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Economics

The Science of Choice
by

Benham Giess

on 11 April 2016

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Transcript of Economics

Finally
In this Unit We Will Learn
Economics: The Science of Choice
-To view society through and economic perspective
-How societies distribute scarce resources
-How supply & demand impact costs
-How the U.S. Government policy shapes the U.S. Economy

The Economic Perspective
Supply & Demand
Economic Systems
The U.S. Economy
What is the Economics?
Economics-
the social science which is concerned how individuals, institutions & society make the best
choice
under the conditions of
scarcity
How do people attempt to satisfy unlimited wants with limited resources?
How people & society pick and choose goods and services to maximize our satisfaction.
Scarcity & Choice-Everyone makes choices
Scarcity
-a situation where human wants exceed limited resources
Restricts Options
Requires a
Choice
-decisions made or course of action taken when face with a set of alternative
has two or more valuable uses
forces people to place a value on the resource
Since all resources are privately or publicly owned ALL decisions have costs
Examples
Oil
Not scarce in 1605
Definitely scarce in 2012...but still abundant
Is Oil Scarce to an Amish Person
Water
if you only use the water to catch fish it is abundant and not scarce
potentially use the water to generate electricity, irrigate farms, drinking water in a city
water is scarce because people have an alternative and are forced to make a choice
Rational Self-Interest
Consumers, Business & Government are purposeful when making a choice
people make choices with a desired outcome in mind
They attempt to maximize their satisfaction
the pleasure or happiness obtained by consuming or a service
weigh the costs & benefits
attempt to maximize their satisfaction
people can make poor choices
All Choices Have Costs-Cost Benefit Analysis
people make decisions by comparing marginal costs & marginal benefits
marginal means "extra", "additional," or "a change in"
16 oz. Soda is $2.95
24 oz. Soda is $3.00
32 oz. Soda is $3.10
People weigh the added benefits and added costs when making a decision
There is always a cost... the cost of forgoing something else
Opportunity Cost
- The most desirable alternative given up as a result of a decision.
Journal Entry: View a recent decision you have made through the lens of an economic perspective.
Goals:
Define: Economics; Scarcity; Choice; Opportunity cost
Describe the central idea of economics
Describe the three features of an economic perspective
Cite examples of a cost benefit analysis you have recently used to make a choice
Analyze a decision to determine the costs, benefits, and opportunity cost of a choice
Define: Command Economy; Traditional Economy; Free Market Economy; Mixed Economy, Market
Goals
Explain the difference between a command economy & a market economy
Answer the three economic questions for each type of Economy
Three Economic Questions
Societies make choices about distributing scarce resources
How should these goods and services be produced?
Who consumes these goods and services?
What goods and services should be produced?
What goods or services maximizes society's satisfaction?
Healthcare, religion, education, defense, consumer goods & services
How should society allocate, land, labor, capital and entrepreneurs?
Societies must decide how to divide up the available goods & services
a. marginal cost/Marginal benefit
b. Opportunity Cost
1. Scarcity Requires peoples to make choices
2. People act in their own self-interest
3. All choices have costs
Traditional Economy
Traditional Economy- an economic system where economic decisions are based on customs, community, family & religion.
Least developed economy
Extensive subsistence agriculture
Utilizes a barter & trade system
Technology is not used
Farming, hunting and gathering are done the same way as the generation before
Economic activities are usually centered toward the family or ethnic unit
Men and women are given different economic roles and tasks
Economic Systems
Def:
a set of institutional arrangements and coordinating processes that maximizes satisfaction of a society
Economics Systems Differ
for 2 reasons
Who own factors of production?
Methods used to motivate, coordinate & direct economic activity
The Command System
Command Economy: an economic system where the government owns the majority of the factors of production and economic decision making occurs through a central economic plan.
Socialism- uses democratic process to distribute wealth evenly (political and economic equality)
Communism- all economic and political power is in the hand of the central government
The Market System
Market Economy- An economic system characterized by private ownership and the use of
markets
to coordinate and direct economic activity.
Participants act in their own self interest
Individual and business seek to achieve their goals through their own decisions
Markets (places where buys and seller come together)
communicate prices and coordinates economic activity
Goods and services are produced by whoever is willing to do so
competition is the result of many of buyers and sellers
Little to no government involvement
Mixed Economies
Mixed Economy- economic system where the government gets involved at points to prevent abuses and regulate the economy
Technically the Economic System found in the U.S.
Government Intervenes to:
-Keep Order
-Provide Vital Services
-Promote the general welfare
Characteristics of a Market Economy
Goals:
Define: Free Enterprise; Invisible Hand
Explain the 5 characteristics of a Market Economy
Explain the 3 virtues of the Market Economy
Describe the 2 reasons for the Demise of the Command System
Private Property
Freedom
Enable Business & individuals to obtain and use resources as they see fit
Encourages investment
maintenance and improvement
innovation
intellectual property
exchange
obtain new resources
Growth
Freedom of Enterprise- business and obtain and use economic resources to produce what the markets dictate
Freedom of Choice- Use labor and resources as they see fit.
-consumers are free to buy or not buy what they see fit and budgets allow
allows market to be flexible and efficient
Self-Interest
-Sellers try to get the highest prices
-Buyers try to get the lowers prices
-Workers try to get the best wages & benefits
Competition
-Competition Requires
Two or more buys and sellers acting interdependently in their economic self interest
Freedom to enter or leave the market
-Diffuses economic power-No Single Buyer can dictate the price
-Markets can grow and shrink
-Allows markets to adjust to tastes, technology &resource availability
Market & Prices
-Coordinates the economy
-Conveys decisions
-Records, summarizes and balances choices
-forces consumers and producers to respond to decisions
Pros & Cons of the Command & Free Market Systems
The "Invisible Hand"
Invisible Hand-competition harness self-interest motives of business and resources and supplier to further social interest.
Critics argue a free-market system allows the wealthy to take advantage of the poor.
Business shift allocation of resources to supply what society wants
Business are starting to be more environmentally conscience
3 Virtues of the Market System
1. Efficiency- Guides resources to what society wants
Profit motive forces encourage little waste
encourage development and adoption of new and more efficient production techniques
2. Incentives- Encourage skills acquisition, hard work and innovation.
-More skills & effort = higher income
-Risks Entrepreneurs make result in wealthy rewards
3. Freedom- individuals act on their own.
-natural rewards and penalties
-more creative thought
Demise of the Command
System
The Coordination Problem
Business are interdependent on each other
Failure of one industry causes a chain reaction
Larger economies have a harder time coordinating
Lack of a reliable success indicator
Quantity often determines success
Distortion in products
success in weight-->large heavy nails
success in quantity--> small numerous nails
Incentive Problem
Coordination issues led to shortage and surpluses
Managers were reward for meeting assigned goals not responding to shortage or surplus
no reward for innovation & problem solving
Larger reward for maneuvering through political party & meeting goals
Goals:
Define: Supply, Demand, Substitute Goods, Complimentary Goods
Describe demand and what affects it.
Describe Supply & what affects it.
Describe how the change in supply and demand will impact price.
What is Demand?
Demand: The amount a purchaser is willing and able to buy at a given price.

