Chapter 14: Basics of our economic system

CHAPTER 14: BASICS OF OUR

ECONOMIC SYSTEMSocial Science

Circular Flow We are all part of the circular

flow of economic activity by buying items with money that you acquire from working

Businesses continue the circular flow through using the money received from profits and paying for resources and landBusinesses pay rent when using

land, interest when using capital, and wages when using labor

Supply and Demand Markets determine how much of a good will be produced

and the prices of the goods, and these choices are determined by the laws of supply and demand

The law of demand is the amount of a product or service that buyers are willing and able to buy at different pricesWhen deciding whether to buy the item, you balance its cost

with the benefit you will receive from itCan be influenced by price, advertising, styles of fashion, and

the way perceive a certain product The law of supply is the amount of a product that

producers are willing and able to offer at different pricesWhen the a price is high, more producers are willing to supply

more of it, and vice versa

Market Price The laws of supply and demand help

determine the price of a product and the quantity offeredAt higher prices, more of a product will be

supplied, but less will be demanded, and the opposite happens with lower prices

The ideal situation is to make the quantity supplied and the quantity demanded equalThe way to make them equal is through market

price, or the price at which buyers and sellers agree to trade

The Entrepreneur An entrepreneur is a person who

starts a businessEntrepreneurs come up with an idea for a

new product, of producing something, or a better way for providing service

Entrepreneurs raises money for capital in order to start their business

Entrepreneurs either provide their own labor, land, and capital or obtain it from other sources

Being an entrepreneur can be risky, since there is a chance they could lose everything if the business fails, but if they succeed, they will make a profit

How Businesses are Owned

There are three styles an entrepreneur can own his business through: Sole Proprietorship: when a business is owned by an individual

○ Owner has freedom to run their business how they want to and profits belong to them alone, but they also bear the sole responsibility of the business, which can become harder as time goes on

Partnership: when a business is shared by two or more people○ the benefits and risks of a partnership are the same as a sole

proprietorship, but it involves more people Corporation: when a business acts separately from the people who

own it and legally acts as one person○ People can buy ownership, or stock, in the corporation, becoming

stockholders, and the cost of the stock raises money for the corporation○ Corporations can raise lots of money through its stocks and the

stockholders are not responsible for the corporation’s debts, but corporations are more difficult to control

The Rise of Big Business In the beginning, most businesses are

sole proprietorships, and most families were self-sufficient

When new inventions and factories started sprouting up, the prices of goods fell, and people began moving to cities to obtain these goods and work in these factories

By the beginning of the 20th century, large corporations dominated many resourcesMajor reason was that they could produce

and sell products more efficiently and are able to do research on their products

Wage Labor Before big business, many in the United

States were either farmers or skilled craftspeople

Because of the rise of new machinery and industrialization, many craftspeople turned to working at factories for wage labor to make money

Many businessmen took advantage of those who worked in factories because they knew workers had to accept whatever they were givenWorkers were subjected to poor and

dangerous working conditions, along with long hours and poor wages

Rise of Labor Unions Workers realized that the only way they

could get fair treatment is to organize against their employers

Workers began to form labor unions, or organizations of workers that seek to improve wages and working conditions and to protect members’ rights

Many small labor and trade unions sprouted up in the 1880’s, along with two major unions, the Knights of Labor and the American Federation of Labor Goal of large unions was to have employers

to participate in collective bargaining, or a process in which representatives of the unions and business try to reach agreement about wages and working conditions

Weapons from Unions and Businesses

Unions used various weapons and strategies against big businesses Slow-downs: workers would work slower Sit-downs: workers would sit at work Boycott: refuse to buy employer’s products Strike: workers refuse to work

Business also had some strategies up their sleeves Strikebreakers: people hired to come in and work for those who were

on strike Private police: broke up striker gatherings State police and militias Blacklist: employees were put on a list to prevent other businesses

from hiring them Businesses and unions made major agreements by 1920,

reducing daily work hours to 8 and making the workplace safer

Labor Unions since 1930 Congress passed the Wagner Act in 1935,

recognizing labor unions and encouraging them to strike if demands are not met

Other acts, such as the Taft-Harley Act, put limits on union power

The rise of industrial unions caused new unions, such as the Committee of Industrial Organization, to form

The Committee of Industrial Organization and the American Federation of Labor formed the largest union, the AFL-CIO, in 1955

Labor unions were a major force in helping Congress pass bills on social security, wage increases, and unemployment insurance

Labor Unions Today The composition of the labor

force has changed since the beginning of the 20th centuryMany people are working in

service industries rather than labor The decline of manufacturing

industries also a cause of a lesser need for labor unionsHas caused many problems,

especially for employees who are out of a job because of a plant closing or lay-offs