Economics Unit 2. The United States Economic System

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1 Economics Unit 2 The United States Economic System

2 Demand

3 Objective 2.01: Illustrate how supply and demand affects prices. What is Demand? Demand: The desire, willingness, and ability to buy a good or service For demand to exist a consumer must 1. want a good or service 2. willing to pay for it 3. Resources available to buy it Individual demand schedule A table that list the various quantities of a product or service that someone is willing to buy over a range of

4 What is My favorite type of candy? I Likes Sprees, Sooo... Price Quantity $ $ $ $ $ Demand Curve

5 Objective 2.01: Illustrate how supply and demand affects prices. What is Demand? Individual Demand curve A graph that shows the amount of a product that would be bought at all possible prices in the market The Law of Demand Quantity demanded and price move in opposite directions Lower price = more things bought Individual vs. Market Demand Market Demand The total demand of all consumers for their product or service Market demand can also be shown as a demand schedule or demand curve

6 Objective 2.01: Illustrate how supply and demand affects prices. What is Demand? Understanding demand is an important tool to understanding our market Diminishing Marginal Utility Utility The pleasure, usefulness, or satisfaction we get from using the product Diminishing marginal utility The principle that our additional satisfaction (marginal utility) tends to go down as more and more units are consumed

7 Objective 2.01: Illustrate how supply and demand affects prices. Changes in Demand Demand is constantly moving up and down As demand goes down people are willing to buy fewer items at all possible prices: curve shifts left As demand goes up people are willing to buy more of the same item at higher prices: curve shifts right Changes in the # of consumers As consumers increase = More demand As consumers decrease = Less demand Changes in consumers income Healthy economy = better pay or better job = more spending

8 Change in Demand Market Demand Curve D2 Increase in Demand D1 D3 $1.0 0 Pric e Decrease in Demand Quantity Demanded

9 Objective 2.01: Illustrate how supply and demand affects prices. Changes in Demand Changes in Consumers Tastes When an item becomes popular, more people buy it (holiday season) When an item fades in popularity, less people buy it Changes in consumers Expectations The way people think about the future If a newer bigger and better product is coming out, consumers may wait to buy it instead of what on the shelf now. Blue Ray vs. HD DVD

10 Objective 2.01: Illustrate how supply and demand affects prices. Changes in Demand Prices of Related Goods Changes in substitutes Using one product in place of another The demand for one brand of tire may increase if another has safety issues Changes in Complements Products that are used together I tunes would not be needed without an Ipod

11 Objective 2.01: Illustrate how supply and demand affects prices. Changes in Demand Elasticity of Demand Law of demand states price goes up demand goes down and vice versa The price of a product does not necessarily mean supply would go down Each product is affected differently Demand elasticity: the extent to which a change in price causes a change in the quantity Elastic Demand The change in price causes a relatively larger percentage change

12 Objective 2.01: Illustrate how supply and demand affects prices. Changes in Demand Inelastic Demand Price changes have little effect on demand Certain product who have no substitutes Pepper Electricity How to Remember the Factors affecting Demand RIBBET minus the extra B = RIBET

13 Supply

14 Objective 2.01: Illustrate how supply and demand affects prices. What is Supply? Supply The various quantities of a good or service that producers are willing to sell at all possible market supplies The Law of Supply The principle that suppliers will normally offer more for sale at higher prices and less at lower prices The higher the price of a good, the greater the incentive is for a producer to produce more Supply schedule A numerical chart that illustrates the law of supply

15 How much will I work? Time is important to me sooo... Pay per hour Supply Curve Quantity of labor supplied per week $ $ $ $ $ $ $

16 Objective 2.01: Illustrate how supply and demand affects prices. What is Supply? Individual Supply Curve A graph showing the amount of a product that would be supplied at all possible prices in the market Unlike the demand curve the supply curve slopes upward The Profit Motive Business try and set prices at a price they will make profit Money is primary goal: Wal-Mart = low prices = you keep coming back to spend more money