Law of Demand: All things being equal people will purchase more at lower prices.
Reasons for change in Demand
Mostly common sense
Law of diminishing returns- each additional item purchased brings less satisfaction so lower prices encourage consumption
Lower prices increasing purchasing power, and discourage a search of alternatives
Tastes and Fashions
Tastes and preferences change due to fads, trends, advertising, health concerns
Water just began out selling soda
Increase in electric cars
Population
The amount of people in a market increases demand.
China & India thirst for oil is increasing demand for oil
America's aging population is increasing the U.S. demand for health care
Consumer Income
Normal or Superior goods
- products who demand varies directly with money income
ex. steaks, furniture, electronic equipment, movie sales
As income increases demand increases for normal goods
As income decreases demand decreases for normal goods
Inferior goods
- products whose demand varies indirectly with income.
ex. used clothing, used cars, movie rentals
As income increases demand decreases for inferior goods
As income decreases demand increases for inferior goods
The Number and Price of Related Goods
Price of Compliments-a good that can be used together with another good.
Peanut butter & jelly as the price of peanut butter go up the demand of jelly decreases.
Smart phones and data usage: As the price of data increases the demand for smart phones decrease
Price of Substitutes- a good that is used in place of another good.
Water ice and ice cream. As the price of water ice increases, the demand of ice cream increases
A reduction in airfares reduces the demand for bus transportation
Consumer Expectations
Buyers change their demand as the present time due to possibility of future price and income change
If consumers believe the price of land will increase in the future, they rush to buy now
If consumers feel the price of land will go down in the future the demand will go down because buyers will wait
If consumers feel their income will go up in the future they buy more now.
If consumers fell they will lose their job they will buy less now.
Change in Supply
Supply- the amount producers are willing and able to make at a given price at a given time.

Law of Supply- producers are willing to produce more a higher prices.
Reasons for change in Supply
Cost of Production
Resources- ex.wages, natural resources, capital
costs of resources impact profit incentive
cheaper cost of production means more profit and an incentive to increase supply
higher cost of production means less profit and an incentive to decrease supply
Technology- improvements in technology make production more efficient and increases supply
fewer production costs increase supply
Expectations of Future Prices
Taxes & Subsidies
Taxes- attempt to discourage the sale of a product the government thinks is harmful.
Income and property tax increase cost
Higher taxes decrease supply
Subsidy-government payment that supports a business or market.
taxes in reverse
lowers cost to producers and increases supply
If the price of a good is expected to increase in the future the supplier may decrease supply now to sell at a higher price later.

