Transcript What is an Economy? - Effingham County Schools

What is an Economy?
MKT-MP-2
Integrate social-studies skills into marketing, sales
and service, to obtain an understanding of
customers and the economic environment in which
they function.
Economic Systems
 Economy: the organized way a nation provides for the needs
and wants of its people
 Resources: the things used in producing goods and services
 Resources = Factors of Production
 Land
 Everything contained in the earth or found in the sea
 Labor
 All the people who work
 Capital
 Money to start and operate a business
 Includes infrastructure: the physical development of a country
 Entrepreneurship
 The skills of people who are willing to invest their time and money to run
a business
Scarcity
 Scarcity: the difference between wants and needs and the
available resources
 Examples:
 USA: educated labor force, great deal of capital, abundance of
entrepreneurs, and many natural resources
 Even the US cannot meet all the needs and wants of its people
 Some live in poverty
 Underdeveloped Nations: not that fortunate
How Does an Economy Work?
 Nations must answer 3 basic questions:
Which goods and services should be produced?
2. How should the goods and services be produced?
3. For whom should the goods and services be produced?
1.
 How these 3 basic questions are answered determines the
type of economy of the nation.
1. Traditional Economy
2. Market Economy
3. Command Economy
Traditional Economies
 Traditions and rituals answer the questions
 Often based on cultural and religious practices and ideals that
have been passed down
 What?
 There is little choice as to what to produce
 If you belong to a community of farmers, you farm
 How?
 There is little choice
 If you belong to a family of potters, then you will continue to follow
traditions of pot making from ancestors
 For Whom?
 Tradition regulates who buys and sells and where and how the exchange
will take place.
Market Economies
 Pure Market Economy: there is no government involvement
in economic decisions
 Gov’t lets the market answer the questions
 What?
 Consumer decide what to produce based on their purchases
 How?
 Businesses decide what to produce
 Must be competitive and produce quality products
 For Whom?
 The people who have money are able to buy more goods and services
Command Economies
 Government makes all the decisions
 Government controls all the factors of production
 What?
 Dictator or group of gov’t officials decide what to produce based on
what they believe is important
 How?
 Government owns all means of production, it runs all the businesses,
it controls all employment opportunities
 For Whom?
 Government decides who gets what is produced
Mixed Economies
 No economy is purely traditional, market, or command
 US is a mixed economy with leanings toward a market
economy
 Regulations to protect food, air, and water supply
 Labor laws
 Social programs
 Welfare, Medicare, Medicaid
 Since all economies are mixed, how much gov’t involvement
 Capitalism
 Communism
 Socialism
Capitalism
 Political and economic philosophy characterized by
 Marketplace competition
 Private ownership of businesses
 aka: Free Enterprise
 Typically democracies
 Political power in the hands of the people
 Usually more than one political party
 Examples: USA and Japan
Communism
 Social, political, and economic philosophy in which the
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government controls the factors of production
Usually authoritarian
No private ownership of property or capital
Society is classless
Citizens are assigned jobs
Examples: Cuba and North Korea
Socialism
 Most have democratic political institutions
 Increased amount of government involvement in the
economy than capitalism
 Typically have more social programs for citizens
 Examples: Canada and Germany
Economies in Transition
 Breakup of the former Soviet Union provides the best
example of societies making the difficult change from
command to market economies
 Examples: Estonia and Latvia
Understanding the Economy
When is an economy successful?
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2.
3.
When it increases production
When it decreases unemployment
When it maintains stable prices
Economic Measurements
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Labor Productivity
Gross Domestic Product
Gross National Product
Standard of Living
Inflation Rate
Unemployment Rate
1. Labor Productivity
 Output per worker hour that is measured over a defined
period of time
 Week
 Month
 Year
 Ways to increase productivity
 Invest in new equipment
 Provide additional training or financial incentives
 Reduce work force and increase responsibilities
 Higher productivity increases profit
2. Gross Domestic Product
 The output of goods and services produced by labor and
property located within a country
 GDP is made up of:
 Private investment
 Government spending
 Personal spending
 Net exports of goods and services
 2009 GDP = $14.12 Trillion
 2010 GDP = $14.87 Trillion
3. Gross National Product
 The total dollar value of goods and services produced by a
nation, including goods and services produced abroad by U.S.
citizens and companies.
 This measure was used by the U.S. prior to 1991
 The main difference between GDP and GNP
 With GNP, it is not where the production takes place but who is
responsible for it
4. Standard of Living
 A measurement of the amount and quality of goods and
services that a nation’s people have
 Reflects quality of life
 Std of Living = GDP/population
5. Inflation Rate
 Refers to rising prices
 Low inflation rate (1% - 5%) shows a stable economy
 High inflation rate (10% +) can devastate an economy
 Money doesn’t have the same value as it did with lower inflation
 Money doesn’t go as far as it used to
 Controlling inflation is performed by the Federal Reserve
 When inflation increases, the FED raises interest rates to
discourage borrowing and slow spending
Current Inflation Rate = 1.50%
5. Inflation cont’d
 Consumer Price Index (CPI)
 Change in price over a period of time of some 400 specific
retail goods and services used by the average urban household
 Producer Price Index (PPI)
 Measures wholesale price levels in the economy
 Changes in PPI are usually passed along to consumers
6. Unemployment Rate
 Higher unemployment rate = economic slowdown
 Lower unemployment rate = economic expansion
Dec. 2010 U.S. Rate = 9.1%
Dec. 2010 GA Rate = 10.2%
The Business Cycle
 The recurring changes in economic activity
 Expansion
 Time when the economy is flourishing
Low unemployment
 Increase in output
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 Recession
 Period of economic slowdown that last at least 2 quarters (6 months)
Unemployment rises
 Decrease in output
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 Depression
 A period of prolonged recession
Nearly impossible to find a job
 Consumer spending very low
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 Recovery
 A period of renewed economic growth following a recession or depression
Factors Affecting Demand
 Strength of want or need
 Availability of supply
 Availability of alternative products that consumers believe
will satisfy their need/want
The Demand Curve
 Demand Curve: relationship between the price and the
quantity demanded
 The Law of Demand: as the price of a product is increased,
the demand will decrease and vice versa
 Economic Market: all the consumers who are willing to
purchase a particular product or service
The Demand Curve
Factors Affecting Supply
 Possibility of profit
 Amount of competition
 Capability of developing and marketing the products and
services
The Supply Curve
 Supply Curve: a graph that shows the relationship between
price and quantity
 Law of Supply: with the price of a product is increased, the
more will be produced and vice versa
The Supply Curve
Market Price
 Market Price: the point where supply and demand for a
product is equal
What is a Surplus?
 A surplus occurs when supply exceeds demand
 Prices usually drop on the item
What is a Shortage?
 A shortage occurs when demand exceeds supply
 Prices usually go up
What is Equilibrium?
 Equilibrium occurs when supply and demand are basically
equal
 Prices tend to remain stable during equilibrium