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Economics
Economics with Emphasis on the Free Enterprise System and Its Benefits is the culmination of the
economic content and concepts studied from Kindergarten through required secondary courses. The
focus is on the basic principles concerning production, consumption, and distribution of goods and
services in the United States and a comparison with those in other countries around the world. Students
examine the rights and responsibilities of consumers and businesses. Students analyze the interaction of
supply, demand, and price and study the role of financial institutions in a free enterprise system. Types of
business ownership and market structures are discussed, as are basic concepts of consumer economics.
The impact of a variety of factors including geography, the federal government, economic ideas from
important philosophers and historic documents, societal values, and scientific discoveries and
technological innovations on the national economy and economic policy is an integral part of the course.
Students apply critical-thinking skills to create economic models and to evaluate economic-activity
patterns.
Economics with Emphasis on the Free Enterprise System and Its Benefits builds upon the foundation in
citizenship; economics; geography; government; history; culture; social studies skills; and science,
technology, and society laid by the social studies essential knowledge and skills in Kindergarten-Grade
12. The content enables students to understand the importance of patriotism, function in a free enterprise
society, and appreciate the basic democratic values of our state and nation as referenced in the Texas
Education Code, §28.002(h).
Absolute and Comparative Advantage
International
trade is based on resources or products which one country
needs and another can provide. A country has an absolute
advantage when it can produce more of a given product
than other countries using a given amount of resources. A
country has a comparative advantage in the product that it
can produce most efficiently given all of the products it
could choose to produce. Each country must determine if
it is reasonable to try to produce the product. To do so, the
country assesses the opportunity cost and if it is low. it may
choose to produce instead of import. Therefore, countries
specialize in the goods they can produce most efficiently. The
United States markets wheat and farm tractors, not items it
cannot produce such as coffee or diamonds.
Balance of Trade Nations seek to maintain a balance of
trade with values of imports equal to exports. By
balancing trade, a nation can protect the value of its
currency on the international market. If a trade imbalance
continues, with one country importing more than it is
exporting, the value of its currency falls. In the 1980s the
United States imported considerably more than it exported,
and the foreign exchange market was glutted with
dollars. As the value of the dollar fell, the prices of
imports increased and consumers paid more for the goods.
The imbalance can be corrected by limiting imports or increasing the number and/or quality of exports. Both of
these actions affect trading partners which may retaliate by
raising tariffs. Maintaining a balance of trade requires
international cooperation and fair trade.
Business Cycle
There are two phases of business
cycles. Recession is a period of decline gauged by changes
in real Gross Domestic Product (GDP). A recession occurs
when the real GDP declines over two quarters or six months.
It begins when the GDP reaches its highest point prior to
a steady decline over at least six months. A recession
continues until the GDP reaches a low point, the trough.
The second phase of a business cycle, expansion, starts
when the GDP rebounds after hitting a trough.
Business Property A business is an economic institution which seeks a profit by allocating resources to satisfy
customers. There are three types of businesses: sole
proprietorships, partnerships, and corporations. Sole
proprietorships, businesses owned by an individual,
account for 75 percent of all businesses. The individual
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controls the property of the business and receives all
profits as personal income. Partnerships are owned by two
or more people who jointly own and share in the
management and financing of the business. They must
agree on the use of property. Corporations are businesses
which are chartered by the state and recognized as a
separate legal entity with the right to buy and sell
property, enter into legal contracts, and sue and be sued. A
corporation has stockholders who elect a board of
directors to run the business. Ninety percent of all business
in the United States is conducted by corporations.
Circular-Flow Model
In the circularflow model, money flows through the system one way and
goods, services, and factors of production flow the other.
Economists use the circular-flow model to visualize the
interdependent relationship of buyers and sellers within a
market. Whether the market is local, regional, national, or
global, the activity of the market follows a circular flow
with individuals earning their income in factor markets and
spending it in product markets. The markets link individuals
with business organizations and other economic
institutions.
