CE.11 The student will demonstrate knowledge of how economic decisions are made in the marketplace by

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Clare Roxanne Dawson
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1 Objectives CE.11 The student will demonstrate knowledge of how economic decisions are made in the marketplace by a) applying the concepts of scarcity, resources, choice, opportunity cost, price, incentives, supply and demand, production, and consumption; b) comparing the differences among traditional, free market, command, and mixed economies; c) describing the characteristics of the United States economy, including limited government, private property, profit, and competition.

2 CE 11a (p. 1) A. People make choices about how to use LIMITED RESOURCES, decide the ownership of RESOURCES, and structure markets for the distribution of GOODS AND SERVICES. B. SCARCITY there is never enough to match the total of what everyone wants! Scarcity forces everyone to make choices about everything from groceries, houses, and gasoline to the luxury items we purchase.

3 CE 11a (p. 2) C. RESOURCES - are factors of production that are used in the production of goods and services. Types of resources are: 1. NATURAL - the renewable and nonrenewable gifts of nature like land, water, animals, minerals, trees, climate, soil, fire, seeds, grain and fruits. 2. HUMAN - the knowledge, skills and abilities possessed by people. LABOR, WORKERS 3. CAPITAL tools and equipment like factories, warehouses, roads, bridges, machinery, ports, dams, and tools; also called capital goods. (Investment money is also a capital resource.) 4. ENTREPRENEURSHIP person who has the ideas for new businesses - INNOVATION

4 CE 11a (p. 4) D. CHOICE - is selecting an item or action from a set of possible alternatives. Individuals must choose/make decisions about desired goods and services because these goods and services are limited. E. OPPORTUNITY COST - is what is given up when a CHOICE is made - the highest valued alternative is forgone (in the past). Individuals must consider the value of what is given up when making a choice.

5 CE 11a (p. 5) 1. Example: If you decide your best choice is attending college to increase your future earning power, the opportunity cost is the value to you of the JOB you could take instead during those same years. That would probably include not only the EXPERIENCE, but the EARNINGS you would gain in the job during those years. 2. Before making any decision, it is important to consider the opportunity cost.

6 CE 11a (p. 4) D. CHOICE - is selecting an item or action from a set of possible alternatives. Individuals must choose/make decisions about desired goods and services because these goods and services are limited. E. OPPORTUNITY COST - is what is given up when a CHOICE is made - the highest valued alternative is forgone (in the past). Individuals must consider the value of what is given up when making a choice.

7 CE 11a (p. 5) 1. Example: If you decide your best choice is attending college to increase your future earning power, the opportunity cost is the value to you of the JOB you could take instead during those same years. That would probably include not only the EXPERIENCE, but the EARNINGS you would gain in the job during those years. 2. Before making any decision, it is important to consider the opportunity cost.

8 CE 11a (p. 3) F. PRICE is the amount of money exchanged for a good or service. Interaction of supply and demand determines PRICE. Price determines who acquires goods and services.

9 CE 11a (p. 4) G. INCENTIVES are things that incite or motivate. Incentives are used to change economic behavior. 1. DISCOUNTS are incentives to encourage people to shop and spend money at businesses. 2. COMPETITION are an incentive for businesses to make better products. 3. BONUSES motivate employees to do their best. 4. SCHOLARSHIPS encourage students to study and get good grades.

10 CE 11a (p. 5) H. SUPPLY AND DEMAND Interaction of supply and demand determines price. 1. SUPPLY is the amount of a good or service that PRODUCERS are willing and able to PRODUCE/MAKE at a certain price. 2. DEMAND is the amount of a good or service that CONSUMERS are willing and able to CONSUME/PURCHASE at a certain price.

11 CE 11a (p. 6) I. PRODUCTION is the combining of human, natural, capital, and entrepreneurship resources to make goods or provide services. Resources available and consumer preferences determine what is produced. J. CONSUMPTION is using goods and services. Consumer preferences and price determine what is purchased.

