Transcript Economic Systems

“It is in this manner that money has
become in all civilized nations the
universal instrument of commerce, by
the intervention of which goods of all
kinds are bought and sold, or
exchanged for one another.”
Adam Smith, The Wealth of Nations
1
Objectives
1. To identify economic resources.
2. To analyze how supply and demand
impact price.
3. To investigate influences on a nation’s
ability to trade.
4. To understand the concept of
productivity.
5. To explore factors affecting business
risk and profit.
2
Main Menu
• Basics of Economics
• Economic Systems Fundamentals
• Global Economics & Trade
3
4
What is Economics?
• Economics is how humans allocate
scarce resources to produce various
commodities and how those commodities
are distributed for societal consumption
5
Impact of Economics
• Can be larger than you realize
– the welfare of a nation’s economy can
directly correlate to an individual’s daily life
 in a stable and expansive economy, individuals
will increase spending and have more jobs
opportunities
 in an unstable and slow economy, unemployment
rates will be high and jobs will be harder to find
How might economics affect your career?
6
Economic Resources
• Are scarce and cannot meet all human
wants and needs
– human necessities
 include goods and services we cannot live without
– human wants
 include every other type of goods and services
we may want but do not need
– examples:
 need: open heart surgery
 want: liposuction
Scarce: of insufficient quantity to satisfy demand
7
Economic Resources
• Resources are anything used to make
goods or services, also called factors of
production
• Distributing and managing these
resources efficiently and equitably are
part of the basic question to be
answered by economists
8
Factors of Production
1. Land
– natural resources found on earth
– includes everything contained in the earth or seas
2. Labor
– human resources
– includes all people who work within an economy
3. Capital
– monetary resources needed to start and operate a
business or goods used in the production process
4. Entrepreneurship
– involves human skills required to start and run a
business
– organizes the other three factors to create economic
goods and services
9
Economic Utility
• Is the value added to a product or service
by the role of marketing
• Includes these five types:
– time utility
– place utility
– form utility
– possession utility
– information utility
10
Time Utility
• Enhances value by having a product or
service available to consumers during a
certain time of day, week, month or year
• Examples include:
– stores staying open after 5 p.m. for those
who work during the day
– retailers providing gift wrapping during the
holiday season
11
Place Utility
• Enhances value by placing products or
services in easily accessible locations for
consumers
• Examples include:
– banks placing ATMs outside of convenience
stores, stadiums, theaters, etc.
– restaurants providing delivery or curbside
pickup
12
Form Utility
• Enhances value by creating more useful
or desirable products out of raw materials
or separate parts
• Examples include:
– grocery stores selling frozen or fresh preprepared meals
– car manufacturers installing a CD player
in a car
– retailers selling bundles of products which
complement each other
13
Possession Utility
• Enhances value by allowing for easy use
by consumer or transfer of ownership to
consumer
• Examples include:
– retailers providing layaway or financing for
large purchases
– property owners renting to those who prefer
not to or cannot afford to purchase a home
14
Information Utility
• Enhances value by supplying consumers
with information
• Examples include:
– informed sales staff describing a product’s
features and benefits
– advertising informing consumers about a
new product
– retailers offering a lesson on how to most
effectively use a product
15
Basic Economic Questions
• Are answered by economic systems in different
ways and include:
– What goods and services do we produce?
– How do we produce those goods and services?
– Who should benefit from the goods and services
produced?