17 Objective 2.01: Illustrate how supply and demand affects prices. What is Supply? Market Supply Graphing Market Supply: combining all the supply schedules of businesses, the total is the market supply An upward slope The market supply curve is the same as the individual slope The influence of price The most significant influencing factor on a supply curve is price of a product

18 Objective 2.01: Illustrate how supply and demand affects prices. Changes in supply Supply can increase or decrease because of other factors just like demand Changes in the cost of resources Cost of resources go up, it becomes more expensive to produce a product Supply curve shifts to the left Cost of resources go down, it becomes cheaper to produce a product Supply curve shifts to the right

19 Change in Supply Market Supply Curve Decrease in Supply $ S 2 S 1 S 3 Pric e Increase in Supply Quantity Supplied

20 Objective 2.01: Illustrate how supply and demand affects prices. Changes in Supply Productivity The degree in which resources are being used efficiently Most news you hear concerns labor When workers produce products faster, a company s costs go down: shifts supply curve to the right When workers produce products slower, a company s costs go up: shifts supply curve to the left Technology the methods or processes used to make goods and services Can cut a businesses cost

21 Objective 2.01: Illustrate how supply and demand affects prices. Changes in Supply Changes in government policies Govt. passing laws to restrict or help production Higher minimum wage New safety features Air bags Increased or tighter govt. control cause supply to decrease Shifts curve to the left Decreased or loose govt. control cause supply to increase

22 Objective 2.01: Illustrate how supply and demand affects prices. Changes in Supply Changes in Taxes and Subsidies Taxes are a cost to businesses Higher taxes mean higher production cost Left Supply curve shifts to the Lower taxes mean lower production cost Right Supply curve shifts to the Subsidy A govt. payment to an individual, business, or other group for certain actions Right Higher subsidy means supply curve shifts Left Lower subsidy means supply curve shifts

23 Objective 2.01: Illustrate how supply and demand affects prices. Changes in Supply Expectations Business demand in the future may increase or decrease production moving the supply curve Elasticity of Supply A measure of how the quantity supplied of a good or service changes in response to changes in price If prices change a great deal and supply follows The product is supply elastic (candy), if it does not the product is supply inelastic (oil)

24 Objective 2.01: Illustrate how supply and demand affects prices. Supply and Demand at work What is a market? Markets bring buyers and sellers together The forces of Supply and Demand work together in markets to establish prices Prices form the basis of our economy To understand how supply and demand work together, we combine the curves

25 Objective 2.01: Illustrate how supply and demand affects prices. Pug Sweaters for Sale Supp ly Surplus Shortage Dema nd

26 Objective 2.02: Predict how prices change when there is either a shortage or surplus Supply and Demand at work Surplus: the amount by which the quantity supplied is higher than the quantity demanded Signals price is to high Consumers are unwilling to pay the price in large enough numbers to satisfy producers Shortage: the amount by which the quantity demanded is higher than the quantity supplied Signals price is to low Suppliers are unwilling to sell their goods or services in large enough numbers to meet all the demand

27 Objective 2.01: Illustrate how supply and demand affects prices. Surplus Shortage

28 Objective 2.02: Predict how prices change when there is either a shortage or surplus Supply and Demand at work Market Forces One benefit of a Market Economy is that it eliminates surpluses and shortages when it operates without restrictions Overtime surplus forces price down Overtime shortage forces price up Equilibrium/Market Price At this price there is neither a shortage or surplus (will move as supply or demand moves)

29 Objective 2.02: Predict how prices change when there is either a shortage or surplus Supply and Demand at work Price Controls Sometimes the govt. fixes the forces of supply and demand because they feel they may be unfair Price ceiling or Price floor Prices as Signals Prices help consumers and businesses make decisions What, How, and for Whom to produce Video games are produced as long as people will buy them