12 CE 11b (p. 1) A. Every country must develop an economic system to determine how to use its LIMITED RESCOURCES resources. B. The key factor in determining the type of economy a country has is the extent of GOVERNMENT involvement. C. The three basic questions of economics 1. What will be produced? 2. WHO will produce it? 3. FOR WHOM will it be produced? Each type of economy answers the three basic questions differently.

13 CE 11b (p. 2) 1. TRADITIONAL economy a) Economic decisions are based on what was done in the PAST (custom and historical precedent). b) People often perform the same type of work as their PARENTS and grandparents, regardless of ability or potential.

14 CE 11b (p. 3) FREE-MARKET 2. economy PERSONAL OWNERSHIP a) - people own and control their own personal/business property and land property/resources PROFIT b) - businesses base most decisions on what will create the largest profit COMPETITION c) when sellers try to attract buyers away from other sellers by producing better products at lower prices CONSUMER SOVEREIGNTY d) businesses make and sell what customers want and are willing to buy INDIVIDUAL CHOICE e) people have the freedom to make their own economic choices MINIMAL GOVERNMENT f) involvement in the economy

15 CE 11b (p. 4) 3. Command economy a) CENTRAL OWNERSHIP (usually by government) of property/resources b) c) i. Farms ii. Natural resources iii. Businesses CENTRAL PLANNED i. CENTRAL GOVERNMENT sets prices ii. CENTRAL GOVERNMENT decides what gets produced iii. CENTRAL GOVERNMENT decides who to sell products to LACK OF CONSUMER CHOICE

16 CE 11b (p. 5) 4. MIXED ECONOMY a. Individuals and businesses are owners and decision makers for the PRIVATE sector. b. Government is owner and decision maker for the PUBLIC sector. c. Government s role is greater than in a free market economy and less than in a command economy. d. MOST ECONOMIES TODAY, including the United States, are mixed economies.

17 CE 11b (p. 6) More Command Private Sector Public Sector More Free Market

18 11c (p. 1) MIXED ECONOMY the U.S. is primarily a free market economy, but because there is some government involvement it is characterized as a mixed economy. MARKETS markets are generally allowed to operate without undue interference from the government. Prices are determined by supply and demand as buyers and sellers interact in the marketplace. GOVERNMENT INTERVENTION government intervenes in a market economy when the perceived benefits of a government policy outweigh the anticipated costs. Private property: Individuals and businesses have the right to own real and personal property as well as the means of production without undue interference from the government.

19 11c (p. 2) Profit: Profit consists of earnings after all expenses have been paid (all income minus all expenses). Competition: Rivalry between producers and/or between sellers of a good or service usually results in better quality goods and services at lower prices. Consumer sovereignty: Consumers determine through purchases what goods and services will be produced. Government involvement in the economy is limited. Most decisions regarding the production of goods and services are made in the private sector.

20 CE12 Objectives CE.12 The student will demonstrate knowledge of the structure and operation of the United States economy by a) describing the types of business organizations and the role of entrepreneurship; b) explaining the circular flow that shows how consumers (households), businesses (producers), and markets interact; c) explaining how financial institutions channel funds from savers to borrowers; d) examining the relationship of Virginia and the United States to the global economy, with emphasis on the impact of technological innovations.

21 12a Businesses A. There are three basic ways that businesses organize to earn profits. The three basic business types are: 1.PROPRIETORSHIP one owner a. The owner the proprietor takes all the RISK and gets all the PROFIT. b. The owner is personally LIABLE (responsible) for any DEBT/LOSSES the business has. 2. PARTNERSHIP two or more owners a. The partners all share the RISK and share the PROFIT. b. Each partner is personally LIABLE for any DEBT/LOSSES the business has. 3. CORPORATION usually has many owners a. The owners of a corporation are its STOCKHOLDERS. b. The stockholders share the PROFITS. Under law, however, a corporation has a separate legal IDENTITY from the owners. So the stockholders liability (risk) is LIMITED to their individual INVESTMENT. They are not personally liable for the debts of the company. B. Entrepreneurs play an important role in all three types of business organizations. 1. ENTREPRENEUR - A person who takes a risk to produce and sell goods and services in search of a profit. 2. An entrepreneur may establish a business according to THREE types of organizational structures.