• Are answered through a nation’s market or
command system
– most economies are not purely market or command;
elements of both systems are included, making them
mixed economies
16
Productivity
• The effectiveness of production
• Gains are a vital role for the economy, to
determine future levels of GDP
• Allows all companies to accomplish more
with less
• Can result in producing too much of a
product, surplus
17
Specialization
• Is focusing all time and effort to a limited
range of services or products
• Allows companies to develop and fine tune
production
• Allows global trading
– countries get to export goods and services
which are native, or particularly easy to produce
in their company
– allows consumers to get products or services
they would not get regularly without trading
– can potentially result in over-specialization
 leaves company vulnerable if the demand for product
or service decreases
18
Labor
• Is a person’s productive activity towards a
specific job or activity
• Can increase efficiency and
competitiveness
• Can increase output and exports, bringing
more revenue
• May be over worked
– if under staffed
 more employees can cause for pay cuts
 replacement costs for hiring more employees
19
Returns
• Are any profit made or lost from a specific
good or service
• Consist of capital gains or income of a
specific investment
• Are not always positive
– the greater the potential of income, the
greater the potential loss
 investments
 products not reaching full marketable potential
20
Law of Diminishing Returns
• Is the rule which states at some point
adding more factors to a production
process will not improve returns
– for example, increasing amount of
employees may not speed up productivity
 must train employees
 may not have enough space for new employees
• Requires companies to determine
efficient ways to increase production
21
22
Assessment
1. Which of the following is how humans allocate scarce
resources to produce various commodities and how those
commodities are distributed for social consumption?
A. Price
B. Economics
C. Supply
D. Demand
2. Which of the following is anything used to make goods or
services and are also called factors of production?
A. Resources
B. Economic utility
C. Supply
D. Human needs
23
Assessment
3. Which of the following enhances value by having a product
or service available to consumers during a certain time of
day, month or year?
A. Possession utility
B. Information utility
C. Place utility
D. Time utility
4. Advertising which informs customers about new product is
an example of which of the following?
A. Possession utility
B. Information utility
C. Place utility
D. Time utility
24
Assessment
5. Which of the following enhances value by allowing for easy
use by consumers or transfer of ownership to consumers?
A. Possession utility
B. Information utility
C. Place utility
D. Time utility
25
Types of Economic Systems
• Market economies
– consumers decide what is produced by the
purchases they make
– businesses make production decisions
– consumers earning more money purchase
more goods and services
– consumers are motivated to work in order to
earn more money
27
Types of Economic Systems
• Command economies
– one person or group of people make
production decisions
– one person or group of people owns all
businesses and runs all businesses
– one person or group of people decides who
will receive goods and services produced
28
Types of Economic Systems
• Mixed economies
– have a mixture of the market and command
economic systems
– most present-day global economies are
varying mixtures due to lessons learned
over history
 the Great Depression of the 1930s showed
us the need for some government regulation
in a free market
 the collapse of the Soviet Union showed us
the need for some personal freedoms in a
command system
29
Economic Systems
• On an economic continuum, with command
economic systems far left and market
economic systems far right, most countries
fall somewhere in between
Command
Communism Socialism
Market
Capitalism
Where on this continuum would you place
the United States? Canada? Russia?
China? North Korea?
30
Capitalism
• Is an economic system in which:
– businesses are privately owned
– product development is proportionate to the
accumulation and reinvestment of profits gained
in a free market
– government is usually democratic and maintains
fewer social services than in a socialist country
• Is the economic system in countries
including:
– United States
– Japan
31
Socialism
• Is an economic system in which:
– there is increased government involvement
– the goal is to keep prices low and provide
jobs for everyone through governmentowned businesses
• Is somewhat vague in its definition
because of its position on the continuum
• Often proves to be a temporary phase
countries go through
32
Socialism
• Includes additional social services in
order to secure a certain standard of
living such as:
– providing free or low-cost medical care
– providing free education from elementary to
college
– providing pensions and free care for the
elderly
– forcing companies and individuals to pay
much higher taxes
33
Communism
• Is an economic system in which:
– the government runs and controls most aspects of
daily life
– there is little or no economic freedom
– theoretically every working-age citizen is assigned a
job or continues getting paid, even if he/she stops
going
– the government decides the type of schooling each
citizen receives
• Is the economic system in countries including:
– China
– North Korea
34
The Free Enterprise System
• Is an economic system which:
– uses the capitalist approach
– encourages people to start and run
businesses without government involvement
– encourages competition
 a struggle between companies
 an essential component of a free enterprise
system
Fun Fact: There were over 27 million
business organizations in the U.S. in 2008.
35
Types of Competition
• Price competition
– focuses on the sale price of a product
– assumes other factors are equal and
customers will choose by price
• Non-price competition
– focuses on factors other than price including:
 product quality
 reputation
 customer service
 business location
36
Degrees of Competition
• Monopolies
– refer to one company controlling a
product market
– have no competition
– are harmful to free enterprise
– are regulated by the U.S. government
• Oligopolies
– are a few companies controlling a product
market
– can affect price and competition
What are some of the product markets
with a monopoly or an oligopoly?
