Transcript Econ unit 3 Skeleton Notes

The Circular Flow Model
and the Market System
Circular Flow

You decide to by a car so you go to the dealer
and exchange money for the car. The dealer has
rented land and buildings while also hiring
workers to produce the cars. The employees
earn income for their labor and use that income
to buy food from the grocery store. This
transaction generates revenue for the grocery
store, which also hires workers and pays them
income that they then use to purchase goods
and services. Your expenditure for the car is
part of a circular flow.
Circular Flow continued

Now, complicating the prior story is the
fact that some car's are made in Japan
and then shipped to the U.S. Your
purchase also creates revenue for the
manufacturer in Japan, who pays
Japanese workers to produce car's. Also,
when you buy a car, you must pay a tax to
the government, which uses tax revenues
to pay for police protection, national
defense, and other services
The Market System

Consumer Sovereignty-

Consumers exercise so much power b/c
the name of the game for businesses is
profit and the only way they achieve this
is by satisfying consumer wants
Consumer Power
In the 1950’s and 1960’s people were eating out
more then ever. They wanted more restaurants
and fast-food outlets.
 As a result McDonalds, Wendy’s, White Castle,
Pizza Hut, Godfathers Pizza, Big Boy’s and other
fast-food outlets flourished.
 By the 1970’s the average number of meals per
person eaten out daily exceeded one (excluding
meals prepared at home and eaten elsewhere)

Profit and Allocation of Resources
When a good or service has profit potential
someone with entrepreneurial ability will put
together the resources needed to produce that
gizmo
 Hopefully they sell their gizmos for more then
they paid for land, labor, capital. (that's profit)
 If the entrepreneur loses money they may opt to
stop producing that good
 The resources then used in the losing operation
are available for an activity of possible higher
value (see book pages 74 and 75)

The Flow of Resources
Resources naturally flow from an activity where
they have a relatively low value to and an
activity with a higher value (ex, rubber sole
shoes go out of style and the rubber is now used
to produce a new popular brand of tires)
 Adam Smith described this phenomenon in his
1776 treatise (essay) “The Wealth of Nations,”
saying it was as if an invisible hand reached out
and guided resources to their most valued use
(more on Adam Smith page 77)

Adam Smith
The Flow of Resources
Firms produce goods and services and use
the resources that enable them to
generate the highest profits
 Firms often mimic other firms who are
generating a higher profit
 If a firm cannot compete with others firms
in the same industry it will go out of
business and possibly move to another
area line of business

McDonalds Dollar Menu

Many other fast food chains copied
McDonalds
The Flow of Resources

Because goods are produced in the least costly
manner, consumers will more often pay a low
price for the goods that they desire
The Determination of Income
Consumers dictate what is produced and the
search for profit defines how goods and services
are produced.
 Now, for whom are goods and services
produced?


Income is obtained by selling the services of
resources
The Determination of Income
Labor=
 land=
 Capital=
 Entrepreneurs=
 This shows us that buyers and sellers of
goods and services and resource owners
are linked in the economy

Linkage of Sectors
Household sector=
 Business sector=
 International sector=


* These three sectors constitute the
______________ of our economy*
Households
A unit of housing may be a house, an
apartment, even a single living room as
long as it constitutes separate living
quarters
 Can consist of family members or college
students sharing an apartment
 Householder
Households
Households
There are more than 100 million households in
the U.S.
 The largest number of householders fall
between the ages of 35 and 44
 Householders between the ages of 45 and 54
have the largest median income (roughly $
60,000)
 Median is the middle value- half of the
households make more than $60,000 and half
make less

Size Distribution of Households
Size Distribution of Households in the U.S.
2 1
7
26
14
One Person
Two Persons
Three Persons
Four Persons
Five Persons
Six Persons
Seven or More
17
33
Size Distribution of Households



In the U.S. the average number of people per household is 2.2
Worldwide, average household size in high-income countries (those
with an average per capita income over $9,000 per year) is near
that of the U.S; that of middle and low income countries is more
than twice as large
Per capita income-
Household Spending

