Chapter 1 • The Economic Environment Section 1.1 Objectives 1. Compare three types of economies 2. Describe and explain the characteristics of a market economy What does it mean when you hear the word Economy? • The way a country manages its money and resources (such as workers and land) to produce, buy, and sell goods and services. • Goods are products like cars, computers, or even corn. – Services are duties performed by one person for another, such as teaching and transportation. • The United States has a free-market economy. – That means people can freely buy and trade goods and services. – The price of each good or service is determined not by the government but by demand. – Demand is a measure of how many people want to buy a particular good or service. – In a healthy economy, demand for goods and services if high. Businesses flourish as they work to keep up with that demand. In a weak economy, demand is low and businesses suffer. Economic Systems • Our businesses operate in a global marketplace and deal with a variety of economic systems that influence each other. • Countries take different approaches in how their economies operate, but each must provide answers to the same basic economic questions. Economic Problem • Scarcity is the conflict between unlimited wants and limited resources. – In order to decide how to use its scarce resources, a country must answer three key economic questions. – The answers to these questions depend in large part on the society’s economic system. Key Economic Questions 1. What to produce? – Should resources be used to provide consumer goods, industrial goods, or military goods? 2. How should things be produced? – What kinds of industries and equipment should be used? 3. For whom should they be produced? – Which of its citizens should benefit most from what is produced? Types of Economic Systems 1. Traditional Economy – Things are done according to tradition and progress very slow – Developing and third world countries – Goods are produced from with techniques being handed down from generation to generation – Poor in material goods • Types of Economic Systems 2. Command Economy – Government owns the businesses and controls the economy – Government makes decisions on what is produced, and how and how they will be shared – Decide how resources are utilized – Decide how much resources are spend on military and how much on consumer goods • Command Cont. – Government officials plan all phases of the economy – Citizens have little say. – Are not designed to meet the wants and needs of the individual – Everyone is the same – Little incentives for people to work hard to increase productivity – Ex: Former Soviet Union which has now moved to a Market • Types of Economic Systems 3. Market Economy – In a market economy, businesses and individuals are free to make their own decisions as they buy and sell in the marketplace. – Capitalism means that economic resources are privately owned by individuals rather than by the government. – Market Economy Cont. – Individual owners of businesses are free to decide what they will produce, which is the basis for the term free enterprise – Market economies are found with a democratic governments – Decisions about production and distribution are largely made by voluntary exchange in the marketplace where sellers and buyers do business. Check-Point • What is the major difference between a command economy and a market economy? ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ Characteristics of Market Economies • Private enterprise • Private property • Profit • Competition Private Enterprise • An individual’s right to own a business, select a market to enter, and produce with limited government direction is called private enterprise. • Based on freedom of choice • Owner you are free to succeed or fail • Right to start any business you wish and operate it as you want as long as you obey the laws that regulate the business. Private Property • Your right to private property means that you can own, use, and dispose of things of value. • Own any item you want with it as long as you do not violate a law that has been enacted to protect others’ rights. • Right to own, use, and sell whatever you create. Profit • Profit is the amount of money left over when subtracting the expenses of operating a business from its income—it is a reward for taking risks. • Why is profit important? Why do we have the right to make profits? Competition • Competition is the rivalry among businesses to sell their products and services to consumers. • Governments with market economies enact laws to help assure competition exists in the market place. Why does competition give consumers more choice? How does choice make products better? Check - Point Which of the characteristics of a market economy do you believe is the most important? ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ Why would it be important you as a business owner? As a citizen? ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 1.2 Make Decisions Objectives: Explain how an economy meets its needs and wants Describe the six-step decision-making process Providing Needs and Wants • The needs and wants of a society are met through the production of goods and services. • This production requires the use of economic resources. Needs and Wants • Needs are things that are required in order to live. • Wants are things that are not necessary for survival, but add comfort and pleasure to our lives. Goods and Services • Goods are things you can see and touch. – Marketplace goods are generally referred to as products. • Services are activities that are consumed at the same time they are produced. – What are some examples? Economic Resources • The means through which goods and services are produced are called economic resources or factors of production. • There are three kinds of economic resources: – Natural resources • Raw materials supplied by nature • Earth, water, oil, vegetables • Goods we use today begin with at least one natural resource Human Resources – Human resources • Are the people who work to produce goods and services • Natural resources cannot satisfy needs and wants be themselves. • Another term is Labor • Operate farms, factories, manage banks, process food Capital Resources – Capital resources • Tools, equipment, supplies and buildings are capital resources. • In economics money is NOT capital. – Money is a tool in order to get capital • • It is one of the first steps in starting a business All three are economic resources are needed to produce goods and services to satisfy needs and wants. Check-Point • Which of the three economic resources do you feel is the most important? Explain why. Economic Decision Making • Economic decision making is the process of deciding among several alternative wants to determine the one most desired. The Decision-Making Process 1.3 HEALTHY ECONOMIES Objectives: 1. Discuss three measurements of an economy's health 2. Name and describe the four phases of a business cycle Economic Measurements • Three measurements used in looking at the health of an economy are: – Gross domestic product (GDP) – Labor productivity – Inflation and Deflation Gross Domestic Product (GDP) • Gross domestic product (GDP) is the total dollar value of all goods and services produced in an economy in one year. • It is a basic measurement of how an economy is doing. GDP Includes Four Major Categories 1. Consumer spending for food, clothing, and housing 2. Business spending for buildings, equipment, and supplies 3. Government spending to pay employees and to buy supplies and other goods and services 4. The exports of a country less the imports of the country Labor Productivity • The measurement of the number of items produced per worker is called productivity. • In a simple model, productivity is computed by dividing the output (the number of units produced) by the input (the number of hours worked). • Examples: Inflation and Deflation • A sustained increase in the general level of prices for goods and services is called inflation. • Can be a problem if it increases too rapidly. Deflation • Deflation is a sustained decrease in the general level of prices for goods and services. • Occurs during a period when the economy is not doing well and workers are being laid off. • Prices decrease but the people have less money to buy them. Check Point • Give a brief description of the three ways to measure the health of an economy. The Business Cycle • The movement of the economy from one condition to another and back again is called a business cycle. • Business cycles have four phases: – Prosperity – Recession – Depression – Recovery Prosperity • Prosperity is the phase where most people who want to work are employed and businesses produce goods and services in record numbers. – Wages are good. – The demand for goods and services is high. • Prosperity does not go on forever. Recession • Recession is a phase of the business cycle where demand for goods and services begins to decrease, production decreases, unemployment begins to increase, and GDP growth slows down. • A decrease in the use of economic resources and a lower demand for goods and services signal this phase of the business cycle. Depression • Depression is a phase of the business cycle marked by a prolonged period of unemployment, weak sales of goods and services, and business failures. • GDP falls rapidly during a depression. • During the Great Depression of the early 1930s, the unemployment rate reached 25 percent. Recovery • Recovery is the phase in which unemployment begins to decrease, demand for goods and services begins to increase, and GDP begins to rise again. • Recovery leads an economy into the most-welcome business cycle, prosperity. Check - Point • State what you consider to be the major characteristic of each of the four phases of the business cycle. Give reasons for your answer. 1.4 PARTICIPATE IN AN ECONOMY Objectives: 1. Define three economic roles and state how they affect supply and demand 2. Discuss how supply and demand affect our economy 3. Discuss standard of living and quality of life Jump Start Activity • TEAMWORK Exercise – As a table make a list of decisions you all made as a consumer over the past several days. • Such as what goods or services to buy or not to buy. Economic Roles • Citizen – Examples: voting and volunteering • Worker – Examples: you help supply goods and services • Consumer – Examples: individual buying decisions have a big influence on our economy. Supply and Demand • You as a consumer help make businesses make decisions when you decide to buy or not buy certain goods and services. • “Casting your dollar vote” • Demand is the relationship between the amount of a good or service that consumers are willing and able to buy and the price of the good or service. • Supply is the amount of a good or service that businesses are willing and able to provide and the price of the good or service. Supply and Demand Effect on Price • Demand – As the demand for a good or service increases, the price tends to go up. – As demand begins to fall, the price generally goes down. • Supply – When a product is in short supply, prices tend to increase if the demand stays the same. – When a product is surplus, prices tend to decrease. • Other factors – Prices may be high because materials are naturally scarce. • Example: Diamonds & Pandas – Your Economic Well-Being • Standard of living refers to the way you live as measured by the kind and quantity of goods and services you can afford. • Quality of life is the satisfaction and enjoyment that you get from your life. Review • What are your three roles in our economy? • What effects do supply and demand have on price? • What is standard of living and quality of life how are they related?