37
Risk
• Includes the possibility of loss or failure in
relation to the possibility of increased
profit in a free enterprise system
• Is a factor affecting business
– new product development
 close to 90 percent of new products fail
– competition
 once a product is on the market, other companies
scramble for a piece of the “market pie”
• Increases when profits increase
38
Profit
• Motivates entrepreneurs to take risks
involved in owning their own business
• Is the income of a business after all costs
and expenses have been deducted
– for example:
 five percent of sales go to profits
 95 percent of sales go to pay costs, expenses,
taxes, etc.
• Increases with lower costs and higher
sales volume
39
Profitable Firms
• Positively affect and benefit:
– employees


increased job market
increased salaries
and benefits
 an improved
economy
– consumers

increased
competition creates
lower profits, higher
quality and better
services for
consumers
– the government

increased salaries
 increased business
profits
 increased money
from taxes
– investors

higher dividend
returns
40
Unprofitable Firms
• Negatively affect the economy with:
– costs to employees
 higher unemployment
 salary cuts
– costs to investors
 loss on investment when stock price
dips too low
 selling stocks at a loss, creating an unstable
stock market
– costs to the government
 decreasing taxes
 decreasing funds available to social services
41
Interest Rate
• Is the amount charged as a percentage of
the initial loan borrowed from the lender
• Affects consumer and business spending,
the higher the interest rate the less likely the
borrower will spend
• Builds up the amount over time it takes the
borrower to re-pay the lender
• Simple Interest = P (principal) x I (annual
interest rate) x N (years)
42
Supply & Demand
• Measures the amount of consumer spending as
an economic indicator
• Requires producers to find an equilibrium
between product price, product quality, supply
and demand for the most return
• Supply
– is the amount of a product available to the market; stock
– according to the law of supply, as product price increases, the
product quantity increases; causing a positive slope
• Demand
– is the consumer’s willingness to buy a product
– according to the law of demand, as product price increases, the
demand for the product decreases; causing a negative slope
43
Supply & Demand Curves
As price
increases,
supply
increases
As price
increases,
demand
decreases
44
Supply & Demand
• Interactions in the marketplace result in one
of the following:
– surplus – when a product is produced in larger
quantities than it is demanded
– shortage – when a product is demanded in
larger quantities than it is produced
– equilibrium – when the quantity of a product
supplied matches the quantity demanded
 can be found at the point where the demand
curve meets the supply curve
 at this point, the producer and the consumer are
satisfied with the price of the product and the
amount produced
45
Supply & Demand Curves
shortage
surplus
46
Government’s Role in Free Enterprise
• Is providing four functions including:
–
–
–
–
basic social services
business support
business, individual and resource protection
competition
47
Basic Social Services
• Provided by the government include:
– protection provided by the military, police and
fire departments
– public education
– medical care for the poor and the elderly
– transportation infrastructure
Fun Fact: Public elementary and secondary schools
across the nation spent about $525 billion for the
2011-12 school year – more than $10,500 per student!
48
Business Support
• Provided by the government includes:
– relief in the event of disasters (i.e., droughts
or hurricanes)
– trade alliances with other countries
 North American Free Trade Agreement (NAFTA)
opened trade in North America by lifting tariffs
and gradually reducing trade barriers within
Canada, the United States and Mexico
NAFTA affected the trucking industry, as well as the
agriculture industry. Do you think these affects were
positive? Could the affects have been negative?
49
Protection
• For businesses, individuals and
resources are provided by the
government through departmental
regulation such as:
– Food and Drug Administration (FDA)
– Occupational Safety and Health
Administration (OSHA)
– Equal Employment Opportunity Commission
(EEOC)
– Environmental Protection Agency (EPA)
50
Competition
• Is provided by the government through its
own business operations such as:
– U.S. Postal Service
– AMTRAK
– Tennessee Valley Authority
Fun Fact: In 2011, the U.S. Postal Service had
over 550,000 career employees and delivered
over 160 billion pieces of mail.