Consumer Economics
In
a
free
enterprise economy, consumers ultimately determine
what goods or services are produced. Their choices depend
on several factors including income, personal and family
needs, debt, advertising, and culture. The economic
choices they make depend on their abilities to spend,
save, lease, invest, insure, and/or use credit financing.
Producers prosper if consumers choose to buy the product,
and they fail if their product has no appeal. They strive to
entice consumers to invest in their companies, save at their
banks, or spend money on their products. Consumers
determine the amount they can invest and the type of
investment, either expendable goods or services, low-risk
saving options, or high-risk exchanges. Each choice has an
economic impact on the consumer, not all of which are
obvious when the decision is made.
Corporation A corporation is a business which is recognized by law as a separate legal entity with all the rights
and responsibilities of an individual including the right to
buy and sell property, enter into legal contracts, and to sue
and be sued. Those seeking to form a corporation seek
permission from the state and may issue stock and pay
dividends. It is easy to raise financial capital for a
corporation by selling stock or issuing bonds. The business
can continue even if the ownership changes, and
transferring ownership is relatively easy. Corporations
can be expensive to start, and stockholders have little
control in the operation beyond the election of a board of
directors. Corporations are also subject to governmental
regulations.
Determinates of Supply and Demand Non-price
determinates of demand are those things which are not
related to the price of a good or service but which alter
our ability or willingness to purchase the item. These defy
the law of demand and cause the demand curve to shift,
thus changing the equilibrium price. Change in our income
either increases or decreases our ability and willingness to
purchase. If our income increases we tend to purchase
more products and we tend to purchase more expensive
products. The price of related goods affects our demand. If
the price of steak increases, we may instead purchase
chicken, or if the price of hot dog buns decreases, we tend
to buy hot dogs to go with them! Our tastes and preferences
determine our demand. We may buy name brands instead
of the cheaper generic brands. The number of buyers in the
market affects demand when we buy fad items. Our
expectations of price increases or decreases will also alter
demand.
Non-price determinates of supply are those things which
are not related to price but do alter supply. They cause the
supply curve to shift and thus change the equilibrium price.
When the costs of inputs increase, a business can not
produce the same number of items at the same price.
When the number of suppliers increase, more items will
be produced. Years ago there were only a few computer
manufacturers and now there are many in the market.
Taxes and subsidies also alter the costs of production and
therefore the number of items produced.
Economic Activity Patterns
Five major
economic activities are producing, exchanging, consuming,
saving, and investing. Patterns of production, distribution,
and use develop as the economic activities become
concentrated in urban, industrial, or agricultural areas.
Geographic and human factors also influence patterns of
economic activity. Ski resorts develop in the mountains,
fanning in the valleys, and mining where there are ore
deposits. Saving and investment also follow patterns,
becoming concentrated in areas of potential growth.
Economic Systems (traditional, command,
market) Economic systems are organized sets of
procedures used within or between communities to govern
the production and distribution of goods and services.
Economists identify three types of economic systems:
traditional (known as subsistence), command (also known
as planned), and market (commercial). In a traditional
economy, goods and services are produced by a family for
their personal consumption. There is little surplus and little
exchange of goods. There is only a limited need for
markets (places to buy and sell goods and services). This
is the type of economy found in less developed nations,
usually in rural areas. The economy reflects the customs,
habits, laws, and religious beliefs of the area, and these
control decisions. Most less developed nations today are
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a mix of traditional and either market or command
economies.
In a command economy, the government regulates economic
activity, making decisions about what and how much to produce, where to locate economic activities, and what prices
to charge for goods and services. These economic decisions
are often made to further social goals. Communism is one
example of a command economy; socialism is another. In
a command economy, the price of goods including
agricultural products are controlled by the government, not
market forces. Production costs are not reflected in prices.
For example, it may cost $1.00 to produce a loaf of bread,
but the price may be set at $.25 to ensure customers are
able to afford adequate provisions. The price also may be
set over production costs given demand.
