Transcript Basic economic concepts - Suffolk Public Schools Blog

Economics
What is economics?
• It studies how we allocate the limited
resources to satisfy unlimited wants
American Free Market
System
• Introduction
• The U.S. economy
• Challenges in a free
market
• Factors of Production
• Business organizations
• Supply and Demand
• Economic systems
The Circular flow of
Economics
• Resources, goods and services and
money flow continuously among
households, businesses and the
government in the U.S. economy.
The Circular flow of Economics
Continued…
• Individual households own the resources used in
production; sell the resources and use the income
to purchase products.
• Businesses (producers) buy resources used in
production; sell the resources and use the income
to purchase products. Businesses provide
households with income and goods and services.
• Governments use tax revenue from individuals
and businesses to provide public goods and
services.
Households
supply
businesses with
labor
(workforce) and
payments for
goods and
services
Households
provide the
government
with labor
(workforce)
and taxes
Businesses
provides
households
with income
and public
goods and
services.
The government
supplies
businesses with
public goods and
services and
payments for
products
purchased.
Businesses provide the
government with taxes and
goods and services.
The government provides
households with income and public
goods and services.
Production, Consumption and
Distribution
Four Questions all Economic
Systems must Address
Four Questions All Economic Systems
must address…
What is produced?
*Production*
• Goods and services must satisfy the
consumers wants and desires
Four Questions All Economic Systems
must address…
•
HOW should these goods be produced?
*Factors of Production*
2.
1.
Capital
Entrepreneurship
3.
Land
4.
Labor
Combine the factors of production to make or produce the goods and services
Four Questions All Economic Systems
must address…
• For WHOM are the goods and services
produced?
*Distribution*
Getting the goods and services from
producer to consumer
Four Questions All Economic Systems
must address…
• HOW MANY goods and services should
be produced?
*Consumption*
Make enough to have a large profit and still
have consumer demand. How many is
determined by supply and demand.
Supply and Demand
Supply and Demand…
• Scarcity is the inability to satisfy all
wants at the same time due to limited
resources
• Choices must be made as to what to
produce, how much to produce and
who will receive what is produced.
• PRICE: Mechanism to decide who
gets goods and services. The amount
that satisfies both producers for profit
and consumers for value.
Scarcity
Choices
Price
Supply and Demand determine price
through their interaction
• DEMAND: is the
amount of a good or
service that
consumers are willing
and able to buy at a
certain price
• SUPPLY: is the
amount of a good or
service that producers
are willing and able to
sell at a certain price.
LAW OF SUPPLY :
Businesses will provide more products
when they can sell them at higher prices
LAW OF DEMAND:
Buyers will demand more products
when they can buy them at lower prices
Incentives
• Incite or motivate
• Change economic
behavior
• Something that spurs
someone into action:
sale, coupons, etc.
Resources, Scarcity &
Opportunity Cost
Good
• Anything that can be grown or
manufactured (made)
• Food
• Clothes
• Cars
Service
• Something a person does for someone
else in exchange for money or value.
• Doctor
• Hairdresser
• waiter
Resources
•
•
•
•
Natural
Human
Capital
Combine to make goods and services
Our Basic Economic
Problem…
People have Unlimited
Wants
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•
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•
•
Food
Clothing
Shelter
Schools
Hospitals
Cars
Transportation
But Resources are Limited
•
•
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•
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•
•
Land
Soil
Minerals
Fuels
People
Money
Technology
Scarcity
• The inability to satisfy all wants at
the same time;
• the NEEDS are greater than the
RESOURCES
Since resources are LIMITED consumers and
producers must make CHOICES
• CHOICE: selecting
from a set of
alternatives
• OPPORTUNITY
COST: what is given
up when the choice is
made.
*Scarcity forces us to choose which needs and
wants to satisfy with available resources.
