Economic Principles Economic Principles _... 1. Economics 2. Economic system 3. Scarcity 4. Trade-off 5. Opportunity cost 6. Marginal cost 7. Factors of production 8. Gross Domestic Product (GDP) 9. Inflation 10. Standard of living 11. Productivity 12. Specialization 13. Division of labor 14. Economic interdependence 15. Market 16. Product market 17. Capitalism 18. Consumer sovereignty 19. Competition 20. Profit motive 21. Voluntary exchange 22. Laissez-faire economics 23. Per capita GDP 24. Socialism 25. Communism Economic Models Economy All activity that affects production, distribution & use of goods & services Economists use economic models to study the economy They study past and present to predict the future Based on assumptions Businesses & government make decisions based on models Economic Principles Economics : Study of how decisions are made when resources are limited. Economics Scarcity: Not enough income, time, and resources to satisfy every desire. Faces individuals, businesses, and countries. Economics must answer the questions of what, how, and whom when dealing with production. SCARCITY IS THE FUNDAMENTAL ECONOMIC PROBLEM Because of Scarcity we must answer 3 questions in economics What to Produce? How to Produce? Whom to produce for? Which of the following best describes scarcity? A. Not enough goods for everyone B. Not enough resources to provide every desire C. Lack of desire to produce enough resources D. The amount that people want What is the fundamental economic problem? 1. Money 2. Time 3. Scarcity 4. Economics All of the following are questions we must ask because of scarcity except: 1. When to produce? 2. How to produce? 3. What to produce? 4. Whom to produce for? Goods and Services Good : Anything manufactured. Service : Something people do for others. Needs and Wants Need : Basic item for survival. Want : Anything including and beyond needs. Factors of Production 1. Capital 2. Land and Natural Resources 3. Labor 4. Entrepreneurship or management Capital Capital goods : All tools, buildings, and machinery businesses use to make goods and provide services. Same as Resources Land and Natural Resources All land used for the business. Natural resources are things that come form the earth such as water and minerals. All energy is considered a natural resource. Labor Hired workers to help in production. Labor earns money, which they use to buy other goods and services. Division of Labor : Separating a big job into smaller jobs. Each person is responsible for doing one job. (Assembly line). Entrepreneurship Entrepreneurs are people willing to take risks in business. Plan and supervise production. Decision makers. With a neighbor, list the land, labor, capital, and entrepreneur that went into making each of the following (you can list more than one item for each) Your shoes iPod Dominos pepperoni pizza Trade-off and Opportunity Cost Scarcity forces people to make choices. Trade-off : Decision that must be made when choosing between items. Opportunity cost : Value of the next best alternative that was given up when a choice was made. Involves time or money. When choosing to do something, you lose. You lose the ability(opportunity) to do something else. ____________________________________________ Production Possibilities : The combinations of goods and services that can be produced from a fixed amount of resources. What was the opportunity cost of passing the Health Care Bill? A. More people will have health care coverage. B. Grandparents will be put to sleep because of Death Panels. C. Obama will become the Devil and the Four Horseman will arrive. D. The government will have less money to spend on other services like the military. Business Costs Fixed Costs Expense is the same no matter how much is produced Example - Rent Variable Costs Expenses that change with number of items produced. Fixed Costs + Variable Costs = Total Cost Marginal Cost extra cost of producing one additional unit of output Marginal Benefit /Revenue additional benefit after all costs are accounted for producing one more unit Cost Benefit Analysis economic model used to compare marginal costs & benefits of a decision Considerations for Businesses PProductivity - MMeasure of the amount of output produced by a given amount of inputs in a specific period of time. In other words How resources are being used efficiently to produce goods and services. SSpecialization TTakes place when people, businesses, regions & countries concentrate on goods or services that they can produce better than anyone else EExamples China and electronics HHuman Capital SSum of the skills, abilities & motivations of people HHow would businesses and employees benefit from this? Productivity Goes up when more output can be produced when scarce resources are used efficiently Requires labor and human capital Increases when businesses invest in human capital Increases with specialization What is an example of a fixed cost of doing business? 