Download Ch13 Ecnomics

Economics
Economics
What is Economics?
is the study of how we produce
and distribute our wealth.
Why do societies have
economies?
 People have basic needs such as food,
clothing, and shelter, and important
wants such as education and health
care.
Factors of Production
 A society combines in factors of production –
land, labor, and capital – to produce the
goods and services its citizens want and
needs.
Capital
 Capital is anything produced in an economy
that is used to produce other goods and
services.
Goods and Services
 A good is any item
that can be bought
and sold.
 A service is any
action that one
person, or group,
does for another in
exchange for
payment.
Goods and Services
 After goods are
produced, they are
distributed to
people who want
them.
 The purchase or use
of these goods is
called consumption.
Opportunity Cost
 Because resources are scarce, people
must consider each option’s opportunity
cost and benefits as they decide which
needs to satisfy.
 Opportunity cost is what you must give
up to do or consume something else. It
is the most valuable alternative that you
don’t choose when you make a decision.
Resources
 Scarcity exists when a resource valued by
a society is not available in quantities high
enough to satisfy the demand.
Resources and Production
 A resource is
anything used to
produce a good or
service.
Production
 Production is the
process of changing
raw materials of the
resource into some
economic good or
service.
Production Costs for a Pair of $100 shoes
made in China and sold in United States
The cost structure of the shoe manufacturing and retailing industry is very
revealing. The “China effect” is quite clear as the total manufacturing costs (wages,
materiel, other production costs such as energy, and the manufacturer's profit)
account for about 12% of the retail costs. This is roughly equivalent to the research
(design) costs of the shoe product.
Resources
 Some resources are
plentiful.
 Some are scarce.
 Water is still a scarce
resource in major
parts of Africa as this
picture shows a child
washing himself with
animal urine
Resources
 A renewable
resource is one
that can be
replaced.
 A nonrenewable
resource is one
that cannot be
replaced.
Basic Economic Decisions
WHAT to
produce?
HOW to
produce?
WHO gets what
has been
produced?
What to produce?
 A society must decide which goods and
services to produce and in what quantity, or
amount.
How to produce?
 People must decide
how to produce
goods and services.
The desire to bring
down the costs of
production often
leads to improved
production
technology.
Who gets what
 Society must decide
how the goods and
services will be
distributed among
the people.
Specialization and
Interdependence
 Because it is difficult for every society to satisfy
all wants and needs, people specialize. They
choose certain kinds of work, products, and
services that they can produce efficiently and
successfully.
Specialization
 After specializing work – they trade what
they have for what they need.
Specialization happens on both an
individual basis and with countries as a
whole.
 The result of specialization is
interdependence.
Interdependence
Interdependence
 Interdependence is
the way production
and consumption of
goods and services
is divided among
many different
individuals, groups
and countries.
Interdependence
 Interdependence occurs when people
and countries depend on one another to
provide goods and services that they
want and/or need. The more people
specialize and trade, the more
interdependent they become.
Interdependence
 For example, Japan has very few natural
resources and little land. As a result, Japan
specializes in technology and manufacturing
goods such as electronics and automobiles.
Japan trades these items for the oil and other
goods it needs.
Imports
 Imports are goods and services in one country
but produced in another – things purchased.
US Oil Imports
Exports
 Exports – goods or services produced in one
country and then sold to people of another
country.
3 Basic Economies
 Traditional Economies
 Command Economies
 Market Economies
Traditional Economy
 Basic economic decisions
are made according to longestablished patterns of
behavior that are unlikely to
change.
 The FAMILY is the basic
unit of the traditional
economy.
 All members work
together to support
society – rather than just
their family
TRADITIONAL ECONOMY
 What: Tradition answers the
question of what and how
much to produce.
 How: Customs are used to
produce (same weapons,
same methods)
 Who: people usually owns
their own resources such as
land, labor and tools.
Traditional Economies
 Examples of countries with
traditional economies:
 Some societies in Central and
Southern America, Africa and
Asia.
Command Economies
 Government or central authority owns or
controls the factors of production and
makes the basic economic decision.
 Farms and stores
 Transportation, communication
 Banking
 Manufacturing
Command Economy
 Who – government
decides
 What – government
decides
 How – government
decides
COMMAND ECONOMY
 CUBA
 North Korea
 Former Command
Economy
 Soviet Union –
Russia was a
command economy
under Stalin.
Market Economy
 Known as a FREE
ENTERPRISE or
CAPITALISM.
 Each individual
decides what to
produce, how to
produce it, to whom to
sell it, and how to
invest the profits that
result from the sale.
Mixed Economy
 Most modern economies are a blend of
traditional, command, and market
economies with the balance between
the three differing.
Market Economy
 A market is a circular flow of goods,
services, capital, and payments such as
wages and interest by producers.
 The laws of supply and demand work
together to determine the market price
of a product and the quantity offered.
 Supply is the amount of something
available.
Law of Supply
 The Law of Supply
states that as the
price increases,
the supply
increases. This
means more
sellers and fewer
buyers.
Supply Curve
Price of a
song on
I-Tunes
Number of Songs
Sellers Want
to Sell
$1.00
10
$2.00
40
$3.00
70
$4.00
140
Law of Supply
 The supply curve is
upward sloping
 The supply curve has
a positive slope
 The supply curve
shows a direct
relationship between
price and quantity
demanded
Law of Demand
A Demand Curve
 The Law of Demand
states that as the price
decreases, the
demand increases.
This means more
buyers and fewer
sellers.
Price of
a Song on ITunes
Number of Songs
People Want to
Buy
$1.00
100
$2.00
90
$3.00
70
$4.00
40
Law of Demand
 The demand curve is
downward sloping
 The demand curve
has a negative
slope
 The demand curve
shows an inverse
relationship between
price and quantity
demanded
Effect of Supply and Demand
Curve Shifts on Equilibrium
Other Factors for
Supply & Demand
 Will the change of price for milk or
penicillin change the demand?
 Why or Why Not?
 Can Brand name or Advertising change
the demand for a product?
 Why or Why Not?
No, People believe they need milk or medicine at almost any price.
You may pay more for a higher priced item because the brand
name is more popular than a less-expensive item.