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A Review of Economic Concepts. Chapter 4 - The Basics of Economics. Economics in Our Lives We all must have a certain amount of food, water, clothing, and shelter to survive. Anything beyond these needs is a want. Need – something that humans require for survival

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Chapter 4 - The Basics of Economics
  • Economics in Our Lives
  • We all must have a certain amount of food, water, clothing, and shelter to survive.
  • Anything beyond these needs is a want.
  • Need – something that humans require for survival
  • Want – something desired, beyond what is required for survival.
  • Basic clothing is a need, but designer jeans are a want
  • Needs are pretty well defined and limited
  • Wants are endless
People have limited incomes
  • This forces us to make choices about how to spend our money
  • Every choice has costs
  • Economist also count the choice we didn’t make as a cost called opportunity cost – or trade-off
  • Opportunity cost – the thing that is given up when something else is chosen
  • How people spend their limited resources depends on their needs, likes and dislikes, income, available substitutes, and the price of goods they want.
  • Goods – any manufactured product, like food, shoes, or TV’s
Like people, governments and businesses face limits and must make choices
  • Businesses have limited profits, and countries have limited resources
  • Resources include workers, money from taxes, natural resources like oil and minerals, and machinery.
  • Because everyone faces limited resources, or scarcity, everyone makes choices
  • Scarcity – not enough resources, time, or money for all needs and wants
Some choices individuals make include whether to save or spend their money, how to spend their money, and how to divide their time between work and leisure
  • Businesses have to decide what to make, how much of it to make, how to make it, and what to do with their profits
  • Profits – money earned beyond the cost of making and selling the product
  • Profits can be taken as owner income, divided among workers, or invested in the business.
  • Invested – to commit money with the hope of making more money
A Closer Look at a Market System
  • The price of a good, or product, depends on how much of the good is available and how many people want it
  • Producers turn resources into good and services.
  • Producers – maker and or seller of goods and services
  • Resources are raw materials, such as oil and minerals.
  • Machinery and people’s labor are also resources.
  • Individuals are producers when they are employed
Economist call products goods.
  • Services are actions, such as lawn mowing, computer assistance, or haircuts.
  • Governments can also be producers when they provide goods such as roads and schools, or when they provide services such as military production and health care.
  • Consumers, or buyers, purchase goods and services.
  • Consumer – buyer and user of goods and services
Producers supply goods and consumers demand them.
  • The amount of supply and demand decide the price.
  • Supply – the amount of a good or service available for sale in a market
  • Demand – the amount of a good or service wanted in a market
  • Goods with a big supply like sand or paper, have a lower price than goods that are in low supply like diamonds.
  • Goods in high demand will sell for a higher price than goods in low demand.
  • Supply and demand will vary by part of the world and location and cultural likes and dislikes.
  • Water will sell for more in a desert than in a rain forest
From Farms to Factories
  • In traditional economic systems, everyone spends all day gathering food, tending crops, hunting, and fishing.
  • People have just enough food for themselves
  • They have no extra left over to sell.
  • This is called Subsistence Farming
  • Subsistence faming – farming to produce just enough food to survive, as opposed to cash crops, which are exported to make money
Over the years, new technologies and inventions made it possible for farmers to grow more crops.
  • Irrigation, the brining of water to fields, meant farmers could grow more crops even when it did not rain.
  • In the early 1700s, new animal harnesses and plows enabled farmers to till and plant more land than when they had shoveled by hand.
  • When people grow more food than they need for themselves, they have a surplus to trade or sell.
  • Surplus – In economics, extra, beyond that required for basic living
  • As a result, not everyone has to farm.
Many of the people who no longer needed to farm found work in factories.
  • The development of steam power and specialized machinery in the Industrial Revolution led to factory production.
  • As workers specialized, they became better at what they did.
  • They produced more cloth working together than they could each working by themselves.
  • Productivity increases with specialization.
  • Productivity – How much a company produces compared with the amount of resources it uses
Factory workers earn wages.