1. Wages 2. Cost of fuel 3. Price of materials 4. Rent on a building Warm up Economic systems Gross Domestic Product (GDP) Measure of an economys size & success (monetary measure - $17.42 trillion 2014 est. #1) Total value of all the final goods & services produced in a country during a single year Used cars not counted in GDP because second hand sales are not counted Used to measure standard of living (quality of life based on the possession of necessities and luxuries that make life easier) in a country Measures quantity not quality Gross Domestic Product (GDP) cont. Per Capita GDP total GDP divided by the countrys population U.S. was $54, est. #1919 Compared yearly to check growth of country Higher GDP from previous year = growing economy Lower GDP from previous year = shrinking economy Economic Systems Three major types: Traditional Command Market The distinguishing factors are the role of government in the economy and the decision making for production. Traditional Economy Economic decisions are made by customs handed down through generations. Hunting, farming, and gathering. No technology. Activities center around the family. Men and women have defined social roles. Found in rural, non-industrialized areas. (Africa, S. America, Asia) Traditional Economies Command Economy Government makes all economic decisions. (China, N. Korea, Vietnam, Cuba, and the former Soviet Union). Advantages: The Govt. can set prices of goods. Set low prices for consumers and give help to factories. Disadvantages No competition. Factories are poorly run and shortages are common. No individual freedoms. Command Economies Former Soviet Union Command Economies North Korea Video Slideshow Command Economies - Cuba Market Economy Decisions are made by the principles of supply and demand. People buy, sell, and produce what ever they want. People can work where they want. Individual freedoms Capitalism : Private citizens own most means of production land, labor, capital & entrepreneurship to make a profit. Free Enterprise : Freedom of businesses to compete for profit without govt. interference. 7 Characteristics of a Market Economy 1. Markets exchanges here determine prices of goods & services. Its the free and willing exchange of goods and services between buyers and sellers. 2. Consumer Sovereignty the consumer is king of the market They are the ones who determine what products will be produced It exists only in Market based economies 3. Economic freedom freedom of choice with consequences Example an entrepreneur starts a business and it fails. The govt usually will not help out. 4. Private Property Rights the freedom to own, use, or dispose of our own property as long as it doesnt interfere with the rights of others. 5. Competition struggle between buyers and sellers to get the best products and the lowest prices. Capitalism thrives on competition Rewards the most efficient producers 6.Profit Motive the driving force that encourages individuals and organizations to improve their material well- being. Purpose is to raise the standard of living It is the reason for growth in a market system 7. Voluntary Exchange act of buyers and sellers freely and willingly engaging in market transactions Both buyers & sellers must feel a benefit Mixed Economy Any combination of Economic systems. The United States is a mixed economy because capitalism and free enterprise exist with government regulations. The U.S. govt. provides services such as highways, postal system, and transportation. Some government regulation. At certain times, govt. can take control of the means of production. Activity On the paper provided, NEATLY create a 4 square of the types of economies we just discussed Command, Traditional, Market, and Mixed. Be sure to include several characteristics, examples, and pictures. These will be hung up and people should be able to easily understand the differences in each of the economies. Warm up 1. Economic system where the government makes all of the economic decisions? 2. Economic system that is a combination of command and market economies? 3. Total dollar value of all final goods and services produced in a country during a single year? 4. Consumers are king of the market because they decide what produces will be produced? 5. Characteristic of a market economy that describes the struggle between buyers and sellers to get the best products and the lowest prices? 6. This is based on private ownership of the means of production and can decide how to use them to use them to make a profit? Capitalism & Free Enterprise The U.S. economy is built on a market economy, but government still plays a role Free Enterprise minimum govt interference Capitalism private citizens own and use factors of production (land, labor, capital, & entrepreneurship) to make a profit. The Drawbacks of capitalism The Rise of Capitalism 2 concepts developed People work for economic gain Government should have a limited role 1200s C.E. trade routes opened between Europe & the East Silk Roads, Marco Polo Throughout hundreds of years trade increased Development of ideas of wealth Adam Smith Scottish Economist Wealth of Nations Basic Principles of Economics Individuals who seek profit benefit all of society Laissez-Faire to leave alone The government should not interfere in the market Governments only role should be to ensure free competition Adam Smith and The Wealth of Nations Socialism Socialism belief that the means of production should be owned & controlled by society either directly or through the govt Karl Marx Wrote The Communist Manifesto Socialist believed industrialized nations divided into bourgeoisie (entrepreneurs) & proletariat (workers) Predicted revolution of the proletariat Transitioning Economies Former Soviet Union & the Soviet BlocSoviet Union Inefficiency of command economies led to no or very small growth Transition of this type of economy led to transition from Communism to Democracies Why would a transition be hard?