Download Decision Making and Money

Decision Making and Money
Basic Concepts-Needs and Wants
Needs—a basic requirement for
survival
Food
Shelter
Wants—something that you do not
have to have for survival, but would
like to have
Cell phone
IPod
Basic Concepts-Goods and Services
Goods—tangible (or physical) products
Clothes
Electronics
Services—intangible (nonphysical)
products
Carpet Cleaners
Goods and services are the products our
economic system produces to satisfy
consumers’ wants and needs.
Basic Concepts-Producers and Consumers
Producers—people who make goods
and provide services
How have you served as a producer in
the last 24 hours?
Consumers—people who use goods
and services
What are some goods and services you
have used in the last 24 hours?
Basic Concepts-Trade offs
Trade-offs—when you give up a
particular benefit or item to get
another that you think is more
desirable
You choose to buy a new music player
such as an iPod. To have enough
money, you must not buy something
else.
Basic Concepts-Opportunity Cost
Opportunity Cost—the benefit or
item you give up (do not buy)
For example, instead of the iPod, you
might have bought a new cell phone.
In this situation, the iPod is the
opportunity cost.
Basic Concepts-Decision Making
To help you make good financial
decisions, use a step-by-step
decision-making process.
Decision Making Step 1
Define the need or problem to be resolved
by buying the item or service.
Example: You need access to a computer
to use in doing homework and surfing
the Internet.
Think about all the ways in which the item
or service could be used and features it
should have to meet your needs.
Decision Making Step 2
List options for filling the need or solving
the problem.
Example: You could buy a new computer,
rent a computer, or use a local library
computer.
List the cost of each option. Research
features of any items you consider
buying.
Decision Making Step 3
Compare the options you have identified. List the
advantages and disadvantages of each one.
Example: Renting a computer may be more costly
in the long term than buying one. Using a
computer at the library will be less costly than
buying a computer. However, you will have to
travel to the library and work during library hours
each time you want to use the computer.
Think about the opportunity cost of each option.
Decision Making Steps 4 and 5
Make a decision based on your
research and evaluation of the
information you have gathered.
Take action based on your decision.
Example: Buy a computer or plan
times to use one at the library.
Decision Making Step 6
Reevaluate your choices. After some time
has passed, think about your decision
again.
Did the option you choose resolve the
problem, or is it filling the need for which
it was selected?
If the answer is no, or if your needs have
changed, follow the process again to
make a new decision.
Basic Concepts-Decision Making
If you plan ahead, you will be better
prepared to use your resources to
fill your needs and wants.
Basic Concepts-The Circular Flow of Money
The flow of
payments in our
economy.
Money
Money is anything that is generally
accepted as payment for goods and
services and repayment of debts.
Money-Coins and Currency
Throughout Treasury's history, the
Department has been in charge of
overseeing the production of U.S.
coins and currency notes for our
nation.
The United States Mint is responsible
for producing coins.
The Bureau of Engraving and Printing
produces paper money.
Money-Fiat Money
Fiat money is currency that a government has
declared to be legal tender, despite the fact that
it has no intrinsic value*and is not backed by
reserves. Historically, most currencies were based
on physical commodities such as gold or silver,
but fiat money is based solely on faith.
Most of the world's paper money is fiat
money. Because fiat money is not linked to
physical reserves, it risks becoming worthless due
to hyperinflation. If people lose faith in a nation's
paper currency, the money will no longer hold any
value.
Money-Characteristics and Functions
The main functions of money are
distinguished as:
a
a
a
a
medium of exchange
unit of account
store of value
standard of deferred payment
Comparative Economic SystemsSupply and Demand
Demand—the quantity of good or
services that consumers are willing
and able to buy.
According to the law of demand, as
price goes up, the quantity demanded
goes down.
In this way, market prices ration goods
and services among those who are
willing to pay for them.
Comparative Economic SystemsSupply and Demand
Supply—the amount of a good or service
that producers are willing to provide.
Producers are more willing to supply products
in greater amounts when prices are high.
In this way, market prices provide an incentive
to produce goods and services.
They are less willing to do so when prices are
low.
Comparative Economic SystemsSupply and Demand
To understand how prices are
determined, you have to look at
both demand and supply.
