Econ

Business cycles

•       Fluctuations in a market system’s economic activity – measured by real GDP

•       Expansion, peal, contraction, and trough

Importance of the economic growth

•       Increasing the Standard of Living

•       Competing in the Global Market

•       Domestic Resources

Increasing productivity

•       Technological Advances

•       New ideas, methods, and tools increase efficiency and output and often lower costs

•       Capital Deepening

•       Capital-to-Labor Ratio  amount of capital stock available per worker

•       Educated and Skilled Labor Force

Economic challenges

•       Unemployment

•       Inflation

•       Poverty & Income Distribution

Unemployment

•       Individuals ages 16 and older are classified as employed if they…

•       Worked for pay or profit one or more hours

•       Worked without pay in a family business 15 hours or more

•       Have jobs but did not work as a result of illness , weather, vacations, or labor disputes

•       Unemployment Rate

•       Does not indicate the differences in intensity with which people look for jobs

•       Conditions for being included exclude some individuals who most people would think of as unemployed

•       Underemployment

Types of unemployment

•       Frictional: when workers are moving from one job to another

•       Structural: occurs as a result of changes in technology or in the way the economy is structured

•       Seasonal: fluctuations in employment based on seasons (agricultural, retail)

•       Cyclical: resulting from recessions and economic downturns

Price fluctuations and price level

•       Aggregate Level: total amount of gods and services produced throughout the economy

•       Aggregate Demand: total amount of spending by individuals and businesses throughout the economy

•       Inflation: increase in the average price level of all products in an economy

•       Deflation: decrease in the average price level of all goods and services in an economy

Measuring Inflation

•       Consumer Price Index

•       A measure of average change overtime in the price of a fixed group of products

•       Producer Price Index

•       A measure of the average change over time in the prices of goods and services bought by producers

Effects of inflation

•       Purchasing Power of the Dollar

•       Value of Real Wages

•       Interest Rates

•       Saving & Investing

•       Production Costs

Demand

•       Demand: the amount of a good or service that a consumer is willing and able to buy at various possible prices during given time period

•       Consumer must be willing and able to buy the good or service

•       Demand must be examined in a particular time period

•       Quantity Demanded: describes the amount of a good service that a consumer is willing and able to buy at each particular price during a given time period

Law of demand

•       An increase in a good’s price cause a decrease in the quantity demanded and that a decrease in a good’s price cause an increase in the quantity demanded

•       This creates a NEGATIVE relationship between Demand and Price

•       Income Effect

•       Purchasing Power: the amount of money, or income, that people have available to spend on goods and services

•       As purchasing power increases, demand increases – you have more money to spend

•       Substitution Effect

•       Tendency of consumers to substitute a similar, lower-priced product for another product that is relatively more expensive

•       Diminishing Marginal Utility

•       Utility: describes the usefulness of a product, or the amount of satisfaction that an individual receives from consuming a product

•       Diminishing marginal utility describes the decline of satisfaction overtime with each additional unit of product

Demand schedules and curves

•       Demand Schedule: lists the quantity of goods that consumers are willing and able to buy at a series of possible prices

•       Demand Curves simply plot demand schedules on a graph

Demand shifts

•       Markets do not stand still – even though a Demand curve will show only one snapshot where our assumptions remain the same

•       Factors can completely shift demand as opposed to simply along the demand line

•       These factors are known as Determinants of Demand

Determinants of Demand

•       Consumer Tastes and preferences

•       Popularity of items & trends

•       Market size

•       Markets can grow or shrink – based on the number of consumers

•       A large number of consumers equals a large number of demand

•       Income

•       Can determine if people actually have money to spend

•       More money = greater demand

•       Prices of related goods

•       Substitute Goods: goods that can be used to replace the purchase of similar goods when prices rise

•       Complementary Goods: goods that are commonly used with other goods

•       Consumer expectations

Elasticity

•       Elasticity of Demand: the degree to which changes in a good’s price affect the quantity demanded by consumers