*Scarcity affects decisions concerning what
and how much to produce, how goods and
services will be produced and who will get
what is produced
Production: (sellers)
Consumption (buyers)
*Combining resources to
make goods and services.
*Using goods and services
*Available resources and
consumer preference
determine what is
produced
*Consumer preference and
price determine what is
purchased
SELLER
Buyer
Challenges in a Free Market:
Terms
Scarcity
In English
You can't have everything
you want.
Lessons for life
Acceptance of scarcity
will help you make
more reasoned choices
Alternatives
In English
Different options from
which you can choose
Lessons for Life
There are many
different ways to
allocate resources and
to solve problems
Yes….these
are generic
Choice
In English
Because you can't have
everything you want, you
have to make choices from
a list of alternatives
Lessons for life
When policy-makers decide on
a particular resource
allocation, recognize that a
choice had to be made due
to scarcity. You may not
like the alternative chosen,
you may question the
choice, but the villain is
scarcity
Trade-off’s
In English
• Choices involve
giving up something
to get something. All
choices have
consequences, both
positive and negative
Lessons for Life
You are responsible for
the consequences of
your choices. Since
you make choices,
you can't be a victim.
Opportunity Cost
In English
What is given up when a
choice is made
Lessons for Life
All choices have opportunity
costs. A good idea is only a
good idea if its value is
greater than the value of
its opportunity cost. Voters
must always identify the
opportunity cost of a
particular policy
Types of Economies
• Traditional economy:
– Economic decisions are based on custom
and historical precedent.
– People often perform the same type of
work as their parents and grandparents,
regardless of ability or potential.
Command Economy
• The central
government makes
decisions and
determines how
resources will be used.
• The central
government owns
property and resources.
• Businesses are not run
for profit.
• Businesses are not run
for profit.
• No competition
• Lack of consumer
choice
• The government sets
the prices of goods and
services.
• China, North Korea,
Cuba
Economic Systems
Mixed Economy
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•
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•
•
Most common type of
economic system
Government and individuals
share the decision making
process
Individuals and businesses
make decisions for the private
sector
Individuals own the means of
production
Government makes plans for
the public sector
•
•
•
•
Government guides and
regulates production of goods
and services offered.
A greater government role
than in a free market
economy
Most effective economy for
providing goods and services
U.S. and most Western
European countries are mixed
economies
Free Market Economy
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•
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•
Also known as capitalism
or free enterprise
Private ownership of
property and resources
(owned by individuals)
Individuals and businesses
make profits
Individuals and businesses
compete
•
•
•
•
Economic decisions are
made by supply and
demand
Profit is a motivator for
productivity
No government
involvement
Consumer sovereignty:
buyers determine what is
produced
Money left
over after
all business
expenses
have been
paid.
COMPETITION
PROFIT
FREE
MARKETS
Markets are
allowed to operate
without undue
interference from
the government.
Money, goods and
services flow
continuously
among individual
households,
businesses and
the government
The U.S. economy is
a MIXED
ECONOMY
CONSUMER
SOVEREIGNTY
Rivalry
between
businesses
for the
same
customers;
results in
better
quality Individuals can
own the means
of production &
property without
undue
government
interference
PRIVATE
PROPERTY
Consumers
determine
what goods
and
services are
produced
by what
they buy
Competition
• We compete for the use of limited
resources
– 2 ways of competition
– Price competition
– Non price competition e.g. waiting,
examination, lucky draw, violence…
Factors of Production
anything that goes into the making
of a good or service
Factors of Production
Capital
Entrepreneur
• Ex: tools, machinery,
money and
technology
Business owner and risk
taker combines the
factors of production
Factors of production cont…
Land
Natural Resources
Labor
Workers and their
time and energy
Business Organizations
The 15 million businesses in the U.S.
fall into three categories:
sole proprietorships, owned by a
single individual,
partnerships, with more than one
owner sharing the risks and profits
and
corporations, owned by their
stockholders.