51
Consumer Role in Free Enterprise
• Two main functions :
– attaching popularity to products
 consumers ultimately decide what products (and
businesses) survive by making purchases
– determine the supply and demand for each
product
 by buying more or less of a product, consumers
establish a supply and demand schedule for the
given product
52
Economic Success
• Can be measured in several ways
including:
– employee productivity
– gross domestic product (GDP)
– rate of inflation
– consumer price index
– producer price index
– unemployment rate
53
Employee Productivity
• Measures the output per hour of
individual employees for a defined time
period
• Can be increased by:
– furnishing new equipment or facilities to
support better efficiency
– arranging for more training or financial
incentives
– decreasing employee ratio and giving more
responsibilities to remaining employees
54
Gross Domestic Product
• Is also known as GDP
• Is the total output of goods and services
produced in a country
• Is the single most important indicator to
capture economic activities
• Helps the price stability be maintained
through mid-tem perspectives
• Is represented by 70% of consumers
spending and government health care
55
Gross Domestic Product
• Can be calculated by using the following
formula:
– GDP = C + G + I + NX
 C is equal to all private consumption, or consumer
spending
 G is the sum of government spending
 I is the sum of all the country's investment, including
businesses capital expenditures
 NX is the nation's total net exports (NX = Exports Imports).
56
Rate of Inflation
• Is the rate of rising prices in a country
• Is usually attributed to the volume of money
and credit relative to available goods and
services
• Signifies a stable economy when low, but an
unstable economy when high
• Is managed by the government by:
– raising interest rates to keep people from
borrowing money
 higher interest rates slow economic growth, thus slow
down the rise of inflation
57
Consumer Price Index (CPI)
• Is used to measure inflation
– measures price changes of about 400 goods
and services used by the average household
including:







food and beverages
housing
apparel
transportation
medical care
recreation
education and communication
• Is sometimes called a cost-of-living index
58
Consumer Price Index (CPI)
How would you describe the
inflation rates from 1981 to 2011?
12
10
8
6
4
2
0
Source: Bureau
of Labor
Statistics of the
U.S. Department
of Labor, 2012
-2
1981
1986
1991
1996
2001
2006
2011
59
Producer Price Index (PPI)
• Is also used to measure inflation
– measures the selling prices received by
domestic producers
• Is considered the trendsetter of the two
since consumer prices generally follow
producer prices
Fun Fact: The Producer Price Index was called the
Wholesale Price Index from the program’s inception
in 1902 until 1978, when the name was changed.
60
Unemployment Rate
•
•
•
•
Is the amount of people without jobs
Is tracked by all countries
Means economic decline when high
Means economic expansion when low
– with more people working, there are more
people spending money and paying taxes
61
Assessment
1. Which of the following is an economic system in which
businesses are privately owned and profit is gained in a free
market?
A. Socialism
B. Communism
C. Capitalism
D. Monopoly
2. Which of the following is the economic system in countries
such as North Korea and China?
A. Socialism
B. Communism
C. Capitalism
D. Monopoly
63
Assessment
3. The amount of product available in a market is known as
which of the following?
A. Supply
B. Demand
C. Resources
D. Stock
4. Which of the following occurs when the quantity of a product
supplied matches the quantity demanded?
A. Gross domestic product
B. Shortage
C. Surplus
D. Equilibrium
64
Assessment
5. Which of the following is the total output of goods and
services produced in a country?
