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Transcript of Economics
What is Economics?????
Economics is the study of how people try to satisfy unlimited and competing wants with the use of limited resources.
It is a social science because it studies human behavior.
It analyzes things like incentives, choice, costs, speculations, and production.
The Chief Economic Problem......
Scarcity is the chief Economic Problem.
What to Produce?
Who to Produce it For?
How to Produce it?
What goes into making us happy?
Wants vs. Needs
Wants are definitely more valuable than needs.
Needs describe the basics: What do you need to survive? Food, clothing, shelter.
Wants define what is produced because we express our needs through wants.
Land- All property, factories, and places used to produce a particular good or service.
Labor - the workforce used to produce things.
Entrepreneurs- They manage business and capital to make things happen.
Capital- Money and Machinery used to produce goods and services
Factors of Production
Consumer Goods Capital Goods
Consumer Goods are bought and sold in the market .
are used to make other goods
Wealth, Value, and Utility.....
Wealth is the accumulation of all tangible goods (not services) that are bought and sold in a country.
Value places a number on something. Creates worth. Paradox of Value is where something has little value, but is a need.
Utility is the usefulness of a good/service.
Wants are far more valuable than needs!
Tell me why the paradox of value exists with the product above.
Economists think that a product has to be scarce for it to have value.
Supply vs. Demand play a huge part in the value of a good/service.
How do we become better decision makers?
Economics make us better decision makers because it is designed around rational choices.
Costs vs. Benefits (activity)
Businesses use PPFs to determine what to make to help with economic growth and success.
This company is very limited in what it can do.
It will only be able to produce what is inside of the Red Frontier line.
Guns and Butter..
Points A-C are possible
If the company decides to make more of one product than the other, then it has to sacrifice something to do it.
This is a Opportunity Cost.
To reach the unattainable, Companies have to grow.
Point D was impossible to reach, but this company grew and raised it capabilities to do so.
What is an Economy/Economic System?
It is an organized way of providing for the wants and needs of a consumer.
It is the collection of how we solve the chief economic problem.
There are 3 major types of Economic Systems out there.
Scarcity is Ritual........
Everyone knows their roles.
3 questions are answered based on necessity.
Not complex at all.
Not very modern.
One size fits One???
One central decision maker
Changes in quick amount of time.
Low consumer satisfaction
Large amount of freedom given away to government.
Adapts and adjusts to change
High degree of freedom
Variety of goods and services
Low govt. interference
Consumers don't value services
Doesn't meet needs of every consumer.
Three Types of Economies
efficiency-resources moved to well informed individuals, then profit and success is made.
Leads to Great Wealth
Doesn't meet everyone's needs.
Ignores the production of public goods (roads, public schools, national defense)
Private goods can be withheld to those who can't pay (fend for yourself attitudes)
Produces only for those who have demand for things.
Rich get richer at expense of the poor.
Redistribution of the Wealth
The question of "for whom" is answered because those less fortunate are able to benefit from the success of others.
Less efficient than capitalism.
Costs of production go up drastically due to excessive employment.
Labor mobility is slowed down because of the amount of government provided services. (entitlements)
Higher taxes to fund government services.
Takes away the incentive to work hard.
What I say goes.......
Property is collectively owned.
Adapts quickly to change.
Resources are strictly controlled.
Individual risk taking prohibited.
No Individual freedom.
Lacks effective incentives to work hard.
Fails to meet the needs of all consumers.
Large focus on defense spending.
Inefficiency of central planning.
Lack of Flexibility to deal with day to day operations.
Evaluating Economic Performance in the United States.
Economic Freedom allows people to choose their own profession, spend money on what they want, and creates an environment that results in consumer satisfaction and profitable success.
Economic Efficiency allows money and resources to be used so that everyone benefits.
Economic Equity insures that everyone is treated fairly in the Market. Minimum Wage and the regulation against price discrimination are good examples.
