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Unit 2: Economics 1.3 Understanding Economic Systems 1.4 Consumer’s Role in the Economy 17.3 Government and the Economy Section 1.3 Understanding Economic Systems Economic System - the way an economy (nation, business, etc.) uses scarce resources to produce goods and services Production - the creation of goods and services Resources - used to create other goods or services Human Resources - skills, training, and abilities people have Nonhuman Resources - raw materials, tools, and manufactured products Economics Economics - the study of how we make use of our resources People’s wants are unlimited but resources are limited Macroeconomics - on a national and global scale Microeconomics - focuses on people and businesses 4 Types of Economic Systems EconomicSystems Traditional Command(Controled) Capitalist(Market) Mixed Types of Economic Systems Traditional Economy Decisions about what and how to produce products are based on traditional customs and beliefs Passed Also from one generation to the next known as a Subsistence Economy Types of Economic Systems Command Economy Decisions about what and how to produce products are decided by a central government Also known as a Controlled Economy Current example: North Korea and Cuba Types of Economic Systems Market (or Capitalist) Economy Decisions about what and how to produce products are made by individuals acting in their own self-interest Government does not intervene “Free Markets” Market – brings potential buyers and sellers together to exchange goods and services Profit - the difference between the money received from sale and cost Types of Economic Systems Mixed Economy Combination of the command and market systems Most countries have a mixed economy with varying degrees of influence - USA – more prominent market - China – more prominent command Foundations of Supply and Demand Scarcity Consumer’s wants are greater than the resources available Economic systems must be developed to determine how to use these scarce resources. Demand The quantity of a particular good or service that consumers are willing and able to buy at a given price over time Demand Curve (also known as the Law of Demand) When the price of a product goes down, demand for that product will generally go up (Price ↓, Demand ↑ Price ↑, Demand ↓) Supply The quantity of a particular product that producers are able and willing to make available for sale Supply Curve (also known as the Law of Supply) when the price of a product goes up, the supply will generally go up (Price ↑, Supply ↑ Price ↓, Supply ↓) Equilibrium Equilibrium price - the price at which the quantity supplied equals the quantity demanded Surplus - excess quantity supplied Shortage - insufficient quantity supplied Supply and Demand Curves 1.4 Consumer’s Role in the Economy Making Decisions in a Market Economy Transactions benefit both buyers and sellers Transactions provide information that helps the economic system work For the merchant: info about buying habits (what to order) For the manufacturer: what to make and offer to sell Price If one company charges more that another, they can…. Lower the price Convince customers to pay the higher price Stop offering the product for sale The Profit Motive Businesses must make profit to survive Ways to increase profits: 1. Reduce costs - less expensive materials, increased efficiency 2. Change price 3. Increase quantity of products sold - Advertising Consumer Economics - terms Consumer - anyone who buys or uses products or services Consumer economics - the study of the role consumers play in an economic system Consumer sovereignty - consumers are in charge in a market economy. They decide what goods and services are produced In our economy, who chiefly determines what products and services will be provided? CONSUMERS Benefits of Competition - good quality, fair price Efficiency and Profits - Profitable companies are: 1. Selling products consumers want to buy 2. Selling at prices consumers are willing to pay 3. Making a profit Measures of the Economy Economic Indicators Measuring the Economy’s Performance Economic Indicators measurements used to monitor the “health” of the economy The National Debt also known as the public debt the total amount of money that the federal government owes – Do you own a saving’s bond? In 2002, the National Debt was $6 trillion. What is it today? Gross Domestic Product (GDP) - the current value of all goods and services produced within a country in a year Real GDP – the GDP adjusted for inflation How much do you think the U.S. produces each year? Measuring the Economy Exchange Rates the cost of one currency expressed in terms of another currency Unemployment Rate the percentage of the civilian labor force that is without a job but actively looking for work “Full Employment” – below 5.5% Consumer Price Index a measure of inflation sustained increase in the average level of prices Calculated using the price of over 200 categories of goods and services that the average household uses (market base) The index is a percentage (%) Internet Assignment 1. What is the US National Debt? • http://www.brillig.com/debt_clock/ • http://www.usdebtclock.org/ 2. What is each citizen’s share of the debt? 3. How much each day does the national debt increase? Internet Assignment (Con’t) Find these exchange rates using the following web site: http://www.xe.com/ucc/ Convert $1 US Dollar into the following currencies 4. Euro 5. Mexican peso 6. Canadian Dollar 7. Country of your choice 8. What is the U.S. unemployment rate as of January 2012? www.bls.gov 9. What is the current Consumer Price Index (CPI) as of December 2011? Write all answers on a separate sheet of paper Section 17.3 Government and the Economy Consumer Income Personal income – the income people receive through wages, profits, dividends, interest, etc. Used as a measure of economic growth Indication of how much people are able to spend and save The BUSINESS CYCLE Business Cycle - The pattern of ups and downs in a nation’s business activity. Peak or Boom - period of prosperity Contraction - period of prosperity wears off - business activity slows down. If that lasts long enough, the economy can find itself going into a recession. Recession – economy is generally falling Depression - not a normal part of business cycle Trough – (lowest point of the cycle) business activity levels off Expansion - economy recovering. Increasing demand, lowering unemployment The Business Cycle Effects of Inflation Hurts those on fixed income Hurts those who save Less purchasing power APY doesn’t keep up with inflation Helps those who borrow Borrow money at the lower APR Factors Affecting Ups and Downs Consumer confidence Technological innovation Government policies War Government Efforts to Stabilize the Economy Goal - minimize swings in the economy and promote economic growth, high employment, and low inflation Tools to accomplish: 1. Fiscal policy - decisions on taxing and spending 2. Monetary policy - managing interest rates, the availability of loans, and the supply of money Control by the Federal Reserve System Chairperson of the Fed-Janet Yellen Example: Bank bailout of 2008
