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Unit 2: Economics

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Joyce Pevler

on 29 September 2015

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Transcript of Unit 2: Economics

Unit 2:

Basic Economics
Some More Basic Economics
Government & The Economy
Why Do We Participate in the Economic System???
Everything we do is connected to the
economic system
in some fashion. Each day we go to

because the work we provide is in
and the
we receive enable us to get the
goods and services
we need to live.
provide labor
for businesses and government
Business and Government
individuals for labor
Money is
for goods and services
Goods and Services are
to Consumers
Participation in Economic Activity is circular in its nature.
Labor is provided for wages and wages are exchanged for goods.

the wages earned from labor are now gone and the process must begin again.
This process will continuously repeat itself throughout your lifetime.
Citizens pay taxes to their government
Government provides services to its citizens
How it Works . . .
Flow of Economic Activity
Price or VALUE is based on two basic factors: Supply and Demand

Supply: the amount of a good or service that is available for consumers to buy
How much there IS

Demand: the amount of a good or service that consumers are willing to buy
How much people WANT
Putting a Price on Things
Price is determined by comparing the amount of demand to the amount of supply and finding an amount where they are equal

Market or Equilibrium Price: the point at which supply and demand meet and price is determined
Determining Price
are the things which people would like to have
are the things which people need to survive

Goods: things that can be made or manufactured
Capital goods are the things used to manufacture other goods
- ovens to bake cookies
Consumer goods are goods meant to be sold to consumers for use
- cookies

Services: work that is done for someone for a certain price
Labor for wages

. . . hairdresser, repair work
Wants and Needs
The reason we study economics is to learn how to make good choices when we spend our money.
1. How can this benefit us in the future?
2. How can it hurt us if we do not understand it?
Economics: the system that society uses to produce and distribute goods and services
Study of how we make decisions in a world where resources are limited

Why study economics???
To make rational choices that satisfy needs and wants at lowest costs
Learn to use resources wisely

Why does the government pay so much attention to the economy???
Keep markets competitive to keep prices low for consumers
Surplus: when supply is greater than demand

What happens to price?
Surplus - demand down, supply up, price down
Shortages: when demand is greater than supply

What happens to price?
Shortage = demand up, supply down, price up
Effects of Price
Goods and Services are produced using resources
Natural Resources or Human Resources
Natural: Land, materials, air, water
Human: Labor, intelligence, money, time

Scarcity: the economic problems of limited goods and the unlimited wants of society in general
**There are not enough resources to produce all things people want**
Scarcity limits the availability of goods and services that people desire or need.

Scarcity gives goods and services VALUE
What people are willing to pay for what they need and/or want
Limited Availability
Effect 1:

Effect 2:
Caused by: income changes, changes in the number of consumers, consumer expectations, consumer tastes, and changes in complements and substitutes
Many consumers plan when making economic choices and their
for the future change their demand
Ex: Planning for marriage, children, college, etc.

A period of
high unemployment
economic boom
can greatly change the demand for certain goods
Do not want to waste money, cannot wait to spend money
Consumer Expectations
number of possible consumers
in an area affects demand

Faster growth areas may face higher levels of demand
More consumers = More demand
Causes higher prices

Areas of the country who are losing population will face lower demand for goods
Less consumers = Less demand
Causes lower prices

*Birthrate, migration, immigration ALL effect the number of consumers
Change in Consumers
The demand of many consumers is based on their
income level or purchasing power

A change in
either direction
to a person’s purchasing power will change their demand for goods and services
More income = more money =
more willing to spend money

Personal Income
: How much money a person makes before taxes
Disposable Income
: How much money a person has after taxes are taken
Income Level Changes
Because consumers have many choices of where to spend their money, the
popularity of items will change demand
People want/willing to pay for what is popular

Advertisers spend billions every year to shape the “tastes” of consumers
Make people want product
Holiday seasons

Some items become high demand items for a short while and then very little demand
- Silly Bandz???
Consumer Tastes
The law of demand says that a lower price will increase demand but this is limited

Diminishing Utility
: The amount of satisfaction or usefulness of a product decreases as more and more are consumed.
You do not want any more no matter how cheap it gets
Ex.—You can only enjoy so many soft drinks before you can’t drink anymore no matter the price you are paying
Diminishing Utility
The amount of a particular good or service consumers want to buy