Economic Security leads to Economic Freedom
Price Stability is designed to keep inflation down and eliminate price gouging.
Private Property Rights
Roles in the Economic Process
Consumers set the tone on what is bought, sold, and produced. We have the most power in the Market.
Government plays an important part because it not only regulates, but it also provides.
It also protects us by supporting the Economic and Social Goals of the U.S.
Entrepreneurs manage the factors of production in order to seek profit.
Businesses owned by one person.
Most Common form of business
Easy to start
Easy to manage
Owner doesn't share profits
High failure rate
Difficult to raise financial capital
Small and inefficient
Owner if financially responsible for losses.
Easy to start
Easy to manage
Lack of special taxes on a partnership
Can attract more financial capital
Larger in size
Easy to attract top talent
Each partner is responsible for the others.
Conflict-not everyone gets along with others.
Form of business organization recognized by law as a separate legal entity having all the rights of an individual.
Count for about 20% of the firms in the U.S.
Ease of raising financial capital.
Directors can hire professional managers
Provides limited liability for the owner.
Charters are expensive
Shareholders have little say in how the company should be run.
Double taxation of profits
Subject to more govt. regulation
Profit gets put back into company to help it grow larger and serve the public.
Vertical- buying a company that makes supplemental goods.
Horizontal- buying a company that makes same product.
Other types of business Organizations
Non Profit- schools, hospitals, churches
Co-ops- Designed to protect and benefit its members.
Labor Unions and Professional Organizations
Government- Direct role of producing services(National Defense) and Indirect role (regulating business)
Study of behavior at the most basic level of economic activity.
What is Demand???
Willingness to pay for product.
The Law of Demand says “Demand for product increases as the price of that product goes down.”
Common sense and simple observations.
Market Schedule (more than one seller)
Individual Schedule (1 firm/seller)
Marginal Utility is when the newness of a product wears off. This is a pretty common occurrence.
Economic model that shows how we express our wants of a product.
Demand Curves and Marginal Utility
Changes in Quantity Demanded cause movement from point to point up and down the curve.
Two major factors are income and substitutions.
If you don’t have enough money you won’t be able to buy something.
Also, if there is an adequate substitute for a good or service at a cheaper price; the original product will not be bought.
Factors that Affect Demand….
There are six factors that affect demand:
Number of consumers
Change in Demand is where the curve either expands or shrinks.
An increase in Demand (D) will cause the curve to move right.
A decrease in Demand will cause the curve to move left.
Changes in Demand…..
(leave room in notes to draw curves on board)…..
Income is important because if you have more money you are more likely to purchase goods and services than if you were broke.
Not everyone wants that same stuff.
A variety of goods and services creates economic freedom and voluntary exchange.
This can affect Demand in a negative or positive way.
Consumer Taste and Income
Changes in price in related products will cause demand to change.
Substitutes are similar products that will either benefit or not from changes in demand.
Complements can cause demand shifts as well.
Substitutions and Complements.
The speculations of consumers will directly affect the demand curve. Hurricane effect.
Also, the more consumers, the better chance that the demand will go up..
Expectations and Number of Consumers
Elasticity is a measure of responsiveness.
It is referred to the change in demand due to a price change.
If the change is large then the product is very elastic.
If there is no change then the produce is inelastic.
The availability of an adequate substitute is very important to the elasticity of a product.
Write the 3 questions on side of this chart. They help determine the elasticity of a product.
How to determine Elasticity
Quantity of a product that is offered for sale.
Deals strictly with producers.
Law of Supply states that, “Products will be offered at a higher price, rather than a lower one.”
What is Supply??
Market schedule (more than one)
Individual (One producer)
There are also six factors that affect supply:
Cost of Inputs
Taxes and Subsidies
Supply is just like demand only the curve goes in different directions.
The increase in supply goes right, while decrease goes left.
Change in quantity (Q) is movement up and down the curve.
Changes in Supply and Factors
Costs of inputs explains how the costs of factors of production affect the production of that good.