30 Objective 2.02: Predict how prices change when there is either a shortage or surplus Supply and Demand at work Advantages of Prices Consumers look for the best price and producers are searching for the most money (without price it would not run as smooth) Prices are neutral Prices favor neither the consumer nor the producer Price represents a compromise Prices are flexible Effects on price makes it fluctuate Prices offer freedom and choice Prices are familiar

31 Business and Labor

32 Objective 2.04: Identify and describe the roles and functions of various economic institutions and business organizations Types of Business Proprietorships Sole proprietorship A business owned and operated by a single person Pizza parlors and beauty salons Advantages Owner receives full ownership and all profits, also makes quick decisions without consulting anyone

33 Objective 2.04: Identify and describe the roles and functions of various economic institutions and business organizations Types of Business Disadvantages The owner is financially responsible for any and all problems Unlimited liability Financial capital Most proprietors use their own capital Attracting qualified employees Partnerships: a business owned by two or more people Structure: draw up legal agreement called articles of partnership

34 Objective 2.04: Identify and describe the roles and functions of various economic institutions and business organizations Types of Business Advantages Multiple owners, raise more money, division of labor Disadvantages The legal structure is complex Partner added or removed, means new legal paperwork Unlimited liability still exist Corporations: a business recognized by law that has many of the rights and responsibilities of an individual Own property, pay taxes, and sue or be sued

35 Objective 2.04: Identify and describe the roles and functions of various economic institutions and business organizations Types of Business Need a charter to start Government document granting permission to organize (name, purpose, address, and other features) How much stock will be issued (stockholders) Elect board of directors (acts on the behalf of the stockholders) Hire managers to run the company Advantages The ease of raising financial capital (stock) Can grow to be large Board of directors can get good employees Ownership can easily be transferred Limited liability

36 Objective 2.04: Identify and describe the roles and functions of various economic institutions and business organizations Owners (Stockholders) elect the Board of Directors who select the President who hires Vice President of Sales Domestic International Vice President of Production Quality Control Research & Development Vice President of Finance Payroll

37 Objective 2.04: Identify and describe the roles and functions of various economic institutions and business organizations Types of Business Disadvantages Expensive and complex to set up Business owners have very little say Lots of government regulations Double taxation Pay tax on profits and then money distributed to shareholders have to pay income tax Other Business Organizations Non profit Churches, Food Bank, and hospitals Cooperative Voluntary association of people formed to carry on some kind of economic activity that serves to benefit its members

38 Objective 2.04: Identify and describe the roles and functions of various economic institutions and business organizations Organized Labor Types of Unions Craft or Trade unions Workers who perform the same skill Industrial Union Workers who may conduct different tasks How Unions are Organized Local Members of a union in a factory, company, or geographic area

39 Objective 2.04: Identify and describe the roles and functions of various economic institutions and business organizations The American Labor Force The individual craft or industrial unions that represent local unions nationwide Send organizers to help set up local unions Negotiate contracts Provide lawyers and other staff Largest unions UAW and USWA International National unions that also have members in Canada or Mexico

40 Objective 2.04: Identify and describe the roles and functions of various economic institutions and business organizations The American Labor Force Union Arrangements Closed shops (must belong to union to work) Union shop (can hire non union workers but must join the union) Right to Work states (prevents unions from forcing workers to join) Modified Union shop (can choose to join the union or not) Negotiations Collective bargaining Officials from the union and from the company meet

41 Objective 2.04: Identify and describe the roles and functions of various economic institutions and business organizations The American Labor Force Mediation 3rd party helps reach an agreement Arbitration 3rd party listens to both sides and then decides how to settle the disagreement Labor-Management Conflict Strike: no one working Lockout: management keep workers out

42 Objective 2.04: Identify and describe the roles and functions of various economic institutions and business organizations The Role of Government The main goal of the government is to encourage competition monopoly: exclusive control of a good or service oligopoly: market condition where a few sellers greatly affect price Mergers: combine two companies government checks to make sure a monopoly will not exist Horizontal vs. Vertical integration