Household spending is called
Spending in the household sector is the
largest component of spending in the
economy (roughly $6.7 trillion in 2000)
 We consume housing, transportation,
food, entertainment, and other goods and
services

Consumer Spending
Business Firms
May be conducted at more than one
location
 The terms company, enterprise, and
business are used interchangeably with

firm
Forms of Business Organizations

Sole Proprietorship-

Partnership-
Forms of Business Organizations

Corporation-

Multinational Business-
Big Business
Very important in the U.S.
 There are many small firms, but large
firms and corporations account for the
greatest share of business revenue
 Many more sole proprietorships than
corporations, but corporations make 15x’s
the revenue
 (see handout and book statistics page 81)
 Big Business is a global phenomenon

Worlds Ten Largest Public
Corporations (2008)
1) Royal Dutch Shell (Netherlands)
2) Exxon Mobil (U.S.)
 3) Wal-Mart Stores (U.S.)
 4) BP= British Petroleum (Britain)
 5) Chevron (U.S.)
 6) Total (France)
 7) Conoco Phillips (U.S.)
 8) ING Group (Netherlands)
 9) Sinopec (China)
 10) Toyota Motor (Japan)
 http://money.cnn.com/magazines/fortune/global500/200
9/snapshots/6388.html


Top Ten Corporations (oil)
Top Ten (not oil)
Business Spending

Investment-
Economics definition of investment is different
then the everyday definition (financial
transaction such a buying bonds or stocks)
 Investment spending in 2002 reached $1,588
billion (equal to ¼ of consumption or household
spending)

International Sector
Foreign buyers and sellers have a
significant impact on economic conditions
in the U.S. (example, foreign exchange
rates can affect the demand for U.S.
goods)
 Current Exchange Rates
 http://www.x-rates.com/

Types of Countries
Industrial and Developing
 Developing countries greatly outnumber
industrial countries
 World Bank

The World Bank groups countries according to
their per capita income (income per person)
Types of Countries (cont.)





Low income economies (per capita income less
than $755.00) heavily concentrated in Asia and
Africa
Middle income economies (per capita income of
$756.00 to $9,265.00)
High income economies such as oil exporters or
market industrial economies (per capita income
$9,266.00 or higher)
Some countries are not members of the world
bank so they are not categorized
Page 86-87 in textbook outline global income
“Industrial Market Economies”
Page 88 shows the 23 industrial market
countries as of 2003 (per capita income)
 1) Switzerland $36,970
 2) Japan $35,990
 3) Norway $35,530
 4) United States $34,870
 5) Denmark $31,090

“Industrial Market Economies”
These countries are highly interdependent
(economic conditions in one country
spread to others)
 As a result these countries must pay close
attention to each others economic policies
 Not on the list are high income oil
exporting countries like Libya, Saudi
Arabia, Kuwait (World Bank considers
these countries to still be developing

Developing Countries
U.S. imports agricultural produce and
minerals from developing countries
 Imports
U.S. exports many manufactured goods to
these countries
 Exports
U.S. Imports
Imports from China have grown 665 percent
since 1992. Imports from Mexico have grown
343 percent over the same period.
 The U.S. is the world's largest market for
exporting countries. In 2004, it imported more
than $1.3 trillion worth of merchandise. Of the
total 2004 U.S. imports, half came from the four
top trading partners: Canada (17 percent),
China (13 percent), Mexico (11 percent), and
Japan (9 percent).

U.S. Imports
U.S. Exports
International Sector Spending
U.S. activity with the rest of the world
includes U.S. spending on foreign goods
and foreign spending on U.S. goods
 As of 2003 Canada and Japan played a
huge role in U.S. trade (roughly 1/3 of
exports and more than 1/3 of imports)
 U.S. trade with industrial countries is
approximately twice as large as trade with
developing countries

International Sector Spending

Trade Surplus-

Trade Deficit-

Net Exports-

Prior to the 1960’s the U.S. exported more than it
imported, but since 1976 net exports have been negative
(U.S. has been in a trade deficit)
Linking the Sectors
See page 124 circular flow diagram and/or
handout
 Financial Intermediaries

Circular Flow-Diagram-