Transcript Understand Economics and Economic Systems

2.01 Economic
Systems
Objective 2.01 Compare different
types of economic systems:
traditional, free enterprise,
command and mixed.
What is Economics?

Economics studies how individuals and
societies seek to satisfy needs and
wants through incentives, choices, and
allocation of scarce resources.
Technology
Land
Oil & fuel
Doctors
Factors of Production

Economic Resources





Natural Resources – raw materials found in
nature that are used to produce goods
Human Resources – people’s knowledge, efforts,
and skills used in their work
Capital Resources – used to produce goods and
services (buildings, materials, and equipment)
Entrepreneurial Resources - recognize the need
for new goods or service
Scarcity – shortage of resources
Why Economic Systems?



Nations use economic systems to
determine how to use their limited
resources effectively.
Primary goal of an economic system is to
provide people with a minimum standard
of living, or quality of life.
Different types of Economic Systems
 Traditional
Economy
 Market Economy (free enterprise)
 Command Economy
 Mixed Economy
Traditional Economy

Found in rural, underdeveloped countries–






Vanuatu
Pygmies of Congo
Eskimos & Indian tribes
Belarus
Customs govern the
economic decisions
that are made
Farming, hunting and
gathering are done the
same way as the
generation before




Economic activities are
centered around the
family or ethnic unit
Men and women are
given different economic
roles and tasks
Advantages: people
have specific roles;
security in the way
things are done
Disadvantages:
Technology is not used;
difficult to improve
Market Economy (Free Enterprise)

Also called a Free Market

Economy or Free
Enterprise Economy


Businesses and
consumers decide what
they will produce and
purchase and in what
quantities
Decisions are made
according to law of
supply & demand



Supply and demand of
goods and services
determine what is
produced and the price
that will be charged.
Advantage—competition
to have the best products
and services
Disadvantage—huge rift
between wealthy and
poor
Note: a true market
economy does not exist.
Command Economy


The government (or
central authority)
determines what, how,
and for whom goods and
services are produced.
Two types:


Strong Command – where
government makes all
decisions (communism –
China, Cuba)
Moderate Command –
where some form of
private enterprise exists
but the state owns major
resources (socialism –
France and Sweden)

Advantages




Disadvantages




Guarantees equal
standard of living for
everyone
Less crime and poverty
Needs are provided for
through the government
Minimal choices
Fewer choices of items
No incentive to produce
better product or engage
in entrepreneurship
Also known as a Planned
or Managed Economy
Mixed Economy



Combination of a
market and a
command
economy
Government takes
of people’s needs
Marketplace takes
care of people’s
wants.



Most nations have a
mixed economy:
United States,
England, Australia
Advantage—balance
of needs and wants
met by government
and in marketplace
Disadvantage—
citizens have to pay
taxes
2.04 U.S. ECONOMY
Objective 2.04 Understand the United States’
economic system.
MIXED ECONOMY
The marketplace
produces:
 cars
 health care
 technology
 food (with some
 Privately owned
government
businesses and
regulations)
government both
government
play important roles.  The
provides:
 defense
 education

A combination of a
free enterprise (or
market) and a
command economy.

UNITED STATES’
MIXED ECONOMY
Free Enterprise/Market Economy
MARKET ECONOMY
CHARACTERISTICS
 Private
property
ownership.
 Freedom of
enterprise and
Choice
 Motive of selfinterest
Competition
 System of
markets and
prices
 The market
addresses
consumer wants
MARKET ECONOMY
Advantages
 Individuals
can own businesses and
resources
 Individuals can buy and sell goods and
services
 Competition in the market leads to greater
choices
 Consumers play a great role in the
economy
MARKET ECONOMY
Disadvantage
 The
critical role of the consumer
in the market can create a
tremendous divide between the
poor and the wealthy
LIMITED GOVERNMENT
 The
government helps protect people
by being a body that monitors public
safety through regulatory agencies
such as:
 Food
& Drug Administration (FDA)
 Occupational Safety and Health
Administration (OSHA)
THE GOVERNMENT PROVIDES SOME
SERVICES TO TAKE CARE OF PEOPLE’S
NEEDS
 Highways--roads
and other
transportation
services
 Schools and other
public education
services
 Social
Security
 Medicare
 Defense and
public safety
COMMAND ECONOMY
Advantages
Consumers
have some protection
in the marketplace
Essential services are provided
for citizens
COMMAND ECONOMY
Disadvantages
Citizens
have to pay taxes so the
government can provide services
Some think there is too much
government control in the
marketplace
UNITED STATES’ ECONOMY SUMMARY
 Largest
national
economy in the
world
 A mixed economy
 Corporations and
other private firms
make the majority of
microeconomic
decisions.
 Government
has a
minimal role in the
domestic economy.
 Business firms in
the U.S. have much
less regulation than
those in many other
nations.
2.02 Supply and
Demand
02.00 Understand Economics and Economic Systems
02.02 Interpret supply and demand graphs
Marketplace



In a free market,
consumers determine
the demand of a
product.
Entrepreneurs see the
demand and make more
of the product.
More supply causes the
price to decrease as the
demand is fulfilled.
Supply Defined


How much of a good or service a
producer is willing and able to
produce at different prices.
Supply is produced by the
businesses in hopes of making
money.
Demand Defined



An individual’s need or desire for a good
or service at a given price.
Individuals are willing to consume more
of product or service at a lower price.
When the demand is high, competitors
see opportunity in the market.
Supply and Demand Graphs




