Transcript specialize Specialization is similar to the division of labor

Chapter 3
American Capitalism
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Producers AND consumers
want to benefit from the system
Consumers want the best price
for the greatest quality
Producers can only charge what
consumers are willing to pay
Producers want to lower costs
to make a greater profit
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Increase productivity and efficiency
Specialization
Division of Labor
Edward Hopper 1942
Constitutional
Protections
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U.S. Constitution
grants certain rights
that allow people to
engage in business activities.
Recognition of property rights
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5th amendment & 14th amendments prevent
government from taking away personal
property away from an individual except
when there is a public reason.
Constitutional Protections
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5th--nor be deprived of life, liberty, or property,
without due process of law; nor shall private
property be taken for public use, without just
compensation.
14th--All persons born or naturalized in the United States and subject
to the jurisdiction thereof, are citizens of the United States and of the
State wherein they reside. No State shall make or enforce any law
which shall abridge the privileges or immunities of citizens of the
United States; nor shall any State deprive any person of life, liberty, or
property, without due process of law; nor deny to any person within its
jurisdiction the equal protection of the laws.
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Taxation – Constitution sets up clear guidelines
on how businesses must be taxed.
Binding contracts – people and businesses have
rights to make and enter contracts. They may not
use political processes to be excused from
contracts. Laws cannot be passed to change a
business agreement.
16th Amendment allows for a personal income
tax
Principles of Free Enterprise
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Profit Motive – force that
encourages people and
organizations to improve
their material well-being
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rewards innovation and
efficiency.
Open Opportunity –
everyone can compete in the marketplace,
enabling economic mobility.
Economic rights
You Have the
Right to…
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Legal equality –
all the same legal
rights
Private property rights – ability to control and
own possessions
Free contract – decide upon agreements
Voluntary exchange – choosing what to buy or sell
when and at what prices
Competition – rivalry among sellers
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Drives down prices, drives up quality
http://www.youtube.com/watch?v=jnjPFZV8Wqo&feature=relmfu
Producers
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The rate at which a
company creates goods
and
services for sale is
called that company’s
productivity
Inputs are resources
used to make things
Output is the amount of goods/services created
Seek to maximize profit
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Cut costs, raise prices while delivering quality
Getting the Most
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Besides lowering
costs, producers can
become more efficient
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One of the easiest ways
to be more efficient is
to specialize
Specialization is
similar to the division of labor
It allows producers to do what they do most
efficiently and trade their income for everything
else
Be a Good
Little Consumer
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Freedom to make
economic choices
Make desires known
through choices
(purchases)
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Producers will respond
Join an interest group– a private
organization that lobbies the
government in their interest
Business Cycles
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Gross Domestic Product –
(GDP) measure of the
country’s economic
well-being
Total value of all FINAL
goods and services produced in an economy
GDP helps to predict business cycles based
on increases or decreases over time
Cycles
Business cycle
 Believed natural
cycles of economic
growth and decline
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Expansion ->
Contraction
Not day to day or weekly activities
Cycles may last a 6 months, a year or longer
Goals of Stabilizing the Economy
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High Employment
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Stable Prices
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Steady Growth
Employment
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Provide jobs for everyone able and
willing to work.
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Good unemployment rate: 4%-6%
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What is the current rate?
Growth & GDP
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Each generation seeks
to obtain a higher
standard of living than
the previous one.
Economy must grow to provide more goods
and services.
Gross Domestic Product (GDP) measures this
growth.
Yearly GDP Growth
Stability Over Time
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Stability gives confidence
to consumers, producers
and investors.
Price levels help indicate
stability.
Dramatic price increases hurt consumers
while dramatic price decreases hurt
producers.
The Nature
of Investment
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Investment is using resources
that could bring immediate
benefits for the purpose of
gaining greater benefits at a
later time
Capital Investment buys new or
upgrades machinery, retrains or
educates workers making both more productive
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The more training and education a worker has the more
likely their standard of living will rise.
Increasing Productivity
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Achieving productivity
and a higher standard
of living:
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Work ethic – commitment
to hard work
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Technology –makes us
more efficient
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Specialization – efficient
division of labor
lowers costs
Education –leads to more innovation and
better decision-making
Government
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Protect private
property
Enforce contracts and rule of law
Protect consumers from dangerous
products and fraud
Public disclosure laws – require
companies to provide info about their
products
Resolve market failures and improve
outcomes
http://www.pbs.org/wgbh/pages/frontline/sh
ows/meat/
More Roles of Government
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Incentives for innovation:
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Regulation: intervening in
a market for a purpose
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Patents, copyrights
Deregulation: removing
market controls
Providing public goods
Redistribution of income :
taxation -> social security, welfare
Providing Public Goods
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Public good – shared
good or service for
which it would be
inefficient or
for consumers to buy
individually.
Total benefits to society
are greater than the total cost.
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impractical
Public goods – financed by the public sector
(govt)
Private good – provided by private sector
(individuals/businesses)
Free-Riders
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Someone who would
not choose to pay for a good or service
but benefits anyway.
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“piggybacking”
Market failure – the market does not
distribute resources equally.
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Using someone else’s wifi
Listening to public radio without paying for
it
Charles Wheelan and
Externalities
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Externalities exist as a
gap between the private
cost incurred and the
social cost that isn’t
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If the gap between the
two is large individuals
have an incentive to do
things that make them
better off at the expense
of others
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What are the different
costs associated with picking
up after your dog in a public
park?
http://www.youtube.com/watch?v=zcPRmh5AIrI&list=PLD78A4CA3338CFA7E&index=9&feature=plcp
Market Failures
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When externalities
aren’t dealt with we say
that markets actually
are unable within themselves to produce
efficient allocations
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Or others are forced to incur costs which they did
not benefit from or create
Governments can resolve these failures
through regulation, taxation or property
rights
Tragedy of
the Commons
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Do people always
take care of the public
goods or resources they share?
Economists use the phrase Tragedy of the
Commons to illustrate how individuals
seeking personal gain will deplete or
destroy common resources.
So what is the solution?
http://www.youtube.com/watch?v=MLirNeu-A8I&feature=relmfu
Safety Nets
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In a free market
economy wealth is spread
unevenly throughout
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society.
Poverty is the result
Poverty threshold –
income
level below which is needed to support families
or households.
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Determined by Federal govt.
Welfare – government aid for the poor
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Reformed during the Clinton era
Redistribution Programs
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Cash transfers –
payments
redistributing
income to the those
who lack it
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TANF – Temporary Assistance for Needy Families
Social Security – to elderly and disabled
Unemployment – to those who have lost jobs, must
show efforts to find work
Worker’s compensation – to injured workers
Government
Programs
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In kind benefits – provided
free or at great reduced
health insurance:
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for
prices
medicare – for those over 65
medicaid – for low income
Education – grants, funding from pre-K to
college
Faith Based Initiatives – allowed to compete
for federal funds to help the poor and needy