Transcript Chapter 1 Notes. File

Ch.1 Notes
What is Economics?
• study of how people try to satisfy wants and
needs through the use of scarce resources.
The Fundamental Economic Problem
Scarcity
is the condition that results
from society not having
enough
Needs and Wants
• A need is a basic requirement for survival and
includes food, clothing, and shelter.
• A want is a way of expressing a desire for
something you don’t need.
Three Basic Questions: ways our limited
resources will be used.
• What to produce
• How to produce it
• For Whom to produce
The Factors of Production
• resources required to produce
– Land, capital, labor, & entrepreneurs
Production
• production, or the process of creating goods
and services
Gross Domestic Product (GDP)
• GDP- the dollar value of all final goods and
services that a country produces in a single
year.
Goods, Services, and Consumers
• economic products
– goods and services that are
• Useful
• relatively scarce
• transferable to others.
-These characteristics mean a product can
command a price.
Goods
• good – an item that is economically useful or
satisfies an economic want
Services
• service, or work that is performed for
someone
Consumer
• The consumer is a person who uses goods and
services
Value, Utility, and Wealth
• value refers to a worth that can be expressed
in dollars and cents
– What increases or decreases value?
• utility, or the capacity to be useful and provide
satisfaction
• Wealth is the accumulation of products that
are tangible, scarce, useful, and transferable
There is no such thing as a
free lunch
Trade-Offs
alternative choices, whenever you make an
economic decision.
Trade-offs
Opportunity Cost
the cost of the next best alternative use of
money, time, or resources when one choice is
made rather than another.
Opportunity Cost
Production Possibilities Frontier
Production Possibilities Frontier
• a diagram representing various combinations
of goods and/or services an economy can
produce when all productive resources are
fully employed
Goods…
• A consumer good is intended for final use by
individuals.
• capital goods - manufactured goods used to
produce other goods and services.
• Any good that lasts three years or more when
used on a regular basis is a durable good.
• A nondurable good is an item that lasts for
less than three years when used on a regular
basis.
The paradox of value
• situation where some necessities, such as
water, have little monetary value, whereas
some non-necessities, such as diamonds, have
a much higher value.
Division of labor
• Takes place when work is arranged so that
individual workers do fewer tasks than before.
– Specialization takes place when factors of
production perform tasks that they can do
relatively more efficiently than others
Economic Interdependence
• rely on others, and others rely on us, to
provide the goods and services that we
consume
Consumption
• The process of using up goods and services
Cost Benefit Analysis
a way of thinking about a problem that
compares the costs of an action to the benefits
received
Free Enterprise Economy
consumers and privately owned businesses,
rather than
the government, make the majority of the
WHAT, HOW, and FOR WHOM decisions
CHAPTER 2 NOTES
Economic
Systems &
Decision Making
ECONOMIC SYSTEM
Rules
that governs what
goods and services to
produce, how to produce
them, and for whom
TRADITIONAL ECONOMIES
TRADITIONAL ECONOMY
 The
allocation of scarce
resources, and nearly all other
economic activity, stems from
ritual, habit, or custom
ADVANTAGES: TRADITIONAL
ECONOMY
Everyone
knows which role
to play
 Likewise,
little uncertainty
exists over HOW to produce,
because you do everything the
same way your parents did
 Life is generally stable,
predictable, and continuous
TRADITIONAL ECONOMIES
If
you are born into a family
of hunters, you hunt.
If you are born into a family
of farmers, you farm.
DISADVANTAGES:
TRADITIONAL ECONOMY
Tends
to discourage new
ideas and new ways of
doing things
NO NEW IDEAS!!
COMMAND ECONOMIES
“THEY PRETEND TO PAY US, AND WE
PRETEND TO WORK”
COMMAND ECONOMIES
 There
are few command
economies in the world today,
but they still can be found in
North Korea and Cuba
 In the former Soviet Union, until
recently a command economy,
the government made the major
economic decisions
 Gov’t owns the means of
production
ADVANTAGES: COMMAND
ECONOMY
 Change
direction drastically in a
relatively short time & little
uncertainty
 Most command economies tend to
provide minimum levels of education,
health, and other public services at
little or no cost to
its people
DISADVANTAGES: COMMAND
ECONOMY
 Not
designed to meet the wants of
consumers
 Does not give people the incentive to
work hard
MARKET ECONOMIES
ADVANTAGES: MARKET
ECONOMIES
 People
and firms act in their
own best interests (United
States)
 The consumer determines WHAT
to produce
 Variety of goods and services
 High degree of consumer
satisfaction
DISADVANTAGES: MARKET
ECONOMIES
Does
not provide for the
basic needs of everyone
Uncertainty: workers and
businesses face as the result
of change
ECONOMIC SECURITY