People draw supply and demand graphs so
that they can easily see the relationship
between the supply and the demand.
A supply and demand graph is a visual
representation of supply and demand.
The graph shows changes in a product’s
demand or supply.
The graph can help predict the performance
of the product over time.
When Supply and Demand Meet



The point at which the supply and demand
curve meet is known as the equilibrium
price and quantity.
When the price is above the equilibrium
price, fewer people are willing to buy—the
price is too high.
When the price is below equilibrium price,
many people are willing to buy a lot of the
product—the price is too low. Suppliers
may not be able to make enough money
to cover costs.
Equilibrium Price (Market Price)
Supply
Curve
Equilibrium/
Market Price
Demand
Curve
Prices tell businesses what to
produce



The prices of goods and services dictate
what products are developed, made,
improved or modified.
When the price is high, demand falls and
businesses produce fewer goods.
When the price is low, demand rises and
businesses produce more goods to meet
the demand.
Competition is sparked
Sellers compete to make a profit
 If a person sees that they can meet a
need or a want, they enter the
marketplace


They compete with other businesses
already meeting the need or want.
OR

They make a new product and competition
follows when others enter the marketplace.
The Profit Motive
People and businesses enter the
marketplace in hopes of making a
profit (money).
 This “profit motive” encourages
people to enter the marketplace.
 This hope of making a profit is the
reward for people who take risks by
entering the marketplace.

2.03 PowerPoint
Objective 2.03 Explain how the Federal
Reserve, Stock Market, and e-commerce
impact the United States’ economic system.
The Federal Reserve


Central Bank of the United States
Regulates the money supply in the US
economy
Raises and lowers the discount interest
rate
 Puts money into circulation
 Removes money from circulation

Impact of the Federal Reserve

If the Federal Reserve raises the discount
rate



Consumer credit becomes more expensive
Consumers buy fewer large goods—
refrigerators, boats, etc.
If the Federal reserve lowers the discount
rate


Consumer credit becomes less expensive
Consumers buy more expensive goods—cars,
washing machines, etc.
What are stocks?
Stocks are shares of ownership in
corporations
 Shareholders have partial ownership
in the corporation
 Corporations are permitted to sell
stock to raise capital for the
corporation
 Shareholders may receive dividend
payments from the corporation

What other investments are traded?

Bonds—loans made by the investor to the
issuer; the investor is repaid with interest







Corporate Bonds
Municipal Bonds
Treasury Bonds
US Savings Bonds
Futures—agreement to buy or sell a
commodity (oil, gold, etc.) at some point
Mutual Funds—combination of individual
stocks
Stocks, Bonds, Futures, and Mutual Funds
are called Securities.
The Stock Market’s Purpose


The stock market is where shares of
stocks, bonds, and futures are bought and
sold (or traded). (Can be electronic.)
The stock exchange is the actual physical
location where stocks are listed and
traded.



New York Stock Exchange (NYSE)
American Stock Exchange
NASDAQ—virtual exchange
The Stock Market’s Functions
Provides companies with a way of
issuing shares of stock to people who
want to invest in the company. The
sale of shares of stock is a way for
the corporations to raise money.
 Provides a place for the buying,
selling and trading of stocks (and
other securities).

Impact of the Stock Market
on the Economy


Bull Market
 Stock prices going up or rising
 Consumers are optimistic and buy stock hoping to
earn more money
 Consumers buy goods and businesses prosper
Bear Market
 Stock prices are going down or falling
 Consumers are pessimistic and reluctant to buy stock
 Investors sell stock so they won’t lose more money
 Consumers buy fewer goods and businesses may
lose money. Some workers may lose jobs.
Impact of E-commerce
on the Economy




Because consumers can purchase goods on the
Internet they have more choices in goods.
Global competition is increased and US
businesses must compete globally.
Fewer salespeople are needed in stores—a shift
in jobs is required. More people are needed in
order fulfillment and customer service.
Goods are manufactured just-in-time—as they
are needed for distribution.
Stocks are . . .
 Stock is ownership in a
company. (Equity)
 If you were to divide your
business up into small
pieces and sell those
pieces, you would
essentially have issued
stock.
Stocks help . . .
 you raise money from
selling those "pieces" of
your business which can
be used to build new
plants and facilities, pay
down debt, or acquire
another company.
 smart owner will keep at
least 51% of the stock,
which will allow them to
retain control of the day to
day activities
 controlling shareholder
What is the Dow Jones Industrial Average?
 An index of thirty, blue chip
stocks that are traded in the
United States.
 It is believed that by looking
at the companies on the list,
a person can get a general
picture of how the market as
a whole is performing.
 The most quoted and
followed index in the world,
and dates back to May 26,
1896.
Bear or Bull Market?
The use of "bull" and "bear"
to describe markets comes from
the way in which each animal
attacks its opponents. That is,
a bull thrusts its horns up
into the air, and a bear swipes
its paws down. These actions
are metaphors for the movement
of a market: if the trend
is up, it is considered a bull market.
And if the trend is down,
it is considered a bear market.
Bear Market
 A prolonged period in
which investment prices
fall, accompanied by
widespread pessimism
 Bear markets usually
occur when the
economy is in a
recession and
unemployment is high,
or when inflation is rising
quickly
 1929 Crash most




famous crash in U.S.
history
Dow Industrials hit a
high of 386 in
September, 1929.
It did not get back to that
level until November,
1954
Dow dropped 89%
1987 – The Market fell
dramatically.
Bull Market
 long term uptrend
(months to years) price
movement in any market
 An extended period of
generally rising prices
 characterized
by optimism, investor
confidence and
expectations that strong
results will continue.