  • They use the wages to fulfill their needs: food, shelter, and clothing.
  • Often there is money left over to also fulfill wants such as books, electronics, and other household goods
  • As more people work for wages, more people demand goods, and more factories are needed.
  • Surplus food and wage work sets up a path for population and economic growth.
  • As people earn money doing one kind of work, they have the money to spend on food they don’t grow themselves.
  • The people who grow the food then have money.
Businesses can increase profits by investing in new machinery.
  • They can also earn more profits by investing in people.
  • Improving worker's health and education can be very helpful to businesses.
  • Education makes smarter workers.
  • Smarter workers make fewer mistakes
  • They can also invent new and better ways of doing things.
  • Healthy workers also make fewer mistakes and are more reliable
Economic Growth and Technology
  • Most nations want their people to have long lives, good heath, safe housing, useful work, and education.
  • Economic growth and development help meet these goals.
  • Economic growth – an increase in a nation’s money or production.
  • Economic growth means creating more money, farms, or factories
  • Economic developments means a change in the economy
  • Economic development – a change in the economy, such as moving from farms to factories
  • People may move from working on farms to working in factories.
  • Factories may change from assembly line to robot production
For a country to grow and devolve, its people need to be healthy and educated.
  • Its natural resources need to be used carefully.
  • Money needs to be invested in roads, housing, and technology
  • Countries with little technology have few machines or other laborsaving devices.
  • Lots of labor is needed to grow food and build houses
  • In technologically advanced countries, fewer people are needed to make most things.
Technology increases productivity
  • This means that more goods can be made with the same amount of labor and materials
  • When productivity goes up, there is more food, housing, and other goods.
  • When supplies go up, prices go down.
  • Food becomes cheaper and household goods cost less.
  • Better productivity also means that people can spend less time working.
  • They have more leisure time to use for fun.
  • Leisure – time away from work or school
Technology can also increase the standard of living.
  • Standard of Living – The level of people’s needs and wants fulfilled by a society. Standard of living increases as productivity increases because the price of goods goes down and the amount of available food increases.
  • Electric power can greatly improve people’s lives
  • Power can run a pump and filter system that provides a village with freshwater.
  • Power can run refrigerators for storing food and medicine.
  • Power can run computers, brining information to isolated villages
  • Telephones and cars shorten the distances between villages and cities.
  • This makes it possible for medical services and food to move easily between areas.
Underdeveloped nations have a lot of poverty
  • Underdeveloped nation – a poor nation whose main economic activity is subsistence farming
  • In these nations, most of the people are subsistence farmers.
  • Industrialized nations – a rich nation whose main economic activity is manufacturing and providing services – like US
  • These nations have some very productive farms that can feed everyone.
  • Developing nations are in between.
  • Developing nations- a nation whose economic base is changing from farms to factories
  • They are in the process of moving from farmsto factories.
To begin improving conditions, countries need capital.
  • They can get capital through the sale of exports, private investment, and economic aid from other countries.
  • Industrialized countries can help other nations by sharing technology, capital, and money.
The Economies of Nations Today
  • Many developing nations are moving away from subsistence farming toward a mixture of factories and farms
  • The process has been slow
  • Some of these countries do not have good farmland.
  • They need to import food form other countries
  • Many developing countries were once colonies controlled by other countries
  • This kept them from earning money on the sale of their natural resources
  • They could not invest in their human and capital resources
  • But new technologies and aid from other countries have helped.
Economic growth and development require careful use of resources
  • Political change, civil wars, and corrupt leadership can prevent economic growth
  • Corrupt – involved in improper conduct such as bribery
  • Money and stability can help nations move away from subsistence farming toward better lives for their people
  • End Sec. 1
Economic Systems
  • Economic systems can be categorized according to who makes most of the decisions in an economy.
  • In a market economy, most of the decisions in the economy about what to produce, how to produce it and who receives it are made by individuals and firms.