Productivity explains how if you don’t make something, there will not be a product to sell.
Cost of Inputs and Productivity
Taxes create a decrease in supply. Seen as a cost.
Subsidies create opportunities to make more of something (increase).
Expectations can cause a company to hold off on production or flooding the market with something.
Taxes, Subsidies and Expectations
A new invention or method that speeds up or slows down production directly affect supply.
Governments step in to put quotas(limits) on what to produce or lift tariffs (taxes on imports) to affect the supply of product.
New Technology and Govt. Regulation
Supply and Demand have a very strange and important relationship.
Companies produce goods based on your wants and needs.
This system is designed to benefit everyone.
Elasticity is different for Supply because substitutes play no real role in change. Neither does the delay of purchasing.
Relationship between Supply and Demand.
Explains the relationship between land, labor, capital, and the output of goods and services.
Deals with the short run, which calls for change in production and its relation to labor.
Short run deals with just labor, while long run allows for a firm to adjust over an extended period of time.
Law of Variable Proportions says that if you change just one factor, the short run will be affected. (Ex. Retail, Restaurants)
Theories of Production
Three Stages of Production
Fixed Costs, Variable Costs, Total Costs, and Marginal Costs.
Combination of costs and inputs affect the way businesses produce.
Gas stations have high fixed costs due to equipment and taxes, but have a low amount of variable costs.
Businesses try to reach point of profit maximization (Money taken in must cancel out money spent.)
Costs and Cost Principles
Monetary value that is put on a product.
Utility raises price.
Availability affects price.
They serve as signals to connect consumers with producers.
Perform an allocation function for goods and services..
What is price?
They favor neither consumer nor producer.
They are flexible
They require no cost of administration
They are common knowledge.
Without price rationing occurs, but this is highly unfair. This leads to lack of incentives to work hard.
Reasons that we have prices
Supply and Demand create a situation where price must be fair to both sides.
This sets a market price that goods are sold.
Equilibrium price occurs where supply and demand intersect each other.
Supply equals demand at market equilibrium.
Price Adjustment and Equilibrium
When producers make more of a product than what is needed.
Price must be lowered to get rid of a surplus.
Set of conditions where producers set a fair price so consumers can have a choice.
Govt will step in to set prices in order to reach many Social and Economic goals. (Efficiency, Equity, Growth, Stability)
Competitive Price Theory and Govt. Regulation
Price Ceilings are put into place to keep people from being charged too much for a good or service. Rent Control is a good example of this.
Price Floors a put into place to keep people from being short changed for things like jobs and such. Example would be Minimum wage.
Price Floors vs. Price Ceilings
Occurs when the consumers want more of something that is available on the market.
Production must be sped up to regulate price.
Questions used to Identify Market Structures..........
How many buyers and sellers?
Does buyer or seller have any influence?
How much competition exists?
What kind of product?
Is it easy or difficult to enter market?
Keep yo' stinkin hands off my Economy!!!!
Characterized by well informed consumers and producers.
5 major conditions
Large # of buyers and sellers
Buyers/sellers deal in identical products
Buyers/sellers act independently
They are reasonably informed
Under perfect competition, supply and demand set the equilibrium price, and each firm sets a level of output that will maximize its profits.
These charts are located on p. 165 in your books.
Market Price & Profit Maximizing
Meets all conditions of perfect competition except for identical products.
Use product differentiation—the real or imagined differences between competing products in the same industry.
Use non-price competition, the use of advertising, giveaways, or other promotional campaigns to differentiate their products from similar products in the market.
Sell within a narrow price range but try to raise the price within that range to achieve profit maximization.
Price Fixing- selling products at a fixed price and controlling the supply to maintain that cost
Dividing the market to keep competition out.
Monopolies- One firm controls everything.
classified as a market failure.
Unintended side effect.
both positive and negative.
Examples of Positive: Health Care, Public Education, and Taxation.