In a market economy, elements of which may be
considered a free enterprise economic system, the laws of
supply and demand and "the market" determine decisions
about what and how much to produce, where to locate
economic activities, and what prices to charge for goods
and services. Profit drives decisions in a market economy.
A mixed economy combines elements of these three systems.
Economic Rights and Responsibilities of
Individuals and Business
Economic rights of
individuals include the right to work, guaranteed by the
Taft-Hartley Act of 1947, which allowed states to formulate
laws making it illegal to require workers to join unions.
Another economic right of individuals is the right to own
private property, that is, the right to hold and exchange
goods and services. This is defined and protected by
government legislation. Economic rights of businesses
include the right to participate in markets for the purpose of
exchanging goods and services. This right is also defined
and protected by government. Economic responsibilities of
individuals include making effective decisions in
comparing economic alternatives of consumption,
investment, and allocation of goods and services.
Economic responsibilities of businesses include engaging
in fair labor practices and fair competition. Both
contribute to the economic health of an economic
community.
Exchange Rates
In
international
finance,
foreign currency is called foreign exchange and the
currency is bought and sold on a foreign exchange market.
The rate of exchange is based on the amount of foreign
currency in circulation. For instance, if the United States
seeks to import Volvos from Sweden, the importer pays
for the automobile with U.S. dollars. If the car costs
35,000 kroner (Swedish currency) but the U.S. dollar is
worth six Swedish kroner, the Volvo costs approximately
$5,100. As more U.S. currency enters the Swedish
market, and as the demand for Volvos increases, the
Swedish kroner becomes more valuable when compared to
the U.S. dollar. Thus the foreign exchange rate changes
from $1.00 = 6 K to $1.00 = 4.5 K. The car now costs an
American importer approximately $7,000. Exchange rates
are published in major newspapers.
Federal Reserve System The Federal Reserve System is the
privately owned, publicly controlled central bank of the
United States. It was created in 1913 by Congress to lend
to other banks in times of need. Each national bank is
required to join the Federal Reserve System (FRS), and
state-chartered banks are allowed to do so. The member
banks own the FRS. The Federal Reserve regulates the supply of money in the economy through interest notes or by
altering the reserve requirement, discount rate, and openmarket options. The Federal Reserve also supplies paper
currency, called Federal Reserve Notes, holds banks' reserves,
provides check clearing services, and supervises member
banks.
Fiscal Policy Fiscal policy is the use of government
spending and revenue collection to influence the economy.
These policies are used to achieve economic growth, full
employment, and price stability. Two automatic stabilizers
which stimulate the economy include unemployment
insurance and federal entitlement programs including
social welfare, pensions, and Social Security.
International Free-Trade Agreements An international
free-trade agreement results from cooperation between at
least two countries to reduce trade barriers and tariffs and
to trade with each other. Developing countries have
designated free-trade areas which do not set uniform
tariffs for nonmembers. The North American Free Trade
Agreement (NAFTA) is the largest free-trade area in the
world. Other countries have formed customs unions,
agreements which abolish tariffs and trade restriction among
union members, and which adopt uniform tariffs for
nonmember countries. The most successful example of a
regional customs union currently is the European Union
(EU). A cartel is also a union of producers or sellers who
limit production or sales to control prices. The
Organization of Petroleum Exporting Countries (OPEC) is
an example of a cartel.
Level of Economic Development
Economic
development occurs in stages. Countries do not
necessarily move through these stages in any order. The
first stage is called "primitive equilibrium" and applies to
nations with no monetary system or other formal economic
organization. Rules pass from generation to generation
and the economy exists in equilibrium based on tradition.