  • At the other end of the spectrum, in a command economy, government officials make most of the decisions in the economy about what to produce, how to produce it and who receives it.
  • Most economic systems also contain elements of tradition or repeating decisions in ways made at an earlier time or by an earlier generation.
traditional economy
Traditional Economy
  • It is an economic system based on traditions, routines, and beliefs.
  • Often, a traditional product is made and sold or traded at open markets.
  • Goods & services are traded for other goods & services
  • The benefit is that the people in the system are closely involved in its operation.
  • Different roles in a traditional economy are passed down through family members.
command economy
Command Economy
  • A system based on central control of trade and production.
  • A government decides what goods and services are given to its people.
  • It may even limit what jobs people can hold.
  • An example is the old Soviet Union.
  • Pure command economies are now found only in politically isolated countries such as Cuba and North Korea.
market economy
Market Economy
  • It is a system that is managed by the people.
  • It is also known as a free market system, or capitalism.
  • Market economies are based on supply and demand.
  • Businesses control how much they produce, and people control how much they consume.
  • A balance between what businesses want to produce and what people want to consume is the hallmark of a market economy.
Most economies are mixed in that some economic decisions are made by individuals and private firms, but some are also made by government officials, either through rules and regulations or through government-owned firms.
  • The U.S. economy leans toward the market-oriented side of the spectrum.
  • An economy like Cuba or North Korea is near the command economy side of the spectrum.
  • But the dividing line between market and command economies in most nations is blurry rather than bright.
  • Econ Disk
Barriers To Trade
  • Barriers to trade are government rules that block or inhibit international trade between countries.
  • The most common trade restrictions are: 1) tariffs, which are taxes on imports; 2) import quotas, which are limits on the quantity that can be imported.
  • Most barriers to trade are designed to prevent imports from entering a country, and thus are used to protect domestic producers from competition and domestic workers from competition for their jobs.
  • For this reason, a policy of high barriers to trade is referred to as protectionism.
  • However, economists point out that protectionism benefits domestic firms by allowing them to charge higher prices to consumers; in effect, protectionism is an implicit subsidy to the protected firms, paid for by consumers.
  • Although trade barriers may save the jobs of some domestic workers, it destroys jobs in other, probably more efficient, industries. Econ Disk
specialization and interdependence
Specialization and Interdependence
  • Specialization- In economics, concentrating on one area of work
    • Basketball shoes and basketball jerseys
  • Interdependence- reliance of one country on the resources, goods, or services of another country
  • Entrepreneurs are willing to risk their own resources in order to sell them for financial gain or profits.
  • Entrepreneurs are successful when they provide consumers with goods and services that consumers highly value.
  • Financially successful entrepreneurs have some common characteristics.
  • First, they are willing to assume risk, and high risk can lead to high rewards.
  • Second, entrepreneurs have unique skills that help them develop new products or new cost-cutting production methods or new ways to serve consumers.
  • Third, many entrepreneurs also have the discipline to work long and difficult hours to achieve their goals.
  • If you want to earn more income, develop valuable skills and use them in ways that are highly valued by others. (Disk)
  • Human capital is the value of people’s work.
  • A skilled worker is valuable to businesses and the nation.
  • Providing education, training, and healthcare to a worker is an investment in human capital.
  • Investing in human capital is important to financial growth.
  • For example, machines on a farm must be maintained.
They need things like fuel and regular repair.
  • Providing training, education, and medicine to workers is just as important.
  • It helps the business make money if its workers are skilled and healthy.
  • Any goods that are used to produce other goods are capital goods.
  • Buying things that help a business to make money is investing in capital goods.
  • Capital goods include machinery or even factories.
natural resources
Natural Resources
  • The natural features of a country can affect economic growth.
  • A countries economy benefits from trade with other countries.
  • For example, Saudi Arabia is rich in oil.
  • Its economy is based on trading oil with other countries.
  • With a resource as valuable as oil, Saudi Arabia has focused on developing that resources instead of others, such as farms.
  • Every country has a different kind of currency, or monetary system.