A. Gross domestic product
B. Shortage
C. Surplus
D. Equilibrium
65
66
The Business Cycle
• Constitutes economic production rising
then falling in a long cycle of expansion
and contraction
• Can be applied as a lifecycle to a single
business or product to explain its success
and/or failure
• Can also be applied to national and
global economics to categorize periods of
prosperity and decline
67
Business Cycle in Global Economics
• Is a series of periods of growing and
shrinking economic activity measured by
increases or decreases in the real GDP
• Often refers to economic upswings and
downswings
– when the GDP increases from one quarter
(three-month period) to the next, it indicates the
economy is growing (or in an upswing)
– when the GDP rises less than in other quarters,
or decreases, it indicates the economy is
slowing down (or in a downswing)
68
Business Cycle in Global Economics
• The business cycle applied to national and
global economics consists of four phases:
1.expansion
– a period of increasing economic activity – GDP
increases, unemployment decreases
2.peak
– period of highest economic activity
3.contraction
– a period of decreasing economic activity – GDP
decreases, unemployment increases
4.trough
– period of lowest economic activity
69
Business Cycle in Global Economics
• Does not always rise and fall in neat,
predictable patterns
– for example, in the 1930s, the United States
experienced a severe depression
 several factors led to the collapse of the
economy, but on Tuesday, October 29, 1929, later
known as Black Tuesday, the stock market
plummeted, proving to be the catalyst to a
devastating period in American history
depression: a phase of the business cycle characterized
by drastic unemployment increases and severe
decreases in economic activity for long periods of time 70
Recession & Expansion
• Recession – two or more consecutive fiscal
quarters of decreasing GDP
– during a recession, plans for new projects decrease,
prices increase, and unemployment rates increase
• Expansion – two or more consecutive fiscal
quarters of increasing GDP
– during an expansion, spending and production
increase, prices increase, and unemployment rates
decrease
How would you describe the current U.S.
economy? Is it in an expansion or recession?
What factors led you to your decision?
71
International Trade
• Is economic interdependence
– most countries depend, in some part, on other
countries for certain goods or services
– each country possesses unique resources
• Imports
– are goods and services purchased from other
countries
– for example, silk from India
• Exports
– are goods and services sold to other countries
– for example, corn to Japan
Fun Fact: The United States was
the world leader in trade in 2010.
72
International Trade Theory
• Seeks to answer questions such as:
– “Why do nations trade?”
 besides cultural and political reasons, the main
reason is price
 countries can buy some goods cheaper than they
can make them
– “What goods should be traded?”
 most countries understand complete selfsufficiency is more expensive than global
interdependence
How do you think countries decide which goods
to purchase from other countries and what
goods to produce on their own?
73
73
Types of Advantage in Trade
• Absolute advantage:
– is when a country possesses unique
resources or capabilities to allow the lowest
cost of production for a product
• Comparative advantage:
– is when a country is able to produce a
product more efficiently and at a lower cost
than other countries
74
Government Involvement in Trade
• Laissez-faire
– French word for “leave alone”
– an economic concept opposing
governmental involvement in
commerce beyond what is necessary How much
to keep an economic system
involvement
running on its own laws
do you think a
– usually associated with a free
government
enterprise system
should have in
• Most countries have some form of
government involvement, including:
– trade barriers
– trade alliances and agreements
a nation’s
economic
system?
75
Trade Barriers
• Tariffs – taxes on imports
– can either be protective or revenue-producing
 protective tariffs increase price on imports to protect
domestic products
 revenue-producing tariffs supply revenue for a country
• Quotas – limit the quantity or monetary value of
an import
– control the level of imports
• Embargos – are a complete ban on certain
products coming in or leaving the country
– usually for political reasons
76
Trade Alliances & Agreements
• Are when governments establish
agreements in order to establish
international trade guidelines
• Include:
– World Trade Organization (WTO)
– North American Free Trade Agreement
(NAFTA)
– European Union (EU)
77
World Trade Organization
• Is a global coalition among many
countries including the U.S.
• Is headquartered in Geneva, Switzerland
• Performs functions, such as:
– providing technical assistance and training
for developing countries
– handling trade disputes and administering
trade agreements
– cooperating with other international trade
organizations
– providing a forum for trade negotiations
78
North American Free Trade Agreement
• Became effective in 1994
• Was implemented to increase trade with
Mexico
• Has a mission to diminish all trade barriers
and investment restrictions between
Canada, the United States and Mexico
• Immediately dropped tariffs from more than
half of the goods traded between Mexico
and the United States
79
European Union
• Established in 1993 between independent
European countries
• Has 26 member countries including:
– Austria, Belgium, Czech Republic, Denmark,
France, Germany, Greece, Ireland, Italy, Spain,
Sweden and the United Kingdom
• Encourages free trade among members and
promotes work as a single market
• Uses the Euro, the single currency
– in 2002, 11 member states made complete
transition to the Euro currency
80
81
Assessment
1. Which phase can be defined as a period of increasing
economic activity?
