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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 Systems Economic System-the way an economy (nation, business, etc.) uses resources to produce goods and services. Production-the creation of goods and services Resources- services. used to create other goods or Include: Human Resources-skills, training, and abilities people have Nonhuman Resources-raw materials, tools, and manufacturer products Economics-the study of how we make use of our resources. Macroeconomics Microeconomics Types of Economics Systems 1. Traditional economy (subsistence)-ways to produce products are passed from one generation to the next. 2. Command (controlled economy)government owns most resources and makes most economic decisions 3. Market (capitalist)- people owns the resources and run the businesses. Based on profit motive Profit-the difference between the money received from sale and cost 4. Mixed Economy Demand and Supply Scarcity-consumers’ wants are greater than the resources available. Demand-quantity of a particular good or service that consumers are willing and able to buy at a particular price. Law of Demand-when the price of a product goes down, demand will generally go up. Supply-the quantity of a product that producers are willing and able to make available for sale at a particular price Law of Supply-producers are willing to offer more of a product at a higher price. Equilibrium Equilibrium price-the price at which the quality supplied exactly 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 Decision in a Market Economy Both buyer and seller get what they want Information for the Economy 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 than another, they can…. Lower the price Convince customers to pay the higher price Stop offering the product for sale The Profit Motive Way to increase profits: 1. Reduce costs-less expensive materials, increase efficiency 2. Change price 3. Increase quantity of products soldadvertising Consumer Economics 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. 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. Section17.3 Government and the Economy Measuring Economic Performance Economic Indicators Gross Domestic Product (GDP)-The current value of all goods and services produced in a country in a year. Inflation-sustained increase in the average level of prices Real GDP is adjusted for inflation Consumer Price Index (CPI)Measures the monthly change in the price of about 400 goods and services (market basket) as a %. Unemployment Rate-% of people who are able to work and looking for work. 5.5% is considered full employment Personal income-the income people receive through wages, profits, dividends, interest, etc. 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. Trough - if things get worse - economy may slide into a depression. The farthest the economy falls is the trough. Expansion-economy recovering. Increasing demand, lowering unemployment Depression-not a normal part of business cycle Effects of Inflation Hurts those on fixed income Less Hurts those who save APY purchasing power doesn’t keep up with inflation Helps those who borrow Borrow money at the lower APR The Business Cycle Factors Affecting Ups and Downs Consumer confidence Technological Government War innovation policies 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 Bank bailout of 2008