•       Elastic Demand: when a small change in a good’s price causes a major opposite change in the quantity demanded

•       Goods tend to have elastic demand when the product is not a necessity, there are readily available substitutions, and the product’s cost represents a large portion of the consumer’s income

•       Inelastic Demand: exists when a change in a good’s price has little impact on the quantity demanded

•       Goods tend to have inelastic demand when the product is a necessity, there a few or no readily available substitutions, and the products cost represents a small portion of consumer’s income

Measuring Elasticity

•       The best way to see if something is elastic or inelastic is to measure Total Revenue

•       Total Revenue refer to the total income a business receives from selling its products

•       Price * Quantity Demanded = Total Revenue

•       The determination of elastic v. inelastic is found in seeing total revenue increase or decrease

Supply

•       Supply: the quantity of goods and services that producers are willing and able to offer at various possible prices during a given time period

•       Quantity Supplied: the amount of a good or service that a producer is willing to sell at each particular price

Law of Supply

•       Producers supply more goods and services when they can sell them at higher prices and fewer goods and services when they must sell them at lower prices

•       This creates a POSTIVE relationship between Supply and Price

•       Profit Motive

•       Profit: the amount of money remain after producers have paid all of their costs

•       A company makes profit when the revenues are great than the cost of production

•       Profit & Markets

•       The motivation to increase price or make a profit, impacts the way in which companies interact with the overall market

Supply schedules and curves

•       Supply Schedule: shows the relationship between the price of a good or service and the quantity that producers will supply

•       Supply Curve: plots on a graph the information from a supply schedule

Elasticity of Supply

•       The degree to which price changes affect the quantity supplied

•       Elastic Supply: exists when a small change in price causes a major change in the quantity supplied

•       Elastic supply will appear in products that can be made quickly, inexpensively, and using few, readily available resources

•       Inelastic Supply: exists when a change in a good’s price has little impact on the quantity supplied

•       Inelastic supply will appear in products that require a great deal of time, money, and resources that are often not readily available

Determinants of Supply

•       Prices of Resources

•       Most common – change in price of the factors of production, making it less or more expensive to create the product

•       Government Tools

•       Taxes on materials used to produce materials or tax on property of the buildings a business owns

•       Subsidies can encourage lowering a price or allow it to be cheaper for a company to make an item so they make a profit

•       Regulation allows the government to protect citizens from company wrongdoing

•       Technology

•       New technology can unlock speed and ability to create products

•       Competition

•       Increase in supply when competition is high – producing more of a product to sell

•       Prices of Related Goods

•       Items used by other items can determine cost (PS5 & new games)

•       Producer Expectations

Productivity

•       Total Product: all of the product a company makes in a given period of time with a given amount of input

•       Marginal Product: the change in output generated by adding one more unit of input

Law of Diminishing Returns

•       Describes the effect that varying level of an input has on total and marginal product

•       Increasing Marginal Returns

•       Diminishing Marginal Returns

•       Negative Marginal Returns

Costs of Production

•       Fixed Costs: production costs that do not change as the level of output changes

•       Variable Costs: production costs that change as the level of output changes

•       Total Costs: sum of the fixed and variable productions costs

•       Marginal Costs: the additional costs of producing one more unit of output

The price system

•       Information

•       What does the price of a good tell us about it? How much are consumers will to pay for a good?

