Econ notes part i

Economics Part I

Why Free Market Is BETTER Than The Rest

Focus:

Agenda: Compare/Contrast economic systems

Explain the importance of competition and profit

Analyze types of business Discuss Factors of Production

Economics or The study of the buying and selling of goods/services and the relationship between consumer, business, and government in that process 

Our System at Work How people obtain GOODS and SERVICES is

what distinguishes different economic systems from each other.

• Traditional Economic SystemDecisions based on how economic activity has been done in the past

- Make and grow all they need themselves - Trade or barter for items they can not produce themselves - Examples: Amish, Native Americans

• Command Economy (N. Korea and Cuba)

The government makes all economic decisions

- Gov’t. owns/controls all tools, money, and equipment

- Gov’t manages what, when, where, and how much is produced

Market Economy Decisions made by individuals with their interests being themselves and their families.

- It is a FREE MARKET or they can buy and sell as they please - Free Enterprise means individuals own all of the tools, resources, and are exclusively responsible for businesses’ success/failure.This market is controlled by two main laws. Laws of SUPPLY and laws of DEMAND

Mixed Economy – an economy that mixes elements of different economic systems

- US has essentially a market economy but there are very small elements of a command economy = CAPITALISM OR MIXED ECONOMY is closely linked to market economy – Productive resources are owned by private citizens but it is not completely free.How so? …

Gov. regulation protects consumers, environment, and workersFDA – how restaurants prepare/serve food or EPA – How companies get rid of byproducts and affect the air qualityLimited price control – You can’t sell MILK, CIGARETTES , etc. for less than X # of dollars = FIRST IS TO PROTECT MILK FARMERS AND SECOND IS TO PROTECT HEALTH OF PEOPLE

Supply and Demand- Law of Supply

Business will produce more of a product when they can sell them at higher price

- Law of DemandBuyers will demand/buy or want more when price is lower

Supply =

Demand= EQUALIBRIUM = PRICE and PRODUCTION TO ELIMINATE SURPLUS AND SHORTAGE

QUANTITY

PR

ICE

Households

Businesses

Government

Adam Smith and Circular Flow ModelIn a free-enterprise economy there is an interaction between _BUSINESSES___, _ CONSUMERS____, government, financial institutions, and charities - They can’t abuse their power because they rely on each other to exist

KEYS to Capitalism - Profit and CompetitionCompanies want to maximize profit or __ increase money made after expenses______ (This is essential to free market/free enterprise)

To make a profit companies provides goods or services. To do this, a company must have adequate factors of production (natural resources, capitol, labor).

Resources are limited so companies must compete for both resources and CUSTOMERS_ ___Scarcity_____________ or a lack of something (resources or goods/services) impacts the PRICEd. Competition , is one of the most basic and vital concepts of Free Market/Capitalism

i. keeps prices lowerii. keeps companies trying to improve productsiii. attracts innovators

**** PATENT – exclusive right to make and sell a product

****COPYRIGHT – exclusive right to publish or sell art

_Monopoly or when one company controls the market (only one selling/providing service) are frowned upon because of the need for competition in a free market.

Success Story – Mark Zuckerburg of _FACEBOOK_____________________ was a college student who thought students on different campuses should have better way of communicating.

Make money off of advertising -

Types of BusinessesWhen businesses start up, the first thing that must be decided is how will it be owned?

Sole Proprietorship – Business owned by one person

Advantages - You’re your own _BOSS_, take in all ___PROFIT__Disadvantages – Lose personal wealth if business fails, must pay for help***Can you get some __VENTURE_ capital? Individuals will invest in your company without actually owning a part. If business becomes successful then they may get part of company or $ with interest.

Partnership – Two or more people share responsibilities, costs, etc of business

Advantages – _WORK, IDEAS, MONEY__ comes from more that one, more workers, share ideasDisadvantages – Lose personal wealth if business fails,__DISAGREEMENTS___________ with partners

Corporations – a business recognized as a separate legal entity

NOTE: Privately owned = _SHEETZ__, Publicly traded = _APPLE_

Raise $$$ by selling ___STOCK __ or shares of the company OR sell bondsPays out __DIVIDENEDS_______ or % of profit proportionate to # of shares owned – Doesn’t have to occur if company not profitingStates grant corporations the right to operate but must follow laws.Board of directors elected by the stockholders and board chooses a President and VP of company

OilCoalIron OreSteel Mill

1. Natural Resources – i.e. Does your location enable you to ship your products or deliver your service (Tractor Trailer, Train, Automotive, Car, etc.) or are the resources READILY AVAILABLE

Making Business decisions- Factors of Production

- Capital - $$$ there are many start up costs and then monthly costs that require sometimes large sources of money – Family, Banks, Gov. Grants, Stockholders * Marginal Analysis - The cost associated with one additional unit of production

EX. My business is selling sandwiches. Should I stay open two hours later every day just to sell on average 5 more sandwiches a night at $4.00 a sandwich while employing 2 workers @ $8.00/hr? (Cost vs. Benefit)

- Customer Base – Newly defined because of global economy – EBAY - Labor - Who will work for your company

Too many workers = waste Too few workers = unhappy

customers and unhappy overworked employees

- State of the economy – See below

•ProductionI.Goods are things MADE or MANUFACTURED while services are non physical things consumers ARE PROVIDED OR DONE FOR THEM.

A.Examples of services include: Personal Services – yoga instructor, repair service – mechanical, or other like retail, legal, etc.B.All services vary in degree of training and level of skill needed.

II.GDP or GROSS DOMESTIC PRODUCT the market value of all goods and services produced annually is called Gross Domestic Product

History of Mass Production- Early 1800’s MP occurred by fast flowing rivers and the first industrial revolution was caused by STEAM ENGINE- The 2nd Industrial Revolution occurred in the late 1800’s with help from the internal combustible ENGINE and INTERCHANGEABLE PARTS.

- Greatest impact ever was Henry Ford’s PERFECTION OF ASSEMBLY LINE. Workers are stationary and parts move to the employee. You complete a specific task over and over again but you can be mostly unskilled.

Assessing the economy- Historically the economy has a natural business cycle –

Peak/PROSPERITY, Decline/RECESSION, DEPRESSION, Expansion/RECOVERY

- Economic IndicatorsA.Leading Indicators – make PREDICTIONS about what is to

come1.Building permits, Loan Applications, Interest Rates

B.Coincident Indicators – presently how is economy doing1.Rate of income for individuals, stock market value,

value of dollarC.Lagging indicators – signs that follow changes to business

cycle – Examples. CPI, GDP1.New businesses were started, unemployment rates

(usually takes 2 or 3 months to show up in unemployment records)