Examples of Negative: Pollution, the use of steroids and antibiotics in our food, and overfishing.
Market is controlled by a few large firms.
Examples- diamonds, oil, tires...
Occurs when a single firm produces a product or provides a service because it minimizes the overall costs.
Examples would be the power or utility companies.
Occurs when the location cannot support 2 or more such businesses.
Examples would be Charter Cable in Alexander City.
occurs when a producer has the exclusive right through patents/copyrights to produce/sell a particular product.
Example is Apple and iPod
Occurs when the govt. can produce service better than anyone else.
Example would be National Defense.
Reasons that Markets will Fail........
Markets need the following to succeed.
Adequate competition must exist.
Buy/Sell must be well informed.
Resources must be free to move across industries.
Prices must reflect costs of production.
Ways that the govt. has stepped in..
Sherman Antitrust Act- Protects trade from Monopolies.
Clayton Act- Outlaws price discrimination.
The Federal Trade Commission- Watchdog Organization to control fair trade and commerce.
Public Disclosure- Companies must post any new information that they have to keep consumers well informed.
Indirect Disclosure- The use of various media outlets so companies can put out "fine print" to keep consumers in the loop.
Deals with Economy as a whole.
Covers topics like…..
Taxes and Federal Spending
What is Macroeconomics???
Most of the Public makes up the civilian labor force.
Labor movement started during the colonial times. Most skilled workers unionized.
Wages are determined by supply and demand
Number of jobs vs. Salaries
Employment and Unions
Most unions participate in protests for workers rights: Strikes, Picketts, and Boycotts.
High American wages has led to the passing of NAFTA (North American Free Trade Agreement)
Businesses leave the country
There are four major categories of labor.
Unskilled labor have the least amount of human capital and generally paid the lowest.
Semiskilled workers usually operate basic equipment that call for minimal amounts of training.
Skilled Laborers possess a higher human capital and hold jobs like carpenter, typists, computer techs.
Professionals have the highest knowledge based education for their jobs.
Types of labor
Collective Barganing – union reps meeting with industry reps on differences
Strike – refuse to work until demands are met
Picket – Parade in front of business
Boycott – mass refusal to buy products
Lockout – Business refuses to let employees work
Reasons for Union Decline:
Employers made strong effort to keep union out.
New additions to the labor force had little loyalty to unions.
Unions are victims of their own success.
Decline of the Unions
Resource Allocation- raise production costs and price. Affect supply and demand.
Behavior- Sin taxes and tax breaks can affect the behavior of the consumer.
Promote Economic Growth- affect the incentives to save, invest, and work.
Economic Impacts of taxes
Benefit principles-Those who benefit from government goods and services should pay in proportion to the amount of benefits received.
First Limitation – Government services provide the greatest benefit to those who can least afford to pay for them.
Second Limitation – the benefits often are hard to measure.
Principles of Taxation
Ability-to-Pay Principle-Belief that people should be taxed according to their ability to pay regardless of the benefits they receive.
Factor One – it recognizes that societies cannot always measure the benefits derived from government spending.
Factor Two – It assumes that people with higher incomes suffer less discomfort paying taxes than people with lower incomes.
Proportional tax- imposes same percentage rate of taxation on everyone.
Progressive tax- imposes a higher tax on people with higher incomes.
Regressive tax- imposes higher rate on low incomes.
Types of Taxes
Individual income tax
Govt. collected nearly 45% of its income
paid through payroll deduction
Indexing keeps workers from paying more in taxes due to inflation.
Employers and employees share the burden
see a deduction in your check for both Medicare and Social Security.
Social Security is a 6% flat tax rate.
Medicare is taxed at a 1.45% rate.
Excise Tax is levied on things like gas and liquor.
Estate taxes are levied when property is transferred form one individual to another.
Gift taxes are made on donations, the giver is the person responsible for this tax.