Americans desire protection from such adverse
economic events as layoffs and illnesses
SOCIAL SECURITY

federal program of disability and retirement
benefits that covers most working people
PRICE STABILITY

inflation
a rise in the
general level of prices


fixed income
income that does not
increase even though
prices go up

CAPITALISM

private citizens, many of whom are
entrepreneurs, own the factors of production
FREE ENTERPRISE

competition is allowed to flourish with a
minimum of government interference.
Consumers decide what products are produced
VOLUNTARY EXCHANGE

buyers and sellers freely and willingly engaging
in market transactions
PRIVATE PROPERTY RIGHTS

(CAPITALISM)
entitles people to own and control their
possessions
PROFIT & PROFIT MOTIVE

profit


the extent to which persons or organizations are
better off at the end of a period than they were at the
beginning
profit motive

the driving force that encourages people and
organizations to improve their material well-being
COMPETITION

struggle among sellers to attract consumers
while lowering costs
ROLES OF:

Entrepreneur


Consumer


To take risks in order to produce a profit
To demand new and better products and to support
the production of those products by giving their
money to the entrepreneurs
Gov’t

protector, provider of goods and services, consumer,
regulator, and promoter of national goals
The national government, for example, supplies defense
services
 State governments provide education and public welfare
 Local governments provide, among other things, parks,
libraries, bus services, fire and police, public utilities

CHAPTER 3
Business
Organizations

MAIN FORMS OF BUSINESS
sole proprietorship
 the partnership
 the corporation

SOLE PROPRIETORSHIPS
a business owned and run by one person
 most common in the U.S.

ADVANTAGES: SOLE PROPRIETORSHIPS
ease of start up, management, & getting out
of business
 owner enjoys the profits
 no separate business income taxes
 personal satisfaction

DISADVANTAGES: SOLE PROPRIETORSHIPS
full responsibility for all losses and debts of
the business
 difficulty in raising financial capital
 size and efficiency – the business may have
to carry a large inventory, or stock of
finished goods and parts in reserve
 limited managerial experience
 difficulty of attracting qualified employees
 limited life – firm ceases to exist when
owner dies, quits, or sells the business

PARTNERSHIPS

a business jointly owned by two or more
persons
PARTNERSHIPS

general partnership


all partners are responsible for the business
limited partnership
at least one partner is not active in the daily running
of the business, although he or she may have
contributed funds to finance the operation
 Limited liability for inactive partner

ADVANTAGES: PARTNERSHIPS
ease of establishment
 ease of management (if a partner dies the
business continues to be ran by the others)
 lack of special taxes
 attract financial capital easily
 slightly larger size, increased efficiency
 easier to attract top talent

DISADVANTAGES: PARTNERSHIPS
each partner is fully responsible for the acts of all
 potential for conflict between partners
 A business may have to file for bankruptcy

CORPORATIONS
form of business recognized by law as a separate
legal entity having all the rights of an individual
 Shareholders are part owners

FORMING CORPORATIONS
formal and legal
 must file for permission from the national
government or the state where the business will
have its headquarters
 Must receive a charter – a government document
that gives permission to create a corporation
 The charter also specifies the number of shares of
stock, or ownership certificates in the firm
 These shares are sold to investors, called
stockholders or shareholders
 money used to set up the corporation

CORPORATIONS

If the corporation is profitable, it may eventually
issue a dividend

a check representing a portion of the corporate
earnings – to each stockholder
CORPORATE STRUCTURE

Common Stock


gives the owner voting privileges, but is the last to be
sold in a bankruptcy.
Preferred Stock
this type of stock conveys no voting rights, but will
have a higher redeem value if the company declares
bankruptcy
http://www.youtube.com/watch?v=fn3y1hNVgA4

::CORPORATION
ease of raising financial capital
 gain capital by selling additional stock
 borrow money by issuing bonds
 professional managers run the firm
 limited liability for owners
 unlimited life
 ease of transferring ownership

:CORPORATIONS
difficulty & expense of getting a charter
 owners have little say in how the business
is run
 double taxation of corporate profits, stockholders’
dividends are taxed twice–once as corporate
profit and again as and personal income
 more government regulation