Supply and demand interact to
determine the price customers are
willing to pay for the number of
products producers are willing to
make.
Comparative Economic SystemsSupply and Demand
The basic principles of the supply and
demand theory
If something is in heavy demand but in short
supply, prices will go up. The rise in price will
reduce demand and expand supply.
If something is in heavy supply but in short
demand, prices will go down. The fall in price
will expand demand and contract supply.
Prices tend to stabilize at the level where
demand equals supply.
Comparative Economic SystemsMarket Economy
Where the resources of a country
are owned and controlled by the
people of the country, rather than
the government.
United States, Canada, UK, Germany,
and the Netherlands
Comparative Economic SystemsMarket Economy Advantages
Capital flows to where it will get the greatest return,
expanding the total size of the economy to its
maximum level.
Supply and demand are closely linked: Someone who
has a good idea or product can quickly put it into the
market so that it is available to those who want it.
Conversely, when a certain type of product is desired
by enough people, it is a simple matter for someone to
provide it.
In a market economy, it is easier for someone with
initiative and virtue to create a better life for
themselves and their family; economic freedom makes
it easer to transform hard work and perseverance into
material wealth.
Comparative Economic SystemsMarket Economy Disadvantages
A market economy promotes trust and openness,
which leaves a society possessing it vulnerable to
enemies who wish to take advantage of that
society's good will. It is the responsibility of the
government to be watchful against such
subversion even when the general public is not.
With a market economy and the freedom of
choice it brings, people are able to make choices
that are harmful to themselves.
Comparative Economic SystemsCommand Economy
An economy where supply and price are
regulated by the government rather than
market forces. Government planners
decide which goods and services are
produced and how they are distributed.
Saudi Arabia
China
Vietnam
Former Soviet Union
Comparative Economic SystemsCommand Economy Advantages
Maximizes the continues utilization
of resources.
Distributes wealth equally among all
people so there are no inequalities.
Only products that are required are
produced hence prevents production
of socially undesired products.
Comparative Economic SystemsCommand Economy Disadvantages
Cannot detect consumer
preferences accurately.
Resources are misallocated as
consumer demands are not satisfied
by production resulting in surplus of
items, overstaffing problems, poor
product quality, lack of efficiency.
Comparative Economic SystemsTraditional Economy
A traditional economy is an economic system in which
resources are allocated by inheritance, and which has a
strong social network and is based on primitive methods and
tools. It is strongly connected to subsistence farming.
Most countries that have historically had a traditional
economy have replaced it with a command economy, market
economy, or mixed economy.
It is still found today in underdeveloped, agricultural parts of
South America, Asia, and Africa.
A traditional economy is where people produce most of what
they need to survive. Hunting and gathering, farming, and
herding cattle are the bases of traditional economy. People
hunt for the food they eat or raise it themselves. Often they
make their own clothing and tools. If they produce more food
than they need, they trade the surplus, or extra food, for
goods made by others.
Comparative Economic SystemsTraditional Economy Advantages and
Disadvantages
Advantages:
Every person belonging to this economy knows
who they are and what their jobs are. They
don't complain.
They have a strong social network based on
primitive methods and tools.
Disadvantages:
When new technology is introduced they are
unwilling to work with it.
They produce more food than needed.
Comparative Economic SystemsMixed Economy
Economic system in which both the
private enterprise and a degree of state
monopoly (usually in public services,
defense, infrastructure, and basic
industries) coexist. All modern economies
are mixed where means of production are
shared between the private and public.
Also called dual economy.
No country is purely command or market
economy because the government must
intervene to keep things in control and if the
people have no power the economy will be
unsuccessful.
Comparative Economic SystemsMixed Economy Advantages
There are many freedoms in a mixed
economy.
People may go into business for
themselves, decide what they will
produce or sell, and set their own prices.
Business owners and merchants pay
taxes, but they reap the benefits of those
taxes through social programs, roads and
other infrastructure elements, and other
government services.
Comparative Economic SystemsMixed Economy Disadvantages
Business people need to find their
own markets for products, and they
are not in control of the taxes they
pay.
Merchants will often complain of tax
rates being too high for the services
provided.