Download Chap002 - Salem State University

CHAPTER
TWO
Economics: The Creation
and Distribution of Wealth
2-1
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Economics: Use of scarce resources to
produce goods/services, distribute them
among competing groups/individuals
 Land
 Entrepreneurship
 Labor
 Knowledge
 Capital
2-2
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Economics: Create Wealth

Micro v. Macro

Resource Development
2-3
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Economic Theory

Thomas Malthus (Early 1800s)
“Dismal Science”
 Too many people


Adam Smith (1776)
Freedom is vital
 “Invisible Hand”

2-4
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Four “What’s” of
an Economic System
$ What
(how it) is produced
$ What amount is produced
$ What method of output
distribution
$ What rate of economic
growth
Adapted from: Edwin Mansfield Economics (New York: W.W. Norton, 1976), p.8
2-5
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Three Economic Systems
Mixed
Socialism
(Highly Controlled)
(Little Control)
Communism
Capitalism
2-6
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Capitalism
 Private
Property
 Profit/Ownership
 Freedom of Competition
 Freedom of Choice
2-7
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Communism

Public Ownership
Productive Capacity
 Capital



Central Planning/Controlled
Economy
Managers = Mandatory Party
Membership
2-8
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Socialism
Private & Public
Ownership
 Some Choices are Limited
 Creates Social Equality &
Equality of Results
 Reduces Individual
Incentive

2-9
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Mixed Economies


Free-Market Economy = Capitalism
Command Economy
Socialism
 Communism


Trend Results in Blend
Capitalism > Socialism
 Socialism > Capitalism

2-10
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Supply Curve
High
Price(P)
S
Low
Quantity(S)
High
2-11
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Demand Curve
High
Price(P)
D
Low
Quantity(D)
High
2-12
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EQUILIBRIUM POINT
Surplus
High
Market Equilibrium
Price
S
Low
Shortage
Quantity
D
High
2-13
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Degrees of Competition
Monopolistic
Oligopoly
Competition
One
Many
Sellers
Monopoly
Pure Competition
2-14
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Monopoly = One Seller

Diamonds

Utilities
2-15
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Oligopoly = Few Sellers

Tobacco

Automobiles
2-16
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Monopolistic Competition =
Many Sellers With Perceived Differences

Fast Food

Colleges
2-17
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Pure Competition
Sellers
Buyer
2-18
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Limitations of Free-Market



Inequality of WealthCauses National & World
Tension
Potential Environmental
Damage
Limitations Push Country
towards Socialism =
Government Regulation
2-19
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Government’s Role in Economics
 Enforces
Rules/Regulations
 Provides Public Goods
 Transfers Payments
 Fosters Competition
 Contributes to Economic
Stability
2-20
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Industrialized
Nations Tax Rate
U.S.
Austria/Japan
Italy
Canada
Germany
Spain/Sweden
France
Finland
Denmark
0%
10%
20%
30%
40%
50%
60%
70%
Source: Parade Magazine, Apr. 12, 1998.
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Where Does the
Government Get Its Money
Excise Taxes
4%
Corporate
Taxes
11%
Social
Security
& Payroll
Taxes
34%
Other
4%
Individual
Income
Taxes
48%
Source: Federal Budget for Fiscal 2001
2-22
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What $1 Billion
Can Buy




Egg McMuffin and large coffee for
President Bush & 2,000 Secret Service
Agents every morning for 575 years.
Average annual grocery bill for
250,000 families of 4.
One year’s food for 5 million cats &
dogs.
Tuition, room and board for freshman
classes at Brown, Cornell, Harvard,
Pennsylvania & Yale with $50M leftover
for books.
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Key Economic Indicators

Gross Domestic Product (GDP)

Unemployment Rate

Price Indexes
Consumer Price Index(CPI)
 Producer Price Index(PPI)

2-25
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What Makes Up the
Consumer Price Index
Recreation Apparel
5%
6%
Medical Care/
Insurance
7%
Medical Care
6%
Other
5%
Housing & Util.
39%
Food &
Beverage
16%
SOURCE: U.S. Bureau of Labor Statistics
Transportation
18%
2-26
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Economic Scenarios
Inflation vs. Deflation = #Dollars
Chasing Amount of Goods/Services
 Recession & Depression = Degrees
of Severity
 Federal Reserve Attempts to
Control

2-27
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U.S. Government
Economic Tools



Monetary Policy- management
of money supply
Fiscal Policy- management of
taxes and government
expenditures
National Debt
2-28
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How Much is the
Federal Debt?
The debt has reached $5.6 trillion
 If $1,000 bills were stacked:

$1 Million = 4.29 Inches
 $1 Billion = 357.5 Feet
 $1 Trillion = 67
Miles


The debt is equal to 375.2 miles in
$1,000 bills
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Labor Productivity




1900 - 1/3 of workforce produced
U.S. food needs
2000 – 1/50 of workforce produces
U.S. food needs
Service vs. Manufacturing
Economy?
Quality vs. Quantity?
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1999 Revenue by Industry
Oil
Server Vendors
B2B Ecommerce
Fast Food
In Billions of
Dollars
Airlines
Tobacco
Books
Music
Movies
$0
$50
$100
$150
$200
$250
$300
Source: Wired, November 2000.
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