Corporations have to pay taxes on income and this accounts for the third largest category of taxes.
Customs duties are levied on goods brought into the United States.
About 1% of federal revenue is collected through miscellaneous fees.
Intergovernmental revenue is the largest form of state revenue. This is funds collected by one level of govt. and redistributed to another level.
Sales taxes are the second largest form of state revenue.
Retirement contributions are the third largest source of revenue.
Individual income tax is the fourth largest source of income.
Economic Recovery Tax Act of 1981
Reduce taxes for businesses and individuals
Reduced the 16 brackets to two (15 and 28%)
Omnibus Budget Reconciliation Act of 1993
Need to balance the budget
Added two top tax brackets, 36 and 39.6%
Taxpayer Relief Act of 1997
New tax brackets and Increased the deduction for children and educator expenses
2001 Tax Cut
Add a 10% bracket and reduce the top brackets, the highest being at 35% by 2006
Increase the tax bracket for the 10% group from $6000 to $7000
Expanded the child tax credit to $1000
Our Government spends more than all of the private companies out there. Known as Public Sector. Didn’t see significant rise 1940s.
Growth of Govt.
Public works projects
Per capita spending in 2009 was $11,458.00
Private Sector provides small portions of services to the public.
The Economics of Spending
Buys goods and services from businesses to provide other service to the general public.
Tanks, planes, manpower
Payments to disadvantaged citizens
Funding for programs like medicare, medicaid, grants, welfare, unemployment, Soc. Security
2 kinds of spending
Affects resource allocation
Can boost economies in certain areas, while hurting others.
Competes with private sector
Cost differences due to subsidies at the expense of the taxpayer.
Also increases power and role of govt.
2/3 of our budget is on mandatory spending
Discretionary spending takes up the rest
Federal Govt. Expenditures
administration of justice
interest on the federal debt
some health programs
Mandatory vs. Discretionary
other special districts.
80% of state spending is directed toward;
insurance trust funds,
interest on the public debt.
State and Local Expenditures
The other 3rd includes expenses;
housing & community development,
parks & recreation.
Largest categories of spending (2/3) include:
interest on debt;
Deficit spending has been the trend since the early part of this decade.
Treasury Bonds and the actual selling of debt is used to generate some kind of revenue for the Federal Govt.
The U.S. Debt has doubled in only 6.5 years. $6.74T to $12.9T in 2010. It just hit $14.3 T on May 16, 2011.
Deficit, Surpluses, and The National Debt
Govt. is different than pvt. sector. We pay back our debts, they don’t.
Taxes go up, people take on the burden, businesses get regulated, etc.
Interest rates either rise or fall, inflation, devaluing of the currency, etc.
Impact of the Debt
Substance that serves as a medium of exchange, measure of value, and a store of value.
Commodity- used also for some other useful purpose.
Fiat- backed by govt. decree.
Paper or Specie (Coined) type of currency.
Must have Portability
Congress is given power from Article 1, Section 8.
Monetary standard is the means by which a government makes its currency portable, durable, divisible, and limits supply.
Greenbacks- paper currency that were declared legal tender. They weren't backed by gold or silver, but trust.
Gold Standard- sets value of currency against the value of a specific amount of gold.
two major advantages- security and prevents the overprinting of money
based on speculation
people may cash out their money
price of gold not fixed
political risk of failure
Federal Reserve System is a central bank run like a corporation
Banks must buy in and purchase stock.
Bank of the government
Set monetary policies control flow of cash in U.S.
Measuring a Nation's Output
Gross Domestic Output (GDP)- dollar amount of all final goods and services produced within a country's borders.
It is the measure of a nation's output. Even though Hyundai is a Korean car, it is produced in the U.S.
It is a calculation of a country's production over the span of a year.
When the GDP is a higher number that means that employment numbers are high, economy is in better shape, etc.
Measured per capita (by person) to determine economic growth.
Gross National Product (GNP) is used to determine how much a country takes in every year.