Sole Proprietorship
1 owner
• The owner takes all the risks
• Supplies capital, hires help, pays
taxes
• The owner makes all the profits
• The owner is solely responsible for
losses
Partnership
More than one owner (2+)
• Risks are shared amongst the owners
• Profits are shared amongst the
owners
• Often more successful than sole
proprietorships
• Responsibilities are shared
Corporation
Owned by stockholders
• Authorized to act as a legal person regardless of
the number of owners
• Owners share the profits
• Liability is limited to investment (you can only
loose as much as you put in)
• Raise money by selling stocks
• No one is responsible for corporation’s debt if it
fails
Making choices
• Which restaurant will you go for lunch?
• What would you like to study at university?
• What will you buy with $100? CD or dress ?
• Which girl (boy) will you marry?
Complimentary tickets
• Going to Busch Gardens instead of
going to work
• Ticket : Free of charge
• Money spent on food, transport..=$60
• Income forgone = $50
• Full cost of going for day at Busch
Gardens=$110
Choosing a Career
Cost-Benefit Analysis
• Cost: Education
• Benefit: Higher paying job
• Example: Cost of college for 4 years
averages $36,000.
Average Annual Earnings—
Different Levels of Education
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Professional Degree $109,600
Doctoral Degree $89,400
Master's Degree $62,300
Bachelor's Degree $52,200
Associate's Degree $38,200
Some College $36,800
High School Graduate $30,400
Some High School $23,400 Average Annual Earnings—
Different Levels of Education.
Source: U.S. Census Bureau, Current Population Surveys,
March 1998, 1999, and 2000.
Taxation
Definition of taxation: In economic terms, wealth transfer from
businesses or households to the government occurs by use of
taxation.
Let us now look at the four main purposes of taxation which are:
1. Revenue: to raise money to spend on hospitals & schools, roads
and government functions like justice system.
2. Redistribution: Transfer of wealth from richer sections of
society to poorer sections. This is controversial.
3. Repricing: Taxes are imposed to influence society; taxation on
tobacco to discourage smoking.
4. Representation: direct taxation results in higher degree of
accountability & better governance.
Types of Taxes
• Income
• Sales
• Self-employed businessperson or independent
Contractor
• Business
• Real estate
• Utility
• Lodging/Restaurant
• Personal property
Personal Finances
• No one will make your life but you!
• You cannot build a house without a
hammer. You cannot build a lifestyle
without money.
Definitions
• Personal finance: the process of planning
your spending, financing, and investing to
optimize your financial situation
• Personal financial plan: a plan of your
financial goals and describes the spending,
financing, and investing plans that are
intended to achieve those goals
How You Benefit From An
Understanding of Personal Finance
• Make your own financial decisions
– Every spending decision has an
opportunity cost
• Judge the advice of financial advisors
– Make informed decisions
Components of a Financial
Plan
• Budgeting and tax planning
• Managing your cash
• Financing your large purchases
• Protecting your assets and income
(insurance)
• Investing your money
• Planning your retirement and estate
A Plan for Your Budgeting
and Tax Planning
• Budget planning: The process of forecasting future
expenses and savings
• Evaluate your current financial position
– Assets: what you own (buying a house vs.
renting)
– Liabilities: what you owe
– Net worth: the value of what you own minus the
value of what you owe
Budgeting
• Identify sources of income.
• Relate employee benefits to disposable income (Do
you have to buy insurance?)
• Estimate income (gross pay versus net pay).
• Estimate expenses.
• Construct a budget/spending plan.
– Fixed expenses (rent/mortgage, insurance,
electricity, water, gas, automobile, phone, cable)
– Variable expenses (groceries, entertainment,
taxes, etc.)