The second state is one of transition when cultural
traditions begin to crumble and people adopt new patterns
of living. The third state is "takeoff and occurs when
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Economics
primitive equilibrium breaks down. During takeoff a
nation spends more of its national income, new industries
grow, and profits are reinvested. Both the agricultural and
the industrial sectors expand. The fourth stage is
"semidevelopment," a time when a nation's economy
expands significantly. Core industries develop and the rates
of technological development and capital investment increase. The nation enters the international economy, making
goods and services for other nations. The final stage is
"highly developed" in which the basic human needs are
met easily and economic efforts turn toward production of
consumer goods and public services. The service and
manufacturing sectors of the economy mature during this
stage.
Monopolistic Competition Monopolistic competition is
a market structure similar to that of pure competition
except that all products are not identical. A monopolistic
competitor will modify the product to appeal to more
customers and thereby monopolize a part of the market.
Breakfast cereals are similar but when one competitor
frosts flakes and captures a part of the market, the
producer participates in monopolistic competition. The
monopoly continues until other companies frost their
flakes. The same is true in the fast food industry. The
products — tacos, hamburgers, or chicken — are
different, but the producers capture hungry customers by
charbroiling or adding seasonings or sauces. This process
of changing a product is called product differentiation.
Grocery chains are also monopolistic. Even though they
offer similar products, the chains can sell for less and
offer more services or greater variety, thus undercutting sole
proprietorships.
Monopoly A monopoly is a market situation dominated by one firm which sets prices for the product. It is
nearly impossible for competitors to enter the market. A pure
monopoly does not exist, but producers of electricity are
close to monopolizing the market.
Oligopoly An oligopoly is a market situation dominated by a few large producers who can affect prices in the
industry. The firms in an oligopoly so dominate the market
that changes made by one firm can cause the industry to
change output, sales, and prices. The American
automotive and airline industries are oligopolies dominated
by firms with an international reputation. The soft drink
industry is the same. Oligopolies can differentiate products
or can standardize them. All members of an oligopoly are
powerful, and entry into the market is difficult.
Opportunity Costs and Scarcity When an economist
considers the cost of an item, he or she considers more than
the price tag. Economists also consider the opportunity
cost or the cost of the next best alternative use of money,
time, or resources when one choice is made over another.
For instance, a student with $25 to spend can choose
between several options, a CD, a new shirt, movie tickets, or
restringing a tennis racket. The student decides that
restringing the racket is the most important need at the
moment. The opportunity cost includes the items and
activities the student gave up when he or she did not buy
tickets to the movies, a favorite CD, or new clothes.
Economists also consider the relationship of the scarcity
of a good or service to its cost. In economics, scarcity is
the condition of not being able to have all of the goods and
services one wants. Resources do not exist in sufficient
quantities to satisfy all desires to use them. Scarce items
may have a higher value and the value may fluctuate
depending on availability. People recognize scarce items
carry a higher opportunity cost; they give up more
alternatives to purchase shrimp off-season than they would
during the shrimping season.
Partnerships A partnership is an unincorporated business owned and operated by two or more people who share
the profits and have unlimited liability for the debts and obligations of the firm. A partnership is easy to start and if
partners cooperate, it is easy to manage. Partners share financial and legal responsibilities for the business, and the
business legally ceases to exist if a partner leaves.
Private Property Private property includes goods
like automobiles and homes as well as personal skills and
knowledge. The right and the privilege to control personal
possessions is a feature of capitalism and the free enterprise
system. People can sell or give their property away as they
wish. This encourages investment and use of the property
and thus stimulates the economy. The rights of private property owners are guaranteed in the 5th and 14th Amendments
to the U. S. Constitution.
Production-Possibilities Curve
A productionpossibilities curve is a diagram which shows the maximum
production of goods and/or services which an economy
can attain if all productive resources are fully employed.
For instance, a country can produce 2,000 tons of iron if
all resources are concentrated on the production of iron,
but the population would starve if some were not
growing wheat for food. Therefore, economists can
figure the amount of productive resources used to plant
and harvest wheat and develop a formula which shows the
relationship of the production of wheat compared to iron.
The difference between concentrating all resources on
iron and dividing them between iron and wheat is called
an opportunity cost. That is the cost in money, time, or
resources when one choice is made rather than another.