•       Incentives

•       Choosing to buy something based on if it is affordable or the long-term pay off is great

•       Choice

•       Encouraging participation in the market, variety of products

•       Efficiency

•       The ability to use resources effectively

•       Ensuring delivery of information to consumers and producers

•       Flexibility

•       The ability to deal with change

Limitations of the price system (market failure)

•       Externalities

•       Not taking into account all of the costs and benefits of production

•       Pollution or proximity of a restaurant to a business

•       Public Goods

•       Fails to assign the cost of public goods to all consumers

•       Requirement through taxes to pay for items, or else it might not be paid for

•       Instability

•       Natural disasters, worker protests, severe weather can impact production

Equilibrium

•       Market Equilibrium: a situation that occurs when the quantity supplied and the quantity demanded for a product are equal at the same price

•       At this point the needs of both consumer and producer are satisfied

•       Surplus: quantity supplied exceeds the quantity demanded at the price offered

•       Shortage: quantity demanded exceeds the quantity supplied at the price offered

Market Structures

•       Perfect Competition: an ideal market structure in which buyers and sellers each compete directly and fully under the laws of supply and demand

•       Buyers & Sellers act independently

•       Sellers offer identical products

•       Buyers are well-informed

•       Sellers can enter or exit market easily

•       Monopolistic Competition: differs from perfect competition in one key respect – sellers offer different, rather than identical products

•       Oligopoly: a market structure in which a few large sellers’ control most of the production of a good or service

•       There are few large sellers

•       They offer identical or similar products

•       Other sellers cannot enter the market easily

•       Pure Monopoly: presence of only one seller controlling all production of a good or service

Economic Goals of the Government

•       Regulating Business

•       Providing Public Goods

•       Promote Economic Well-Being

•       Stabilize the Economy

•       Moderate the Business Cycle

Regulating Business

–  Prevents Abuses

–  Prevent business from taking unfair advantage of workers

–  Occupational Safety and Health Administration (OSHA)

–  Equal Employment Opportunity Commission (EEOC) enforces regulations that protect workers from discrimination in hiring or promotions based on age, race, religion, or national origin

–  Protects Consumers

–  Food and Drug Administration (FDA), Consumer Product Safety Commission (CPSC), Federal Trade Commission (FTC), & Federal Communications Commission (FCC)

–  Limits Negative Externalities

–  Regulations that minimize the negative side effects of some economic activities

–  Environmental Protection Agency (EPA)

–  Nuclear Regulatory Commission (NRC)

–  Promotes Competition

–  Antitrust laws that break up and prevent monopolies

Providing Public goods

•       Price system fails to assign the cost of public goods among all consumers, but the government can fix this

•       Shared Responsibility – different departments and commissions

•       Privatization – government selling contracts or private businesses fill gaps in the market

Effects of Government Regulation

–  Prices

–  Government regulation often causes prices to increase

–  Raising of production costs or trying to maintain a certain price floor

–  Services

–  Greater or smaller levels of service

–  Profits

–  Productivity

Financial institutions in the U.S.A.

•       Commercial Banks

•       Lend money, accept deposits, and transfer money among business, other banks and financial institutions, and individuals

•       Savings and Loan Associations

•       Established to lend money and accept deposits

•       Credit cards & insured deposits

•       Mutual Savings Banks

•       Serve people who wished to make small deposits that large commercial banks did not want to handle

•       Credit Unions

•       Employees of large businesses and institutions and members of large labor unions often belong to credit unions

Type of taxes

•       Proportional Taxes

•       Flat Tax Rates – same percentage (or portion) of a persons income

•       Has a greater effect on people with lower incomes

•       Progressive Taxes

•       Larger percentage of income from a high-income person than from a low-income person

•       Regressive Taxes

•       Larger percentage of icome from people with low incomes than from people with high incomes

How does the government collect tax?

•       Income Tax

•       Corporate Income Tax

•       Social Security Taxes

•       Property Tax

•       Sales Tax

Tarrifs

•       Revenue Tariffs – raise money for the government

•       Protective Tariffs – restrict the number of foreign goods sold in a country

Economics: the study of the choices that people make to satisfy their needs and wants

•       Microeconomics: the study of choices made by economic actors such as households, companies, and individual markets

•       Macroeconomics: examines the behavior of entire economies

Consumers v. Producers

•       Consumer: people who decide to buy things

•       Producers: people who make the things that satisfy consumers’ needs

•       Goods v. Services

•       Goods: psychical objects that can be purchased

•       Services: actions or activities that are performed for a fee

Economic Resources

•       The environment around you influences the decisions you make

•       What do you see when you look around you?

