rights to trademark corporation • Pays a licensing fee • Lack flexibility

  34. Macroeconomic Concepts

  35. Measuring Economic Activity • Gross domestic product (GDP) • Total value of all goods and services • High GDP = healthy economy (usually) • Per capital GDP – value per household • Better indication of standard of living • Consumer Price Index - monthly changes in costs of goods and services • Rise in prices = inflation • Drop in prices = deflation (can lead to increased unemployment) • Rise in prices and rise in unemployment = stagflation

  36. Measuring Economic Activity Cont’d • National Debt – money owed by the federal government • National Deficit – the amount of money “over budget” in a given year • Government spends more than it collects in taxes in a given year • Economic Growth – GDP grows, CPI remains at levels that increase profits w/o causing inflation, national debt shrinks (or at least stays level)

  37. Measuring Economic Activity Cont’d • Net Exports – Total exports minus total imports • The more exports the more money that flows into the economy • Positive net exports = growing economy • Unemployment Rate – percentage of total labor force that is not working • Cyclical unemployment • Structural unemployment • Frictional unemployment • Seasonal unemployment

  38. Measuring Economic Activity Cont’d • Fiscal Policy – governments decisions to tax and spend (made by Congress) • Taxes • Income tax • Capital gains tax • Property tax • Spending • Domestic programs (education, healthcare) • Welfare programs (income redistribution) • National Defense programs • Increased spending leads to increased taxes, leaving citizens with less disposable income

  39. Measuring Economic Activity Cont’d • Monetary Policy –Federal Reserve controls the flow of money in the economy • Easy-money policy • Tight-money policy • Required reserve ratio (RRR) - • Discount Rate – • Open Market Operations • Controls the sell/purchase of U.S. Treasury Bonds • Sell bonds to decrease money supply • Buy bonds to increase money supply

  40. Measuring Economic Activity Cont’d • Federal Reserve (organization) • Board of Governors • Appointed by U.S. President • Sets monetary policy • Federal Reserve Chairman – Ben Bernanke • Federal open Market Committee • 12 Regional Federal Reserve Banks • Numerous Private Member Banks

  41. Measuring Economic Activity Cont’d • The Business Cycle


  43. INTERNATIONAL ECONOMY • International Economics – how economies in different countries impact one another • International Trade – buying an selling goods across international borders • Exports – goods sold to another nation • Imports – goods bought from another country • Market Advantage – • Absolute advantage – one country can produce a product using less resources than another country • Comparative advantage – one country can produce a product at a lower opportunity cost than another country

  44. International Economy

  45. International Economy • Trade Restrictions and Barriers • Used to protect domestic industries or for national security • Quota – limitation on the number of imports • Tariffs – taxes on imports • Embargo – refusing to trade with another country (often used to punish) • Standards – specific guidelines on imports to make them meet high standards established by FDA, EPA, • Subsidies to domestic industries to help them compete

  46. International Economy • Trade Organizations • World Trade Organization (WTO) • European Union (EU) • Association of Southeast Asian Nations (ASEAN) • United Nations (UN) • North American Free Trade Agreement (NAFTA)

  47. Trade Organizations • World Trade Organization (WTO) • Establishes rules fr international trade • Helps resolve disputes between member nations • European Union (EU) • Trading union consisting of 25 European nations • Facilitates trade and commerce • Seeks to create a unified regional economy

  48. International Trade Organizations • Association of Southeast Asian Nations (ASEAN) • Aims to accelerate economic growth, social progress and cultural development among its members • United Nations (UN) • Seeks effective solutions to economic matters through diplomacy • Helps determine how worldwide economy responds to international circumstances

  49. International Trade Organizations • North American Free Trade Agreement (NAFTA) • Lowered trade barriers between U.S., Canada and Mexico • Allows U.S. businesses greater access to foreign markets (positive) • Possible loss of U.S. jobs (negative)

  50. International Economy • Balance of Trade – rate at which a nation trades with other nations • Favorable balance of trade – country exports more than it imports • Unfavorable balance of trade- country imports more than it exports • Balance of Payments – value of money coming into a country due to exports minus imports