Budgeting and Tax Planning
A Plan to Manage Your Cash
• Credit management: decisions
regarding how much credit to obtain to
support your spending and which
sources of credit to use
– Credit cards-decrease credit score (score given people based on
how you use credit and available to bankers)
– Short term loans-increase credit score
– Mortgages-increase credit score, tax-deductible, build equity
(equity is value held by bank but available to you as cash when
you sell your home)
Managing Your Cash
Banking
• Checking-check card, checks, cash
machine
– Easy access, but with service fee
• Savings
– Less access, rarely a fee
• Certificate of Deposit (CD)
– Little access, they pay you interest!
Developing the Financial
Plan
• Step 1. Establish Your Financial Goals
– Types of goals
• Car, home, college, wealth, charity
– Set realistic goals
• Stronger likelihood of reaching goals
– Timing of goals
• Short term (within one year)
• Intermediate (between 1–5 years)
• Long term (beyond five years)
Developing the Financial
Plan
• Step 2. Consider Your Current
Financial Position
– How your future financial position is tied
to your education
• Consider your skills, interests, and career
paths
– How your future financial position is tied
to your career choice
• Choose a career that will be enjoyable and
suit your skills, as well as one which helps
you reach your financial goals
Integrating Key Concepts
A Plan for Your Financing
• Loans often needed for large
expenditures
– College tuition, car, house
• Managing loans
– How much can you afford to borrow?
– Determining maturity of the loan
– Selecting a loan with a competitive
interest rate
Financing
Your Large Purchases
Insurance
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Property-against fire, casualty
Liability-against lawsuit!
Automobile-This is a state law.
Health –medical costs are very
expensive!
• Life-as gift to those you love
Investing
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Stocks
Bonds
Annuities
Mutual Funds
Property (Real Estate, Precious Metals,
Art, etc.)
A Plan for Your Investing
• Funds not needed for cash can be
invested
• All investments have some level of
risk
• Risk: uncertainty surrounding the
potential return on an investment
Retirement
• Employee Benefits-not as common as
it used to be!
• Social Security-A political issue. Do
you want to count on this?
• Personal Savings-Your best bet!
A Plan for Your Retirement
and Estate
• This includes insurance planning, retirement
planning, and estate planning
– Retirement planning: determining how much
money should be set aside each year for
retirement and how those funds should be
invested
– Estate planning: determining how your wealth
will be distributed before or upon your death
• Your will
How to stay out of financial
trouble
• Maintain a record-keeping system for credit purchases
• Ensure safekeeping of credit and credit cards
• Avoid late payment and other penalties-pay attention to
deadlines, bills, etc.
• Debt payment plans-BUDGET!!
• Warning signs of debt problems
– Default, Notices, Repossessions, Collection agencies,
Liens, Garnishment, Foreclosure, Repossession, Eviction
• Credit counseling
• Understanding bankruptcy: Chapter 7 (liquidation), Chapter 13
(repayment)
• Rebuilding credit
-bank accounts-->credit cards-->short term loans-->mortgages
Miss Cheng could spend two hours at a concert or
tutoring a student at $70 per hour. She could use the time
on painting instead and earn a total of $170. If the price of
the concert ticket is $250, what is the opportunity cost of
her choice of going to the concert?
A. $410
B. $420
C. $430
D $440
No. of coupons
Gifts
5
15
20
Cup
Bag
Camera
A.Cup
B. Bag
Mary has accumulated 20 Coupons.
What is the opportunity cost to her
if she uses them to exchange for one
camera?
C. Cup and Bag
D. Cup or Bag
A. Once a choice is made,
the problem of scarcity
is solved.
Which of the
following statements
about scarcity is true?
B. A good is scarce if not
everyone has it.
C. Scarcity means unlimited
human wants.
D. Both rich people and poor
people face the problem
of scarcity.
Answer: D
Which of the following are opportunity
costs of attending school?
(1) Poor examination results
(2) Income forgone
(3) School fees
A. (1) and (4) only
(4) Expenditure on dinners
B. (1) and (3) only
Answer: C. (2) and (3) only
C. (2) and (3) only
D. (2) and (4) only