If the price of a good is expected to decrease in the future, the supplier may increase supply now so they won't have to sell their stock later a lower price.
Profitability of Other Goods
Producers switch productions to similar goods to maximize profits.
Car manufactures will produce more pick up trucks when construction increases
Car manufacture will produce more small cars when there is less construction in a recession.
The Business Cycle
The Private Sector
Public Sector
The U.S. Economy
Households- the major spenders in the economy, ultimate suppliers of all economic resources
Business-create goods & services for profit
Plants- fabricate & distribute goods & services.
ex. physical establishments, factory, farm, mines, stores, warehouse
Firm-organization that operates one or more plants
Industry- a group of firms that produce the same or similar products
ex. tech industry; pharmaceutical
Public Sector- all economic activities carried out by Federal, state & local government.
Provides legal framework
Maintains Competition
Redistributes income
Reallocates Resources
Promotes Stability
Gross Domestic Product: GDP
GDP- Total market value of all final goods and services produced with in a country in a given year.
House Purchases + Business Investments + Government Spending - Imports = Total GDP
High point of business cycle
the time following a peak where output fall
the low point in the business cycle
The period of growth in output following a trough
Period of growth extending from the trough to previous peak
The period of growth extending past the previous peak
Lack of confidence in economy leads to buying less
Decreased demand leads to producers making less
Producers therefore need less workers
Unemployed workers buy less and don’t have $$ to invest
Snowball Effect downward
What goes down:
Bust Cycle or Contraction
Recession
A recession that is especially long and severe.
Depression
High consumer demands lead to producers wanting to increase supply
To increase supply you need more workers
More workers then have more money to buy newly made goods (so prices can rise) and they will invest their $$
Must come up
A
RECESSION is a prolonged period of time when a nation’s economy is slowing down, or contracting

( Defined by 2 consecutive Quarters of zero or negative economic growth; GDP )
Almost entirely based on Consumer Confidence
Characterized by a number of trends
People buying less stuff
Decrease in factory production
Growing unemployment
Slump in personal income
An unhealthy stock market
Increase in Savings rate
Boom Cycle or Expansion
Private Sector
Households
Household income comes from
Wage & Salaries (major component)
rents, interest payments, profits
House is Income Spent
86% of income is spent
13% of average income is paid in taxes
1% of average income is saved
Consumer spending
11% on durable goods that last 3 years or more
29% on non durable goods (gas, clothing, food)
60% spent on services
Sole proprietorship-a business owned and operated by one person
Partnership-two or more individuals pool own and operate the business
pool resources
share risk, profits & losses
Corporations
Legal Forms of Businesses
A legal entity that is separate and distinct from its owners who own shares of the corporations called stocks.
Stocks- a share in ownership of a corporation
Corporations are individuals
they enjoy most of the rights and responsibilities that an individual possesses
right to enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets and pay taxes.
Advantages to Corporations
What is a Corporation?
Most dominant form of business from sales & profit perspective
Very effective at raising money
Pools financial resources of large number of people
Sell stocks (part ownership in company)
Bonds- a loan given to a company, to be paid back plus interest
Corporations are able to easily to begin, expand and sell
Limited liability
is most important aspect of a corporation is limited liability.
shareholders have the right to participate in the profits, through dividends and/or the appreciation of stock,
Shareholders not held personally liable for the company's debts.
Can continue beyond the life of their owners.
Stock market
Stock Market

Benefits to buying stocks
Dividends – pay out part of company profits to the stockholders
Capital Gains – sell the stock for more than what you paid for it
Stock Exchanges
There are three big stock exchanges in the United States:
NYSE - New York Stock Exchange
AMEX - American Stock Exchange
NASDAQ - National Association of Securities Dealers

Dow Jones Industrial Average (the DOW)
Represents 30 large companies in various industries such as food, entertainment, and technology

