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CHAPTER 8 Copyright © 2006 by the McGraw-Hill Companies, Inc. CHAPTER 8: Production, Distribution, and Consumption The study of economics focuses on the following: • The production and distribution of goods and services and how they relate to buying, selling, and making a profit • The role of government in regulating business activities • How a society accumulates and distributes wealth Copyright © 2006 by the McGraw-Hill Companies, Inc. CHAPTER 8: Production, Distribution, and Consumption In a primitive economy the acquisition and distribution of goods is absorbed within the traditional mode of existence. • Shared materials for clothing and shelter • Seasonal migration • Strong communal life The San people of Africa have lived in a primitive economic society for over 20,000 years. Copyright © 2006 by the McGraw-Hill Companies, Inc. CHAPTER 8: Production, Distribution, and Consumption (Continued) Capitalism is based on the private ownership of property and the resources of production. The United States economy is based on the theory of capitalism. • Wide selection of goods to purchase • Regulation through competition • Focus on the individual Copyright © 2006 by the McGraw-Hill Companies, Inc. CHAPTER 8: Production, Distribution, and Consumption Socialism is a system in which major industries may be owned privately or publicly but are subject to governmental control. • Limited choice of goods to purchase • Central regulation of supply and price • Focus on society’s needs as a whole In Norway, the government controls key industries, such as petroleum and oil production. Copyright © 2006 by the McGraw-Hill Companies, Inc. CHAPTER 8: Production, Distribution, and Consumption (Continued) Communism is a system in which property is owned by the state and all citizens share in the common wealth according to their need. North Korea is one of the few remaining countries that practice communism. • Limited choice and ability to purchase goods • Regulation according to abilities and needs • Focus on the group Copyright © 2006 by the McGraw-Hill Companies, Inc. CHAPTER 8: Production, Distribution, and Consumption The modern economy first developed in Europe during the late Middle Ages. • Political fragmentation under the feudal system created a situation that allowed for the growth of freedom and the economy. • The modern economy did not emerge due to deliberate planning, but as a response to local conditions. Copyright © 2006 by the McGraw-Hill Companies, Inc. CHAPTER 8: Production, Distribution, and Consumption Supply and demand are the basic factors that determine price. $3.00 $2.50 Price per Cookie • Supply: the amount of goods and services available for sale $2.00 $1.50 $1.00 $0.50 $0.00 1 2 3 4 Number of Cookies Copyright © 2006 by the McGraw-Hill Companies, Inc. CHAPTER 8: Production, Distribution, and Consumption (Continued) Supply and demand are the basic factors that determine price. $3.00 $2.50 Price per Cookie • Demand: the desire and ability of consumers to buy a good or service $2.00 $1.50 $1.00 $0.50 $0.00 1 2 3 4 Number of Cookies Copyright © 2006 by the McGraw-Hill Companies, Inc. CHAPTER 8: Production, Distribution, and Consumption (Continued) Supply and demand are the basic factors that determine price. $3.00 $2.50 Price per Cookie • Law of Supply and Demand: the market prices of goods and services are determined by the relationship of supply to demand $2.00 $1.50 $1.00 $0.50 $0.00 1 2 3 4 Number of Cookies Copyright © 2006 by the McGraw-Hill Companies, Inc. CHAPTER 8: Production, Distribution, and Consumption Measures of economic activity give an indication of how the economy is doing and where it might be heading. • The Dow Jones Industrial Average • Gross Domestic Product (GDP) • Rate of inflation • Unemployment rate Copyright © 2006 by the McGraw-Hill Companies, Inc. CHAPTER 8: Production, Distribution, and Consumption Both GDP and GNP tend to fluctuate in a pattern called the business cycle. The last, as well as the worst, depression in American history, called the Great Depression, occurred in the 1930s. • A period of growth, or a boom, is followed by a period of slowdown called a recession. • A severe recession is called a depression. Copyright © 2006 by the McGraw-Hill Companies, Inc. CHAPTER 8: Production, Distribution, and Consumption Government can help an economy by: • Providing security • Requiring dependable standards • Providing trustworthy courts • Enforcing laws • Maintaining international agreements In 2002, the U.S. Department of Justice formed a special task force to investigate possible fraud and insider trading in the wake of Enron Corporation’s bankruptcy. Copyright © 2006 by the McGraw-Hill Companies, Inc. CHAPTER 8: Production, Distribution, and Consumption (Continued) Government can hurt an economy by: • Being corrupt • Conducting unfair trials • Oppressing and exploiting residents • Spending unwisely For nearly ten years, William Marcy “Boss” Tweed ran a corrupt political machine that profited at the taxpayers’ expense and put New York City’s economy in serious jeopardy. Copyright © 2006 by the McGraw-Hill Companies, Inc. CHAPTER 8: Production, Distribution, and Consumption (Continued) Government can influence economic activity through its taxation policy and enforcement. Types of Government Taxes Income tax A percentage of wages, profits, and other income paid to federal, state, and local governments Social Security A percentage of wages paid into a public insurance fund tax that can be drawn on upon retirement Capital gains tax Money paid to the federal government out of profits from the sale of land, buildings, stocks, and other capital assets Property tax Money paid (usually to a local government) by the owners of real estate Sales tax Money paid to federal, state, or local governments on the purchase of goods or services Copyright © 2006 by the McGraw-Hill Companies, Inc. CHAPTER 8: Production, Distribution, and Consumption Financial institutions accept deposits, lend money, safeguard and transfer funds, guarantee creditworthiness, and exchange money. • For individuals: savings banks, savings and loan associations, and credit unions • For businesses: commercial banks • For the government and other banks: central banks • For governments and nations: international financial institutions Copyright © 2006 by the McGraw-Hill Companies, Inc. CHAPTER 8: Production, Distribution, and Consumption When deciding how to manage finances, a person needs to think about the following: • • • • • • Setting priorities Making a budget Banking and saving Investing Controlling debt Planning for retirement Copyright © 2006 by the McGraw-Hill Companies, Inc. CHAPTER 8: Production, Distribution, and Consumption The distribution of wealth is the way that money is divided among the people in a group, country, or the world. • The disparity between the rich and the poor is growing larger. • This will inevitably have a continuing impact on current events. U.S. Distribution of Wealth, 1997 Portion of Population (% of Wealth) Next 10%, 11.50% Next 40%, 15.20% Bottom 40%, 0.50% Next 5%, 11.40% Top 1%, 39.10% Next 4%, 22.30% Copyright © 2008 by the McGraw-Hill Companies, Inc. CHAPTER 8: Production, Distribution, and Consumption Economic development is encouraged by the following practices: The invention of the Internet is a major force behind the developing global economy. • Inventiveness and ingenuity • Organization and efficiency • Utilization of natural and human resources Copyright © 2006 by the McGraw-Hill Companies, Inc. CHAPTER 8: Production, Distribution, and Consumption THE END Practice the skills you learned in this chapter by taking the Chapter Review Quiz or the GED Practice Quiz. Copyright © 2006 by the McGraw-Hill Companies, Inc.