LIMITED LIABILITY COMPANY (LLC)



limited liability company is a hybrid type of legal structure
that provides the limited liability features of a corporation
and the tax efficiencies and operational flexibility of a
partnership.
The "owners" of an LLC are referred to as "members."
Depending on the state, the members can consist of a single
individual (one owner), two or more individuals,
corporations or other LLCs.
Unlike shareholders in a corporation, LLCs are not taxed
as a separate business entity. Instead, all profits and losses
are "passed through" the business to each member of the
LLC. LLC members report profits and losses on their
personal federal tax returns, just like the owners of a
partnership would
BONDS, PRINCIPAL, & INTEREST

bond


principal


written promise to repay the amount borrowed
amount borrowed
interest

the price paid for the use of another’s money
HOW CAN A BUSINESS GROW?
reinvestment of profits
 merger
 two or more businesses combining
 horizontal merger
 two or more firms that produce the same
kind of product
 vertical merger
 firms involved in different steps of
manufacturing or marketing

CONGLOMERATE

firm that has at least four businesses, each
making unrelated products, none of which is
responsible for a majority of its sales
MULTINATIONAL

corporation that has manufacturing or service
operations in a number of different countries
NONPROFIT ORGANIZATION

operates in a businesslike way to promote the
collective interests of its members rather than to
seek financial gain for its owner
schools, churches, gov’t, hospitals, welfare groups,
adoption agencies, chamber of commerce, unions
 do not issue stock, pay dividends, or pay income taxes

COOPERATIVES

voluntary association of people formed to carry on
some kind of economic activity that will benefit
its members
SERVICE COOPERATIVES

provides services such as insurance, credit, and
baby-sitting to its members, rather than goods
CONSUMER COOPERATIVES
buys bulk amounts of goods such as food and
clothing on behalf of its members
PRODUCER COOPERATIVES
helps members promote or sell their products
CH. 4:
DEMAND
the desire,
ability, and
willingness
to buy a
product

DEMAND BASICS
Price goes up…demand goes down
 Price goes down, demand goes up

DEMAND SCHEDULE
shows the various
quantities demanded
of a particular product
at all prices that might
prevail in the market
at a given time

DEMAND CURVE
graph showing the
quantity demanded
at each and every
price that might
prevail in the market

ELASTIC VS. INELASTIC

Elastic-Luxuries

Inelastic-Necessities
MARGINAL UTILITY
the extra usefulness or satisfaction a person gets
from acquiring or using one more unit of a
product
 The reason we buy something in the first place is
because we feel the product is useful and that it
will give us satisfaction
 The more you get of something, the less
satisfying it becomes

MARGINAL UTILITY
CHANGE IN DEMAND

people are now willing to buy different amounts
of the product at the same prices (change in
consumer income can cause a change in demand)
CONSUMER TASTES

Advertising, news reports, fashion trends, the
introduction of new products, and even changes
in the season are things that can affect demand
SUBSTITUTE
can be used in place of other products
 When the price of a good goes higher, people will
substitute another in its place

COMPLEMENTS

the use of one increases the use of the other

Personal computers and software are two
complementary goods
CH. 5
SUPPLY
the amount of a product that would be offered for
sale at all possible prices that could prevail in the
market
 law of supply


the principle that suppliers will normally offer more
for sale at high prices and less at lower prices.
SUPPLY SCHEDULE
& SUPPLY CURVE

supply schedule
listing of the various
quantities of a
particular product
supplied at all
possible prices
in the market

supply curve
a graph showing the
various quantities
supplied at each
and every price that might
prevail in the market
SUPPLY CURVE
All normal supply curves slope from the lower
left-hand corner of the graph to the upper righthand corner
 This is a positive slope and shows that if one of
the values goes up, the other will go up too

QUANTITY SUPPLIED
quantity supplied is the amount that producers
bring to market at a specific price
 change in quantity supplied is the change in
amount offered for sale in response to a change in
price
 supply and demand usually determines the final
price for the product, the producer has the
freedom to adjust production
 supply and demand usually determines the final
price

SUPPLY
CHANGE IN SUPPLY

suppliers offer different amounts of products for
sale at all possible prices
Cost of Inputs
 Productivity (labor)
 Technology
 Taxes and Subsidies

SUBSIDY
gov’t payment to an individual, business, or other
group to encourage or protect a certain type of
economic activity
 For example, if a domestic industry, like farming,
is struggling to survive in a highly competitive
international industry with low prices, a
government may give cash subsidies to farms so
that they can sell at the low market price but still
achieve financial gain