•       What type of social class you grew up in?

•       The Influence of social media

•       But also the physical environment…

•       These environments are considered economic resources

•       Resource: anything people use to make or obtain what they need or want

Factors of production

•       Natural Resources

•       Human Resources

•       Capital Resources

•       Entrepreneurship

Natural Resources

•       Natural Resources are items provided by nature that can be used to produce good and to provide services

•       Natural Resources are only considered a factor of production when it is scarce, and some payment is necessary for it’s use

•       Breathing vs. scuba diving

•       Human Resources are any human effort exerted during production

•       Capital Resources are manufactured materials used to create products

•       This includes capital goods and money used to purchase them

•       Capital goods: buildings, structures, machinery, and tools used in the production process

•       Consumer goods: finished products - the goods and services that people buy – that are produced from capital goods

•       Entrepreneurship is the combination of organizational abilities and risk taking involved in starting a new business or introducing a new product

•       Entrepreneurs attempt to fill gaps in the market – creating something of value

•       Think of something that would be useful to have

Understanding scarcity

–      All resources are LIMITED

–      The combination of limited economic resources and unlimited wants results in a condition known as scarcity

–      Many factors can contribute to scarcity – man-made v. non-man-made

–      Rain fall each year vs. collector edition sneakers

Economic Systems/Society must address three basic economic questions:

•       What to Produce

•       How to produce

•       For whom to produce

What to produce

–      Society’s needs and wants can never be met completely

–      Society then must determine which needs and wants are more important and urgency of them

How to produce

•       How many workers do you hire?

•       What capital goods do you use to complete the product?

•       What is the cheaper route? In the long run? In the short run?

For whom to produce

•       Who gets to have this new product? Who does it it serve to give the new product to? What is the return for creating that new product?

•       The WHOM can also influence price

•       Productivity is the level of output that results from a given level of input

•       Efficiency: the use of the smallest amount of resources to produce the greatest amount of output

•       Division of labor - assigning small tasks to individuals or small groups of people (assembly line style)

•       Specialization

•       A trade-off is when one good is sacrificed for another

•       An opportunity cost is the value of the next best alternative that is given up to obtain the preferred item

•       The best example of this is when you only have enough money to purchase one of two items – which do you purchase and what do you lose by not purchasing?

•       Trade-offs and Opportunity Costs can be illustrated using a production possibilities curve

•       A production possibilities curve shows all of the possible combinations of two good or services that can produced within a stated time period, given two important assumptions

•       Assumption 1: the amount of available resources and technology will not change

•       Assumption 2: all the natural, human, and capital resources are being used in the most efficient manner possible

Economic Systems

•       Traditional

•       Command

•       Market

•       Mixed

Traditional Economies

–      Traditional economies are based on a society’s values – customs & traditions

–      The answers to the three economic questions are found in the past

–      Contemporary economic activities are based on the collection of rituals, habits, laws, and religious beliefs

–      Tradition decides your role in society – family does this, so you will do this

–      Traditional economies exist in parts of North America, Latin America, Asia, and Africa

Command Economies

–      Relies on government officials to answer the basic economic questions

–      They hold the sole power to determine what products will be made and how they will be made

–      Th individual in command economies have little to no say in what is being produced

Market Economies

–      Individuals answers the three main questions

–      The government has NO SAY in what, how, and for whom goods are produced

–      Market: the free exchange of goods and services

–      Market economies are driven strictly by self-interest and incentives (making money)

Mixed Economies

•       Mixed economies combine elements of traditional, market, and command economic models to answer the three basic economic questions

•       This creates three main categories of mixed economies:

•       Authoritarian Socialism

•       Capitalism

•       Democratic Socialism