For instance, if the country grows wheat to satisfy food
demands, the opportunity cost is the income it will not
receive for the iron it is not producing. The productionpossibilities curve is used by economists to chart the
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Economics
relationship of choices and costs.
Profit Motive Profit motive is the force which
motivates people and organizations to improve their
material well-being. The profit motive is a characteristic
of the free-enterprise system and capitalism and is the
main reason people start businesses. To a business, profit
means the difference between revenues and costs. The freeenterprise system uses supply, demand, and the profit
motive to determine the answers to the four basic
economic questions: "what to produce," "how to
produce," "how many to produce," and "for whom to
produce."
Pure Competition Pure competition is a market
structure consisting of a large number of independent and
well-informed buyers and sellers of an identical product.
None of the buyers or sellers is powerful enough to influence the price, and more buyers and sellers are able to enter
the market easily. This is an idealistic situation. There are
no examples of a pure competition, although market
gardeners and truck farmers operate in a market which is
close to it.
Societal Values
Each
society
identifies
values that everyone within the society is expected to
uphold. Societal values vary among cultures within
nations and among nations. These influence public
behavior including business dealings. For instance, some
cultures expect to barter as a part of normal business
transactions while others may view bartering as insulting.
Business people must understand the societal values of all
trading partners to be most effective.
Sole Proprietorship A sole proprietorship is an unincorporated business which is owned and managed by one
person. The sole proprietor enjoys the rights to all profits
and bears the responsibility for all debts and other liability.
It is the most common form of business organization in
the United States and is the easiest to start and stop.
Stocks and Bonds A stock is a certificate of ownership in a corporation. If the corporation is profitable,
stockholders are paid a dividend, or their portion of corporate
earnings. A bond is a formal contract to repay borrowed
money and interest on the borrowed money at regular
future intervals. Stocks and bonds are two ways that
businesses and industry can finance operations.
and the ability to pay for it. The time of year affects the
supply and the demand of some goods. For instance,
watermelons ripen in the summer at the same time people
crave them. The two forces of supply and demand
combine in the laws of supply and demand: more will be
bought at lower prices and less at higher prices and more
will be offered for sale at high prices than at lower prices.
The laws are presented visually in supply and demand
graphs. A supply curve illustrates the relationship of supply
and price based on the way a business distributes goods.
When the price of a good is low, supply is limited; as
prices increase, the supply increases. A demand curve
illustrates the relationship of demand and price. As price
decreases, demand increases. A demand schedule shows
the quantity demanded at a range of market prices at a
given time. The relationship of supply and demand is
presented in a supply-and-demand graph depicting
equilibrium or market-clearing price. This is the price at
which the supply curve and the demand curve will
intersect. This is the price at which all that is supplied
will be bought and all that is demanded will be offered.
The law of supply and demand applies only in a market free
from price regulations imposed by government.
Taxes Local, state, and national governments generate revenue by charging taxes. A tax levied on a person's earnings
is an income tax. Income taxes provide the largest source of
revenue to the national government. A general revenue tax
levied on the manufacture or sale of items such as cigarettes,
gasoline, or alcohol is called an excise tax. Property tax is
levied on property owners in local communities to offset
expenses of services provided including street construction
or maintenance. School tax is also collected on the local level
to help pay for public education. Tariffs are another form of
tax levied against importers of goods. Some goods and
income are tax-exempt (not subject to a local, state, or
federal tax).
Trade Barriers
Barriers to trade include quotas of
imports and protective tariffs. Health and safety
regulations and requirements are often used by
governments as more subtle trade barriers.
Voluntary Exchange
Buyers and sellers are free to
engage in market transactions with few outside restrictions.
Voluntary exchange is a characteristic of the freeenterprise system and capitalism, and through this market
mechanism, consumers control the market.
Supply, Demand, and Price Supply is the amount of
goods available. Demand is the desire to own something
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