12b Economic Flow Resources, goods and services, and money flow continuously among households, businesses, and markets in the United States economy.

22 12b Economic Flow Resources, goods and services, and money flow continuously among households, businesses, and markets in the United States economy. Businesses (producers) buy resources; make products that are sold to individuals, other businesses, and the government; and use the profits to buy more resources. Individuals (households) own the resources used in production, sell the resources, and use the income to purchase products.

23 CIRCULAR FLOW

24 12b Notes A. Resources, goods and services, and money FLOW among households, businesses, and markets in the U.S. economy. B. Individual and business that SAVINGS AND INVESTMENTS can be borrowed for business expansion and increased consumption. C. (households) 1. OWN the resources used in production 2. SELL the resources 3. USE the income to purchase products D. (producers) 1. BUY resources 2. MAKE products that are sold to individuals, other businesses, and the government 3. use the profits to BUY more resources E. GOVERNMENT 1. use TAX revenue from individuals and businesses to provide PUBLIC goods and services

25 12c Financial Institutions Private financial institutions act as intermediaries between savers and borrowers that include households and business investors. Most common types of private financial institutions: BANKS 1. offer a full range of saving and checking accounts, and make loans 2. SAVINGS AND LOAN most offer general banking services MEMBERS 3. CREDIT UNION a type of bank open only to of the sponsoring group. They are often set up by large companies for their employees to use. C. Private financial institutions receive DEPOSITS and make LOANS. D. Private financial institutions encourage saving and investing by paying INTEREST on deposits.

26 12d Glogal Economy A. Virginia and the United States pursue international trade in order to INCREASE WEALTH. B. GLOBAL MARKET = worldwide markets in which the buying and selling of goods and services by all nations takes place C. Reasons That States and Nations Trade: 1. To obtain goods and services they cannot PRODUCE or cannot produce efficiently themselves LOWER COST 2. To buy goods and services at a or lower opportunity cost 3. To SELL goods and services to other countries 4. To CREATE JOBS

27 12d- Technology D. Virginia and the United States SPECIALIZE in the production of certain goods and services, which promotes EFFICIENCIES and. GROWTH E. Impact of Technological Innovations: Internet 1. Innovations in technology (like the ) contribute to the global flow of information, capital, goods, and services. 2. The use of such technology also LOWERS the cost of PRODUCTION.

28 13a Competition A. Ways the Government Promotes Marketplace Competition: 1. Enforcing ANTITRUST legislation to discourage the development of monopolies a. MONOPOLY = one business controls all or almost all of the sales of a product. In most cases monopolies are illegal, because without COMPETITION, the business has an unfair advantage over buyers. In certain cases, such as electric services or cable TV, monopolies may be allowed with government regulations of prices. b. Examples of Antitrust Legislation: i. Sherman Antitrust Act of 1890 ii. The Clayton Act of Engaging in global trade 3. Supporting business start-ups a. SBA The Small Business Administration b. Giving SUPPORT AND TRAINING c. Offering LOW INTEREST LOANS

29 13a REGULATION B. Government Agencies that Regulate Business and Oversee the Way Individuals and Companies Do Business: 1. FTC FEDERAL TRADE COMMISSION a. investigates unfair business practices b. investigates cases of undue restrictions on markets 2. EPA ENVIRONMENTAL PROTECTION AGENCY a. sets rules to protect the environment b. regulates ground water contamination and air pollution 3. FCC FEDERAL COMMUNICATION COMMISSION a. regulates radio and TV broadcasting b. TV and movie ratings c. Labeling of music lyrics

