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Unit 7 Notes: Economics
Scarcity
• Needs-required for survival
– Water, food, clothes +shelter
• Wants-things we like to have
• THE PROBLEM- we have unlimited wants but have limited resources = SCARCITY
• Goods and resources are scarce or limited.
• Countries cannot produce enough to satisfy wants.
What do we produce?
• Countries have to make the choice of how to use their limited resources to fulfill needs and satisfy wants.
• What do we make?
• How do we make it?
– What resources do we use?
• For Whom do we produce it?
Production Possibilities Frontier
Making Economic Decisions
• Trade-offs-alternative you face if you do one thing over another. $ for school or $ for healthcare.
• Opportunity cost-go to college or work after high school. The cost of the next best use of your time or
money.
Rational Choice
• Choosing the alternative that has the greatest value among comparable-quality products.
– Buy things that satisfy consumer but at a low cost.
• Helps you make best use of scarce resources.
– Money and time.
Factors of Production
1. Land
2. Labor – workers
3. Capital – $ and resources
4. Entrepreneurial Skill – Risk taker
Big Businesses
• To maximize efficiency and productivity:
• Mass production
– Assembly line
– Interchangeable parts
• Specialization
– Division of Labor-each worker has own task.
• Technology-robots
Workers
• 2 types of labor:
• Skilled workers
– White-collar-professionals
• Unskilled workers
– Blue-collar-laborers
Diminishing Marginal...
• Utility-Amount of satisfaction decreases with each additional unit consumed.
• Ex: Choc. Chip cookie dough
• Return- at one point it becomes unproductive to hire one more worker.
Types of Costs
• Fixed Costs-expenses that are the same no matter how much you produce; rent, mortgage on house.
• Variable-change with amount produced; increase with amount increase=raw materials;
– electricity, wages, supplies
• Total Cost=fix cost + variable costs.
Different Economic Systems
• Free Enterprise
• Capitalism
• Socialism
• Communism-Command
• Traditional
• Market
• Mixed
Free Enterprise
• USA’s economy
• Competition flourishes with minimal government interference
• Markets-places where buyers and sellers go to negotiate prices.
• Companies driven by profit motive.
Capitalism
• Very similar to F.E.
• People work for economic gain.
– Entrepreneur-takes a risk to start a business.
• Gov’t control is small.
• Adam Smith-father of capitalism.
– Believed entrepreneurs who seek profit benefit society.
– Laissez-faire-gov’t should keeps hands off economy.
– Believed the invisible hand guides the economy.
Command Economies
• Communism-individual has little or no control over economy.
– Gov’t commands actions of business.
• Socialism-businesses owned by society and controlled by the gov’t.
– Wealth distributed equally among all citizens.
– Karl Marx
Traditional
• People specialize in a trade or skill.
• Use your skill to barter with others.
• Money is not exchanged, only goods and services.
Mixed Economy
• Combines the elements of a market economy (capitalism) and a command economy (communism).
• Private ownership exists but decisions made while considering government regulations and intervention.
• Building Codes
• Fire Exits
• Handicap Accessibility
• Required seat belts in cars
• Ex: USA and most other economies.
Our Market Economy
• Supply and demand help people make decisions and allocate resources.
• Consumer demand drives decisions businesses make.
• AKA capitalism-private citizens own most factors of production.
• AKA free enterprise-businesses compete for profit with minimal gov’t interference.
Government’s role in our economy.
• Private sector does not provide all services.
– Education, defense.
• Tries to make markets competitive.
– Regulate electricity.
• Provide incentives and punishments.
– Tax breaks, grants, farm subsidies.
– Pollution tax, cigarette tax, taxes in general.
USA-Mixed Market Economy
• Private property
• Some gov’t control and regulations; Duke Power
• Voluntary exchange of goods and money.
• Ability to have patents and copyrights.
• Goals
– Full employment=96% of workforce employed
– Productivity
– Division of Labor
Philosophers
• Adam Smith
• wrote Wealth of Nations
• Laissez-faire
• No gov’t control over economy.
• Spend it when ya got it!
• Save when ya don’t
• Economy is guided by the invisible hand and
will fix itself so keep out of it.
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Karl Marx
wrote Communist Manifesto
Class struggle between capitalist and
workers.