  • An exchange rate is the price that one country’s currency has compared to another country’s currency.
  • Without an exchange rate, global trade would be impossible to conduct.
  • Exchange rates change daily.
  • The Changes are based on factors like government stability and the strength of a country’s market.
  • END SEC. 2
Jordan - Dinar

Saudi Arabia - Riyal

Israel - Shekel

middle east economics
Middle East Economics
  • There are many different types of economic systems in the Middle East.
  • Many countries have mixed economies with different levels of government control.
  • Some countries are less developed than others in the region.
  • Middle Eastern countries have thrived on producing exports to other countries.
  • Cash crops have included grain, silk, and cotton.
  • For the last sixty years, the region’s main export has been oil.
  • The region imports much of its food and other essential products.
  • Israel has a mixed economy that is also technologically advanced.
  • The Israeli government and private Israeli companies own and control the economy.
  • Israel does not have many natural resources.
  • Israel has to import grain, oil, military technologies, and many other goods.
  • The country is a producer of high-tech equipment, electronics, biomedical industries, and cut diamonds.
  • The service industry accounts for much of Israel’s economy – areas such as insurance, banking, retail, and tourism account for over half of it.
  • Israel relies heavily on US economic and military aid.
saudi arabia
Saudi Arabia
  • Saudi Arabia also has a mixed economy but leans toward government control..
  • Saudi Arabia’s main export is oil.
  • The oil industry has made the Saudi royal family quite wealthy.
  • In fact, several members of the royal family are among the wealthiest people in the world.
  • Oil accounts for well over half if the country’s economy.
  • Oil funds the country’s education, defense, transportation, health, and housing.
  • The government is trying to encourage more private businesses to boost the economy and decrease the countries dependence on oil.
  • The government of Turkey controls the country’s economy.
  • Turkey’s economy, however, is not entirely a command economy.
  • A large part of the country’s economy is based on farming.
  • The Turkish government has had many disputes with other countries over its use of natural resources, such as the Euphrates River.
  • Clothing and textiles are the countries major industries.
  • The service industry makes up about half of Turkey’s economy, as it does Israel's economy.
economic growth israel
Economic GrowthIsrael
  • Economic growth has been difficult to achieve for many Middle Eastern countries.
  • War is a major threat to the region’s economies.
  • For example, both war and a large number of immigrants present challenges to the Israeli economy.
  • The Israeli government has taken control of certain economic activities in order to address these problems.
  • The Israeli government controls most activities related to agriculture.
  • This helps the nation’s economy because the county’s natural resources are so limited.
saudi arabia1
Saudi Arabia
  • Some gulf countries invest money to make their economies more diverse.
  • In the last few decades, Saudi Arabia has begun encouraging the development of industries other than oil in order to make its economy stronger.
  • In 1976, the Saudi government crated the Saudi Basic Industries Corporation.
  • The SBIC invests in capital goods.
  • These capital goods have made the country a steady producer of steel, industrial gasses, plastics, and petrochemicals.
  • Wars can also influence a country’s economy by influencing what the country decides to produce.
  • Iran’s war with Iraq led Iran to put more money into its military industries.
  • The number of people without jobs is Iran is high.
  • The country provides less protection for its human capital than other countries do.
  • For example, Iran does not have private labor unions to protect workers.
  • It is a mixed economy on the side of government control of oil and major industries.
natural resources1
Natural Resources
  • The natural resources of a country can affect economic growth.
  • Most Middle Eastern economies were once based on farming.
  • When oil was discovered, it became the main source of money for many countries in the region.
  • Governments with large oil reserves stopped investing in other parts of their economies.
  • Countries in the Middle East that do not have oil are often poorer than countries that do.
  • The region has many deserts and mountains and few rivers.
  • This physical makeup causes it to be more difficult to produce and transport goods.
  • Countries often spend money made from exporting oil on imports of items that are not available in the region.
Other nations such as Turkey, Israel, & Lebanon, which are not a rich in oil, must export other products.