Law of demand
: As the
of a good
amount demanded
and as price decreases then demand will increase

**Price and amount demanded move in opposite directions**
Law of Demand
substitute Goods
: Goods that can be used in place of another product
ex.—chicken or beef

If a good experiences a price change then the substitute good will face a demand change
Price up = demand up
Ex—chicken price increases, demand for beef increases
Substitute Goods
Inelastic Demand:
Change in the price does NOT affect the quantity demanded
complementary Goods: Goods that work with another product
Ex: DVDs and DVD player

A change in the demand for one will many times affect the demand for the other as well
Price up = demand down
Complementary Goods
Taxes — higher or lower taxes affect the overall profit level which determines supply
To companies, taxes they pay are just another cost

Lower taxes
means greater profits and more supply

Higher taxes
means fewer profits and less supply
Taxation Policies
Supply can also be affected by other products that producers could supply

If price falls for one product then they will supply less and shift production to another type product
Always want to make the most money; produce goods that get the most money
Alternative Products
Diminishing Returns - The producer can only
produce so much
of the product before
its cost is more

than the profit
received from its sale

You can only increase factory production so far until a larger factory is needed which may be more costly than its worth
Diminishing Returns
Producers as well as consumers make economic plans. A company that expects record sales or few sales will adjust its supply levels
Expect to sell more = make more

Economic forecasts by the government become very important to large producers
Stock market quotes
Value of money
Tax changes
Company Expectations
The cost of the materials that go into goods and services can affect the production costs which affect the amount which can be supplied at each price level
Businesses charge more when they have to pay more to make a product

Higher wages lowers supply
Pay people more, lowers profit
Cheaper resources increase
Price of materials goes up
Cost of Resources
Governments can affect suppliers in many ways

More regulations or fewer regulations producers must follow can affect supply levels
Tighter government rules tend to restrict supply (cost companies more money)

Government subsidies
can help some producers cut costs to increase supply levels while fewer subsidies cause production costs to rise
Government payment to an individual or company (ex: farms)
Government Policy
: The amount of a particular good/service that producers will supply at a given price
Offer different quantities of a product depending on the price buyers will pay
Offer more at higher prices and less at lower prices

Law of Supply
: As the
of a good/service
then producers will
supply more
of the product and as the
price decreases
they will
supply less.

**Driven to make profit**
Law of Supply
3. When have you seen a shortage and for what product(s)?
4. When have you seen a surplus and for what product(s)?
5. Plot the following on two demand graphs.
Price Quantity Price Quantity
$50 0 $100 10
$40 1 $90 20
$30 1 $75 30
$20 2 $50 40
$10 3 $25 50
$5 5 $10 60
The degree to which a change in price affects the demand for the product.
Elastic Demand:
Expensive and luxurious items
A change in the price affects the quantity demanded
The purchase can be postponed
Necessities, few substitutes can be found.
Changes in Demand
6. What is demand in YOUR words?
7. What are the SIX factors that influence demand and how do they work?
8. Plot the following on 2 demand graphs.
Price Quantity Price Quantity
$50 100 $50 275
$40 90 $40 225
$30 70 $30 180
$20 30 $20 105
$10 10 $10 55
The law of supply says that producers will supply more at a higher price but this is limited.
The degree to which a change in price affects the supply for the product.
Elastic Supply
: A change in the price affects the quantity supplied
*Easy to produce more*
Inelastic Supply
: A change in the price does NOT affect the quantity supplied.
*Hard to produce more*
*Remember: A company's main focus is to make a PROFIT*
Natural Resources: Oil
Food products grown
Rooms in a hotel
Seats on an airplane
Caused by: productivity, cost of resources, company expectations, government policy, taxation, and alternative products.
Changes in Supply
: The amount of a good/service that can be produced in a given time.

in productivity allow producers to
make more
of a product in a given time and at the
same price
which decreases cost and
increases profits.