30 13b Public Goods A. Characteristics of Most Goods and Services Provided by the Government: 1. Provide benefits to many SIMULTANEOUSLY (at the same time) 2. Would not likely be available if INDIVIDUALS had to provide them 3. Examples of public goods and services: a. public TRANSPORTATION b. public EDUCATION c. POLICE d. Interstate HIGHWAYS e. POSTAL service f. national DEFENSE (military)

31 13b GOVERNMENT Ways Governments Pay for Public Goods and Services: 1. Through TAX REVENUE a. SALES TAX: state and local government collected on the sale of most items sold in stores. b. PROPERTY TAX: local government collected each year on land, houses, and other buildings. It is based on the value of the land and buildings. c. CAR TAX: local government collected each year on cars and other vehicles. The tax is a percentage of the value of the vehicle. d. INCOME TAX: federal and state government automatically taken out of each pay check. In April, tax forms are filed with calculations that show a person s total income and tax for the previous year. They may find that they owe a bit more or that they are owed a refund. 2. Through BORROWED funds 3. Through FEES like park entrance fees

32 13c Taxation A. The government taxes, borrows, and spends to influence economic activity. B. If the Government: 1. Raises taxes there will be LESS money for individuals and businesses to spend. 2. Lowers taxes there will be MORE money for individuals and businesses to spend. 3. Borrows more money LESS money will be available for individuals and businesses to borrow. 4. Borrows less money MORE money will be available for individuals and businesses to borrow. 5

33 13c spending 5. Spends more money a. Demand will INCREASE, which may INCREASE employment and production. b. May result in HIGHER taxes. 6. Spends less money a. Demand will DECREASE, which may result in a SLOWING of the economy. b. May result in LOWER taxes. C. The 16th Amendment to the Constitution of the United States of America authorizes Congress to tax personal and business incomes.

34 13d FEDERAL RESERVE A. The Federal Reserve System is our nation s CENTRAL BANK. B. The Federal Reserve System acts as the FEDERAL government s bank. C. The Federal Reserve System has the duty to maintain the VALUE of the national currency (dollar). D. The Federal Reserve System regulates banks to ensure the soundness of the banking system and the SAFETY of deposits.

35 13d FED E. The Federal Reserve System manages the AMOUNT of money in the economy to try to keep inflation LOW and STABLE. 1. If too MUCH money is circulating, the value of money will start to DECLINE. 2. When the value of money DECLINES, prices start RISE. That is called INFLATION.

36 13e Consumer rights A. The U.S. government passes laws and creates agencies to protect CONSUMER rights and PROPERTY rights. B. Individuals have the right of PRIVATE OWNERSHIP. 1. Consumers are protected by negotiated CONTRACTS and LAWS. 2. The FEDERAL AGENCIES enforce consumer contracts and laws.

37 13e Health and Safety C. Government agencies establish guidelines that protect public HEALTH and SAFETY. 1. Consumer Product Safety Commission 2. Food and Drug Administration (FDA) 3. National Highway Traffic Safety Administration D. Consumers may take LEGAL against violations of consumer rights.

38 13f Money A. MONEY is defined as anything that is generally accepted as a method of payment. B. When the U.S. government issues CURRENCY and COINS, people accept it in exchange for goods and services because they have CONFIDENCE in the government. C. Governments everywhere issue money to make such exchanges EASIER and SAFER to accomplish.

39 13f types of money D. In the U.S. the three types of money are: 1. COINS 2. Federal Reserve NOTES (the technical term for U.S. paper currency) 3. DEPOSITS in bank accounts that can be accessed by: a. CHECKS b. DEBIT CARDS

Things people like and desire.

1 Wants 1 Things people like and desire. 2 Needs 2 Things you must have to live. 3 Scarcity 3 When there is not enough for all who want it. 4 Choice 4 To make a decision. 5 Goods 5 Things that can satisfy