  • Location is also crucial.
  • Nations along the Mediterranean and in milder areas often have more agricultural products and attract a greater population.
  • Greater population often leads to more industry and higher production.
  • More mountainous regions tend to feature smaller populations and industries like mining.
  • Deserts often provide rich oil supplies but lack water and other resources to support industries or agriculture.
middle eastern trade
Middle Eastern Trade
  • Before the 1950’s, the Middle East had a very strong agricultural industry.
  • Today, most countries in the region depend heavily on voluntary trade.
  • The ME must import much of its food and other products for daily life.
  • Over half of the food eaten in the ME is produced outside the region.
  • The region does not have many highly developed industries besides oil.
  • Without trade with other countries, countries in the ME would suffer.
  • Some ME countries are trying to trade more with other nations in order to improve their economies.
  • For example, 12 countries signed a trade agreement with the European Union to end tariffs in this region by 2010.
ME countries face both physical and political trade barriers.
  • The lack of rivers suitable for travel transport is a major physical trade barrier for many countries in the region.
  • Deserts also make trade extremely difficult in some countries.
  • Mountains are also physical trade barriers in such countries as Afghanistan.
  • Political trade barriers include embargos, sanctions , and tariffs.
  • The biggest export from the ME is oil.
  • Countries in the region control about 65% of the world’s supply of oil.
  • This is how gulf countries make the majority of their money.
  • Nations such as Saudi Arabia had relatively small economies before the discovery of oil.
  • The Persian Gulf is a huge asset to trade in the region.
  • It provides an easily accessible route for transporting goods.
More secular countries, like Turkey, Lebanon, and Israel, tend to embrace western fashions, music, and trends.
  • Therefore, modern technological advances, clothing, movies, CD’s, and other forms of western culture impact much of the Middle East.
  • These same western trends, however, tend to be rejected in nations such as Saudi Arabia and Iran that follow stricter Islamic guidelines.
  • The central organization of the world oil trade is the Organization of Petroleum exporting countries (OPEC).
  • OPEC is an international organization that has 12 members.
  • The members of OPEC include the ME countries of Iran, Iraq, Saudi Arabia, & Kuwait.
  • OPEC’s purpose is to help its members develop policies on oil production and trade that will benefit each other.
  • The organization raises and lowers the price of oil according to market demand, availability, and other factors.
  • OPEC’s actions can cause oil shortages in countries like the US that depend on imports from OPEC nations.
the 1973 oil crisis
The 1973 Oil Crisis
  • Some trade barriers are political.
  • Sometimes governments limit trade with other countries because they disagree with the actions or policies of those countries.
  • This is a trade barrier designed to purposefully hurt the economy of another country.
  • The 1973 oil crisis is one example of such a trade barrier.
  • The 1973 oil crises began on October 17, 1973.
  • OPEC announced that its member nations would no longer ship oil to countries that had aided Israel in its recent war with Egypt.
  • Those countries included the US and many in Europe.
  • OPEC raised the price of oil 70%.
  • As a result, the price of gasoline in the US quadrupled over several months.
These actions had a large impact on industrialized nations because of their growing dependence on oil and gas.
  • Western countries had been used to cheap and plentiful oil resources before the crisis.
  • Oil consumption had doubled in the US.
  • At the time, the US was using about 1/3rd of the world’s energy.
  • The crisis caused the value of the US dollar to drop.
  • It also had a widespread negative impact on the world economy.
  • OPEC started shipping oil to Western nations again in 1974.
  • Western economies began to get stronger again.
Wars are another type of political trade barriers.
  • Since the 2003 invasion of Iraq, Iraqi oil production had been hampered by violence.
  • In addition, OPEC nations have raised the price of oil.
  • Due to this rise in price, the price of gas is the US has increased from $1.00 per gallon in 1996 to over $3.00 this year.
  • The cost to heat homes has also risen.
  • The average US consumer has struggled to keep up with these quickly rising prices.