Better technology is a major focus of increasing productivity.
9. What is supply in YOUR words?
10. What are the SIX factors that affect supply and how do they work?
Interchangeable Parts:
Ability to make large products out of smaller ones so that the larger parts can be easily placed/replaced

Mass Production

Produce products in large quantities by using labor, machines, and technology

Assembly Line

One person is responsible for one part of production; move product in a line
Labor Intensive Work
: Job that required a lot of human effort and physical contact
Lower paying jobs
Many labor intensive products produced overseas
People do not want to take these jobs because they are not well-paid

Using machinery to make products or provide services
Technology, Internet
Machines sometimes take the jobs of people - quicker and more accurate
Increases Productivity
Comparative Advantage:
When one nation is better able to produce a good or service than another nation
Nations specialize in producing certain products based on their resources

What causes the advantage???
Economic interdependence: We rely on other nations to produce goods, and they rely on us to provide the goods and services we consume.
Comparative Advantage
Economies of Scale:
The idea that a larger business is more efficient than a smaller one because of its ability to do things in larger volume
More investors believe in company
Easier to get loans and employees

Law of Diminishing Returns:
Economic law that states that the level of return for additional labor or work will decrease at some point and continue to decrease
You can only produce to a certain point before you start to lose money
Growing Businesses
The amount of a good or service that can be produced in a given time.

What does Increased Productivity do?
Produces more, which will cut costs, increase profits, and increase demand
What is the effect of productivity on Inflation???
Lowers (rise of prices) because more are produced at lower cost

Specialization of Labor / Division of Labor:
Method of having workers do only a part of a product but do it very efficiently
Blue collar labor
(hard, low-paying)
White collar labor
(managerial, high-paying)
Producing Goods
Opportunity Cost:
This is the benefit that you have given up in order to pursue an alternative
Ex: studying for a test
Opp. Cost = hanging out with friends or family

Trade Off:
This is the choice that you make when faced with economic decisions where you have to choose one thing over another
What you exchange for something else
Trade Off = time
Economic Choices
The decision making process that is involved in producing goods/services
Sole Proprietorship:
Economic Terms
Key Figure:
Henry Ford
Economic Systems
Capital or Capital Goods:
The money or tools needed to produce goods/services
The natural resources needed to produce goods/services
The WORK required to produce goods/services
Factors of Production
Traditional Economy:
Economy where people supply most of the goods and services used
Many things done by tradition
Usually in places of little modern technology
Usually use the bartering (trade) system
Command Economy:
Economy where the government controls the factors of production
Tells citizens how to run the economy
Government makes all the decisions
Opposite of market
No competition, no profit motive

Self-sufficient and do not rely on others.
World changes and disasters have little effect on economy.

Without competing firms, individuals can charge whatever they want.
Do not compete well in the world economy
Wealth evenly distributed among citizens
All profits go to government

People have less economic freedom and few choices
Lower per capita GDP (make less money per person)
Typically fail due to human nature
Market Economy:
Individuals make all economic decisions according to supply and demand
Laissez-faire Economics:
Government has a hands-off approach
Also called free market, free enterprise, or capitalism
Competition and supply and demand determine the economy -- the "invisible hand"
Driven by competition and the profit motive
Private citizens have a lot of economic freedom
Price is determined by firms (often low)
Base prices on supply and demand