A. Expansion
B. Peak
C. Contraction
D. Trough
2. Which phase is defined as the period of lowest economic
activity?
A. Expansion
B. Peak
C. Contraction
D. Trough
82
Assessment
3. Which of the following is a phase of the business cycle
characterized by drastic unemployment increases and
severe decreases in economic activity for long periods of
time?
A. Depression
B. Recession
C. Expansion
D. Contraction
4. Which of the following is defined as tow or more consecutive
fiscal quarters of decreasing GDP?
A. Depression
B. Recession
C. Expansion
83
D. Contraction
Assessment
5. Which of the following can be defined as the taxes placed on
imports?
A. Risks
B. Quotas
C. Tariffs
D. Embargos
84
85
Assessment
1. What type of utility refers to using raw materials?
A.
B.
C.
D.
Possession utility
Time utility
Form utility
Information utility
2. Which of the following is NOT one of the basic
economic questions listed in the presentation?
A.
B.
C.
D.
What goods and services do we produce?
How do we produce those goods and services?
When will we produce those goods and services?
Who should benefit from the goods and services
produced?
86
Assessment
3. Economic resources are also called factors of
production.
A. True
B. False
4. Which of the following is NOT a suggested way to
measure economic success?
A.
B.
C.
D.
Rate of inflation
Immigration rate
Gross domestic product
Unemployment rate
5. A market economy usually has one person or a group
of persons making production decisions.
A. True
B. False
87
Assessment
6. Which of the following is not a governmental role in
the U.S. economy?
A.
B.
C.
D.
Provides services
Supports businesses
Regulates by making laws
Determines prices
7. Conditions of supply and demand interaction include
which of the following?
A.
B.
C.
D.
Surpluses
Shortages
Equilibriums
All of the above
88
Assessment
8. Employee productivity measures the total goods and
services produced in a country.
A. True
B. False
9. Which of the following accurately defines tariff?
A.
B.
C.
D.
A ban on certain imports
A type of trade agreement
A tax on imports
A limit on the quantity of imports
10. Which of the following is NOT a phase of the
business cycle?
A.
B.
C.
D.
Reaction
Peak
Expansion
Contraction
89
Internet Links
World Trade Organization
http://www.wto.org/index.htm
Provides information and facts on the World Trade Organization
and its members
U.S. Department of Labor
http://www.dol.gov/
Provides data for unemployment rates and CPIs
U.S. Bureau of Economic Analysis
http://www.bea.doc.gov/bea/di1.htm
Provides GDP data and data on international trade
U.S. Census Bureau
http://www.census.gov/
Provides statistical data on numerous topics including business
90
Resources
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New York: Glencoe McGraw-Hill, 2002.
“Fast Facts: Back to School Statistics”. NCES.ed.gov, June 5, 2012.
http://nces.ed.gov/fastfacts/display.asp?id=372
Heilbroner, Robert L. The Worldly Philosophers: The Lives, Times & Ideas of
the Great Economic Thinkers. New York: Simon and Schuster, 1961.
Perreault, William D. and E.Jerome McCarthy. Basic Marketing: A GlobalManagerial Approach. Boston: Irwin McGraw-Hill, 1999.
Terpstra, Vern, Ravi Sarathy and Debra Laverie. International Marketing. New
York: Harcourt College Publishers, 2000.
“The Corporate Scandal Sheet.” Forbes.com, January 13, 2003.
http://www.forbes.com/home/2002/07/25/accountingtracker.html
“United States Postal Service 2011 Annual Report to Congress”. USPS.com,
June 5, 2012. http://about.usps.com/publications/annual-reportcomprehensive-statement-2011/annual-report-comprehensive-statement91
2011.pdf
Acknowledgements
Production Coordinators:
Amy Baker
Amy Hogan
Leah Richardson
Gloria Shimanek
Technical Writer:
Jessica Odom
Production Manager:
Geoff Scott
Executive Producer:
G.W. Davis
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CEV Multimedia, Ltd.
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