Eventually workers revolt and overthrow
capitalist.
Gov’t will control economy and businesses
Redistribute wealth to all.
Philosopher #3
• John Maynard Keynes
• Hands on when necessary.
• During down times gov’t should spend to create jobs even if it causes debt.
• Deficit spending then pay off debt in long run.
• Money given to people in form of tax cuts gets the economy moving.
• FDR uses this to help end the Depression.
• Tools: Taxes and interest rates.
Philosopher #4
 Andrew Mellon
 Sec. of Treasury for Harding, Coolidge, Hoover
 Lower govt. spending
 Balances the budget = no additional debt
 Cut taxes and it will trickle down to the poor
 Rive save, spend, or invest = create jobs
Trickle-Down Economics
• Ronald Reagan
– Supply-side economics-make it and they will buy it; opposite of demand side
• AKA Reaganomics
• Idea that rich should get largest tax cut.
– Spend money on expanding business
– Provides jobs
– Money trickles down to poor.
Supply & Demand
The Law of Demand
 What is Demand?
o The amount of a good or service that consumers are willing and able to buy at a certain price
 What is a demand schedule?
o A chart that shows how much of a product consumers demand at several different prices
 Demand measures how much the consumer will buy at different prices
 Therefore, the law of demand states – as prices increase, demand will decrease
Demand Curve
 What is a Demand Curve?
o A line on a graph showing how much of a product consumers demand at different prices
Law of Demand
• AS PRICES DECREASE (GO DOWN), DEMAND WILL INCRASE (GO UP)
• AS PRICES INCREASE, DEMAND WILL DECREASE
• If many people demand a product, prices will increase, if demand is low, prices will decrease
Types of Demand:
• Elastic Demand = when the price goes up, demand goes down
• Inelastic Demand = when the price goes up, demand stays the same (example: baby formula)
NON-PRICE FACTORS THAT CAUSE DEMAND TO SHIFT
• TASTE (Habits, desires, styles, fads, and advertisement may affect people’s willingness to buy a product
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INCOME (If income is high, people will buy more, if income is low, people will buy less
• Gross Income = is the total amount people make before taxes are taken out
• Net Income or Disposable Income = the
amount people have for spending after taxes have
been take out
FORMULA: PI (PERSONAL INCOME) – PT (PERSONAL TAXES) = DI (DISPOSABLE INCOME)
• Price of related goods
• Substitute good = a good that is used in a place of another (example: margarine can be used in place of
butter)
• Complimentary good = a good that is used with another good (examples: paint and brushes, pancakes &
syrup)
Supply
 What is Supply?
o The amount of an item producers are willing to make at the different prices
 What is a supply schedule?
o A chart that shows how much of a product the producer is willing to make at the different prices
 What is a supply curve?
o A line on a graph showing how much of a product the producer will make at different prices
The Law of Supply
• AS THE PRICE OF A PRODUCT INCREASES, PRODUCERS WILL MAKE MORE OF THE PRODUCT
• AS THE PRICE OF THE PRODUCT DECREASES, THE PRODUCER WILL MAKE LESS OF THE PRODUCT
Supply Curve
NON-PRICE FACTORS THAT CAUSE SUPPLY TO CHANGE
• Production Cost = prices of the factors of production (land, labor, capital) may change
• Technology
A. The use of new knowledge and skills change the methods of production
B. Increases productivity (the amount produced in a given period of time)
C. Lowers production price and allows businesses to offer a larger amount at a lower price
The Law of Supply & Demand
• When supply is Greater than demand, there is a SURPLUS and prices decrease
• When supply is Less than demand, there is a SHORTAGE and price increase
• When supply Equals demand, prices tend to remain the SAME
Factor and Product Markets
• Factor-place where workers earn wages, salaries in exchange for their labor.
• Product-where workers take income and purchase products made by the producer.
• This creates economic interdependence. Our economy depends on the exchange of money between
producers and consumer.
Wages and Salary
• Wages- variable cost
• Salary- fixed cost
• Payroll taxes taken out
– income, Social Security, Medicare
• Disposable income- $ left after you pay taxes
• Discretionary income- $ left after you buy your needs
– Used to buy wants