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Chapter 8: Economics: The Creation and Distribution of Wealth

Chapter 8: Economics: The Creation and Distribution of Wealth. What is Economics?. Economics The study of how a society chooses to use scarce resources to produce goods and services and distributes them among competing groups and individuals. Resource Development

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Chapter 8: Economics: The Creation and Distribution of Wealth

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  1. Chapter 8:Economics: The Creation and Distribution of Wealth

  2. What is Economics? • Economics • The study of how a society chooses to use scarce resources to produce goods and services and distributes them among competing groups and individuals. • Resource Development • The study of how to increase resources and make better use of them

  3. What is Economics? • Microeconomics • The study of the behavior of individuals and organizations in particular markets • Macroeconomics • The study of a nation’s economy as a whole

  4. Economics Theories • The Economics of Despair • Eventually the world’s population will exhaust its natural resources and starve • Growth Economics • Resources can be increased through technology and entrepreneurship • The Invisible Hand • Self-directed gain creates economic and social benefits • A successful business provides wealth for the owner, jobs for others, and tax revenue to fund public works

  5. Four “What’s” ofan Economic System • What is produced • What amount is produced • What method of output distribution • What rate of economic growth Adapted from: Edwin Mansfield Economics (New York: W.W. Norton, 1976), p.8

  6. Economic Systems • Free – Market Capitalism • All or most of the factors of production and distribution are privately owned and operated for profit • Right to Private Property • Right to Own and Profit from a business • Right to Freedom of Competition • Right to Freedom of Choice

  7. Free – Market Capitalism • How Free Markets Work • Decisions about what and how much to produce are made by the market • Buyers and sellers negotiate prices for good and services

  8. Free – Market Capitalism • Supply and Demand • Supply: the quantity of products that suppliers are willing to produce at a given price • Demand: the quantity of products that buyers are willing to purchase at a given price • Equilibrium Point (Market Price) • The point at which supply = demand

  9. Supply Curve High Price(P) S High Low Quantity(S)

  10. Demand Curve High Price(P) D Low High Quantity(D)

  11. Equilibrium Point Surplus High Market Price/ Equilibrium Point Price S D Shortage Low Quantity High

  12. Competition Within Free Markets • Perfect competition • Many sellers of nearly identical products • No seller is large enough to dictate the price of the product • Farm products • Monopolistic competition • There are a large number of sellers of similar products • Buyers perceive the products to be different • Fast food • Colleges

  13. Competition Within Free Markets • Oligopoly • The market is dominated by a few sellers • Automobiles • Tobacco • Monopoly • A market in which there is only one seller • Utilities • Diamonds

  14. Limitations of Free-Market Economies • Inequality of wealth causes national & world tension. • Potential environmental damage. • Limitations push country towards Socialism & greater government regulation.

  15. Economic Systems • Socialism • Private & Public Ownership • Some Choices are Limited • Creates Social Equality & Equality of Results • Reduces Individual Incentive

  16. Economic Systems • Communism • Public ownership of all productive capacity and capital • No private ownership • Central Planning/Controlled Economy • Managers must be Party Members

  17. Economic Systems • Mixed Economies • Some allocation of resources is made by the market • Some allocation of resources is made by the government • The United States is an example of a mixed economy • The foundation or basic system is Capitalism • The government supplements the basic system

  18. The Government’s Role in the U.S. Economy • Enforces Rules/Regulations • Provides Public Goods • Transfers Payments • Fosters Competition • Contributes to Economic Stability

  19. Key Economic Indicators • Gross Domestic Product (GDP) • Total value of all goods and services produced in a country in a given year • Unemployment Rate • The number of civilians aged 16 years or more who are unemployed and have tried to find work within the prior 4 weeks

  20. Key Economic Indicators • Price Indexes • Consumer Price Index (CPI) • Measures changes in the prices of ~400 goods and services that consumers buy • Producer Price Index (PPI) • Measures changes in prices at the wholesale level

  21. Inflation and Recession • Inflation • A general rise in the prices of goods and services (the CPI) over time • Disinflation • Price increases are slowing (the rate of inflation is declining) • Deflation • Prices are declining • Recession • 2 or more consecutive quarters of decline in GDP • Depression • A severe recession

  22. U.S. Government Economic Tools • Monetary Policy • Management of money supply. • Fiscal Policy • Management of taxes and government expenditures. • National Debt • Borrowing to support federal spending.

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