https://www.scottrade.com/

Standard and Poor’s 500 (S & P 500)
Tracks the price changes of 500 different stocks
Broader picture of stock market performance
Preferred by professional investors
Bull vs. Bear
Bear Market
If the economy is “doing poorly” prices (as a group) tend to fall over a significant period of time
Generally in a recession and unemployment is high
Bull Market
If economy is “doing well” then the prices of stocks (as a group) tend to rise
Associated with increased investor confidence
Return of the Bear in 2008
Abysmal year — the worst since the Great Depression -- wiping out $6.9 trillion in stock market wealth
The average price of a share listed on the NYSE plunged 45% to $41.14 by the end of the year from $75.01 a year earlier.
The Dow Jones industrial average fell 33.8% for the year and 38% from its record close of 14,165.53 in October 2007, making it the Dow's worst year since 1931, when the country was in the midst of the Great Depression.
The Standard & Poor's 500 index, the indicator most watched by market pros, slumped 38.5% in 2008 and 44.8% from its 2007 high of 1,565.15.
Goals:
Define: Business Cycle; Expansion; Contraction; Prosperity; Recession; Depression
Explain the difference between the private & public sector using their components
Draw and Label the Business Cycle found in the Free Market Economies
Analyze Reasons for the boom and bust cycles.
An Economies total output is measure by its GDP
-GDP Growth is most important economic indicator
-indicates health of countries economy
-Historic Growth is between 2.5%- 3%
Business Cycle-The recurring and fluctuating levels of economic activity that an economy experiences over a long period of time.
Public Sector
Nature, Random Shocks
Weather
Earthquakes
Wars
Industrial Disputes
Economics Policy
Economic Policy: a government course of action aimed at producing a vibrant, healthy and growing economy.
Goals of Economic Policy
Stable prices--> low inflation rate
Full Employment --> unemployment rate of 5% or less
Economics Growth --> at least a positive % GDP Growth Rate
Economic Theories- How to stimulate the economy?
Supply-Side Economics Benefits
Poor output mainly due to inflation results from lack of supply
cut taxes
reduce regulations
reduce government spending
Supply-Side Economics Costs
takes long periods of time
mainly benefits wealthy
Keynesian Economic Theory
Poor Output results from poor demand
Government essential for combating recession
lower taxes (especially for lower/middle incomes)
increase government spending
Keynesian Economics Costs
Large budget deficits
Inflation- artificially high value of goods and services that leads to rising prices
Monetary Policy
Involves manipulating the available money supply in the country
Controlled by the
Federal Reserve
Federal Reserve- the Central Bank of the U.S. that controls U.S. monetary policy to ensure:
Handle the banking needs of the U.S. Government
Borrows money for federal government
bonds-a loan given to be paid back plus interest
Lends Money to Other Banks

Tools of the Fed
Expansionary – Prevent recession
Lower interest rates
Buy Government Bonds
Lower the price of borrowing
Encourages greater investment and spending
buy cars, homes, expand business

Contractionary – Prevent inflation
Raise interest rates
Sell high interest government bonds
Increase the price of borrowing discouraging borrowing.
Takes $ out of the economy to slow it down
Fiscal Policy
Fiscal Policy- The government influences the economy by changing how it spends and collects money
Dictated by Congress and the President

Expansionary – Prevent recession
Democrats-->
Increase Government Spending to boost employment
Provide Government services
Increase demand and consumer spending
Increase unemployment insurance
Republicans-->
Cut Taxes for businesses and/or individuals
Stimulate supply and investments
increase hiring
Contractionary – Prevent inflation
Democrats- aren't concerned about inflation but are willing to raise taxes
Republicans--> cut governments spending
to reduce total spending in the economy
Mandatory (60%)
Entitlement
Social Security
Medicare
Food Stamps
Veterans Benefits
Federal Pensions
Federal Budget
Discretionary (35%)
Defense – soldiers and supplies
Everything Else
Education
Scientific research
Student loans
National parks
Environment
Foreign Aid
Farm Subsidies
http://www.msnbc.msn.com/id/21134540/vp/35179282#35181507
Spending-The Federal Budget
http://defeatthedebt.com/
-National Debt-total money by the federal government owed year after year
-Currently over $16 trillion
Problems with having a debt??
-Government must pay the interest on the money owed
-Interest rates on government bonds are tied to home & car loans
Defeat the Debt
“Understanding the debt”
Can the US Budget be balanced? (9:45)
http://www.msnbc.msn.com/id/21134540/vp/34838276#34839222
Deficit Spending-spending more money than collect in taxes
-Responses to Deficit or National Debt??
-Create more $$ which leads to inflation
-Borrow money – issue bonds
-Raise taxes – not politically smart
-Cut spending – also not politically smart
-Total 2009 Deficit -- $1.42 trillion
http://www.washingtonpost.com/wp-srv/special/politics/presidential-budget-2014/
President Proposes;
Congress Disposes
Taxing-The Only Thing Certain in Life is Death & Taxes
Types of Taxes

Federal & States Taxes
Income Tax – Proportional vs. Progressive (Federal and State)
Excise Taxes-“sin taxes” to discourage the use of an item
Gasoline, cigarettes, alcohol, telephone, cable, etc.
Estate Tax – “Death Tax”-Tax on total value of $ and property of a person who died
Gift Tax – give tax free up to $10,000
Federal Taxes
Payroll Taxes
FICA – Social Security and Medicare
Unemployment
Tariffs-Protect businesses from cheaper foreign goods
State & Local Government
Property Taxes
Sales Tax
Profitability of goods in joint supply
Full transcript