Some people cannot afford prices and are left out of economy
Gap between rich and poor
Mixed Economy:
A mix together of market and command systems
US Model
Individuals have economic freedoms
Government retains some control for benefit of citizens
Makes sure that products are safe and that businesses are fair.
Private citizens still make all decisions and earn profits
Government keeps products safe and prices competitive (low)
Business owned by a single person or a married couple
3/4 of ALL businesses are a sole proprietorship
Owner receives all profits
Owner makes all decisions
Unlimited liability - owner responsible for all problems and debts of business
Difficult to raise money
Difficult to find good employees
Business owned by two or more people
Must be set up by articles or partnership
--Legal documents defining the partnership
Pool resources and capital
Do not have to pay corporate income taxes
Partners have own talents and oversee different parts of business
Complex legal organization
Unlimited liability
Business that has many owners
Must get a charter to organize
Elect a board of directors to make decisions
to investors (owners)
Ownership share of corporation
to shareholders (owners)
with investors
Limited Liability: The ability of a corporation to protect its shareholders by placing only the amount of capital they have invested at risk.
Corporation is solely responsible for debts
Incorporation: Legal process of forming a corporation through state government
Ownership easily transferred
Easy to raise/borrow money
Owners have little say in management
Extra taxation
Non-Profit Organization:
Business that is organized to provide a service and NOT to make large profits for the owners.
Many are charities or service groups: Churches, social service organizations
Operate at low costs to provide services to citizens
Little taxation
Difficult to organize and keep operating
Rely on donations
Types of Businesses
Expansion Period:
Peak Period:
Contraction Period:
Trough Period:
Business Cycle:
The periodic and cyclical ups and downs of the economy
Phase where the economy is growing --
Gross Domestic Product (GDP) increases from year to year.
Amount of Goods Produced:
Output of goods and services increase
People expect to make more money
Number of Jobs Produced:
More goods and services means more jobs for people
Number of Business Starts:
More businesses starting - expect to produce more
Phase where the economy has reached its peak of growth
Amount of Goods Produced
Number of Jobs Produced
Number of Business Starts
EVERYTHING is at its BEST possible level:
Phase where the economy is starting to decline from its peak activity --
GDP is reducing from year to year.
Could lead to a recession . . .
Amount of Goods Produced:
Demand goes down;
Causes supply to decrease
Number of Jobs Produced:
Not selling as much;
Number of jobs decreases
Number of Business Starts:
Less new businesses
- do not expect to make money
Phase where the economy has reached its lowest point
ALL are at the LOWEST possible levels:
Could lead to a depression
Amount of Goods Produced
Number of Jobs Produced
Number of Businesses Started
The Business Cycle
11. Explain how mechanization, interchangeable parts, mass production, & the assembly line are connected.
12. What nations (or regions) are examples of the different economic systems?
13. What are local examples of the different types of businesses?
14. What happens in the expansion period?

15. What happens in the peak period?

16. What happens in the contraction period?

17. What happens in the trough period?

18. Why must (our) government be careful during each period of the business cycle?
Explain with details.

19. Create the graphic (below) with the periods of the business cycle marked.
Standard of Living:
A measure of how well a person lives as well as the amount of free time they have.
Make sure all Americans have enough goods and services
Method of international comparisons
Gross Domestic Product (GDP):
The value of all goods and services produced in a nation in a given year.
Measures quantity, NOT quality
GDP is compared with previous years -- To see what period the economy is in & what (if anything) the government should do to help.
A general increase in the cost of goods and services
. . . Stuff costs more
Why is it bad?
Reduces purchasing power of money
Alters people's decisions
Consumer Price Index:
400 commonly-used items sampled by the government to determine prices
Allows government to measure inflation
Controlling Inflation . . . Job of Federal Reserve
The Role
of Government
Fiscal Policy:
How a government taxes and spends money
Federal government creates a budget to define how it will raise money & where it will spend the money
US has not passed a budget in YEARS . . .
Government Spending
Increased Spending -- Speeds up the economy
Puts money in people's pockets
Usually through jobs
Decreased Spending -- Slows down the economy
Keeps the money for the government
Increased Taxation -- Slows down the economy
Less money in people's pockets
Decreases demand
Decreased Taxation -- Speeds up the economy
More money in people's pockets
Increases demand
Supply Side ("Trickle Down") Economics
Taxes cut to corporations
Lowers production costs & encourages investment (ideally more jobs)
Goal: Speed up the economy
Regulated through Federal Reserve
(Central Bank of US)

The money supply can be described as tight or easy according to the actions of the government
Interest Rates:
Government controls a basic interest charge (discount rate) used by banks

Raising Interest Rates (Tight Monetary Policy):
Slows down economy
Fed reduces money supply by discouraging banks to borrow money

Lowering Interest Rates (Easy Monetary Policy):
Speeds up economy
Fed increases money supply by encouraging banks to borrow money.
Tax & Spend
20. Why is it a good idea to measure economic health through production?
21. Why does the government track 400 items to measure the Consumer Price Index?
Monetary Policy:

How the government regulates the amount of money in circulation
Reserve Requirements:
The amounts of money the government requires banks to keep as deposits.
Raising Reserve Requirements (slow down economy):
Banks must leave more money with the Federal Reserve, giving them less money to give to people
US Savings Bonds
How can YOU effect the economy?
Government SELLS Bonds to Consumers
Money is pulled out of circulation
Raise interest rates on bonds to slow economy
Government BUYS Bonds back from Consumers
Take bond to bank to cash it out (with interest)
LOAN the government MONEY!!!
Lowering Reserve Requirements (speed up economy):
Banks do not have to keep as much money, have more money to lend to people.

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