Transcript Unit 6 Free Market and Role of Government. The existence of

Unit 6 Free Market and Role of
Government. The existence of
competition in a free market
economy ensures individual choice.
The government can protect a free market economy
by maintaining a stable currency, tax breaks to
proprietorships, law and order…
Scarcity – The basic economic
problem that arises because
people have unlimited wants
but resources are limited
51. How do individuals and governments utilize scarce
resources?
Trade Off/Opportunity Costs – A
benefit, profit, or value of something
that must be given up to acquire or
achieve something else.
Factors of Production – Resources
required for the production process.
Ex. Land, Labor, Capital, Enterprise
Economic Questions:
1. What is to be produced?
2. How are the goods to be produced?
3. For whom are the goods produced.
Traditional Economic Systems
• The economy is based on custom, the
way things have always been done.
• low technology development
• the “village” takes care
of each other
• Often a leader and elders
make decisions.
Command Economy
• The government controls the economy.
• technology use varies according to the
economic system and the country
• The government provides the goods and
services it chooses.
Market economy (free market,
capitalism, free enterprise)
• The economy is based on supply (producers) and
demand (consumers).
• medium to high technology use
• Each individual takes care of
him/herself
• Government stays out of the
economy (“laissez-faire)
Characteristics of a market economy
• Laissez-faire – government
leave business/free enterprise
alone, “hands off”
• Invisible hand – the economy will be balanced
by competition, profit motive and self interest
• Consumer sovereignty - the consumers and their
demand are the driving forces in a market economy
• What consumers purchase is
their private property, the
goods/services belong to the
consumers
Sole Proprietorship
• Sole Proprietorship
– a business owned and operated by a single
individual
Advantages of a Sole Proprietorship
• Most popular type of business in the US (75%
of businesses)
• Easy to start-up
• Least-regulated form of business
• Owner gets to keep all profits
• Owner has full control of management of the
business
Disadvantages of Sole Proprietorships
• Unlimited Liability (unlimited losses)
– Owners are fully and personally responsible for all
of firm’s debts
• Limited Life
– “dies” when the owner retires or closes the
business
Partnerships
• Partnership
– A business owned and managed by two or more
people
Partnerships
• Advantages
– Able to raise more
money than a sole
proprietor
– Owners are able to
specialize
• Disadvantages
– Require articles of
partnership
– Unlimited liability
– (unlimited losses)
– Potential for conflict
Corporations
• Corporation
– A legal entity, owned by individual stockholders
who face limited liability for firm’s debts
“A legal entity…”
• To start a corporation, must create a legal
charter to describe business
• Corporations have legal identities separate
from that of their owners
• Corporations function in many ways like
individuals
– Pay taxes
– Sign contracts
– Can sue others and be sued
“…owned by individual stockholders…”
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Stock – certificate of ownership
Stockholder(s) are the owner(s)
Stockholder(s) elect leaders of the company
Money from stock is used to start-up and run
the corporation
“…who face limited liability for the
firm’s debts.”
• Limited liability (limited losses/debts, can
only lose what you put in, NOT personal
assets, personal items)
– Only the corporation, not the owners, is
responsible for any debt of the corporation
• Stockholders can only lose the amount of
money they have invested in the business
Advantages of Corporations
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Limited liability for owners
Unlimited Life
Ability to raise financial capital through stock
Can grow very large
Disadvantages of Corporations
• Difficult to start-up
• Owners/stockholders may have very little say
in management
• More government regulation
• Higher tax rates
Law of Demand
• When prices goes up the quantity demanded
goes down.
• When the price goes down the quantity
demanded goes up.
Demand Curve
• ..
Demand Shift Factors
1.
2.
3.
4.
5.
Population – more people = more demand
Income – more money = more demand
Substitutes – higher price for butter decreases demand for butter
and increases the demand for margarine
Complements – higher price for peanut butter usually reduces
demand for peanut butter and for jelly
Tastes and Preferences – more popular = more demand
Demand Shifts
• rise in demand = rise in
demand curve to the right.
(high demand for turkeys
before Thanksgiving)
• drop in demand – lower in
demand curve to the left
(little demand for turkeys
after Thanksgiving).
Law of Supply
• Suppliers will offer more (higher quantity) of a
good at a high price
• As price increases, quantity the supplier is
willing to supply increases
• Price and quantity supplied go in same
direction
Economics choices for the supplier
(the producer)
• 1. fixed costs – a cost that will remain fairly constant;
the price of rent,
• 2. variable costs – costs that will change, a producer
will not pay the same every month; the electricity
• 3. total costs – the fixed costs + the variable costs
• 4. marginal costs – the cost of adding one more unit
of production (what is the cost of producing just one
more item, one more “baconator” if new
employees/machinery must be included in the
pricing?)
Supply shifts too!
• Cost of Resources (input)
• (also called factors of production)
– If the price of resources used in production increase,
the supply will decrease
– Price of resources decreases, supply increases
• Government Influence (taxation + regulation)
– If government limits supply, the supply decreases
– If government supports more supply, the supply
increases (ex/ farm subsidies)
– If government regulations increase production costs
(environmental regulations EPA, or safety regulations
OSHA), supply may decrease
When the supply and demand
curves intersect, the market is
in equilibrium
Surplus is when there is an
excess supply of a product.
Shortage is when the quantity
demanded is higher than the
available supply
Monopoly
How does competition affect price and output?
1. Only one seller in the market
2. Extremely difficult to enter the market
3. Produces 1 product
4. Doesn’t need to compete
5. Full control over price
• Examples
– Duke Power
– Pizza at Wake Forest
Monopolies
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Sometimes called a “market failure”
Full price control
Total market power
Should the government regulate monopolies?
Oligopoly
How does competition affect price and output?
1. A few (2-4) sellers in the market
2. Difficult to enter the market
3. Similar products
4. Compete with few other sellers
5. Some control over price
• Examples
– Forsyth and Baptist Hospital
– American Car Companies
Competitive Market
How does competition affect price and output?
1. Large number of sellers
2. Easy entry into the market
3. Very similar products
4. Highly competitive
5. Very little price control
• Examples
– Pizza
– Groceries
Monetary policy
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• Controlled by the Federal Reserve System
• Discount rate
– The rate the Federal Reserve Bank (a bank for the
banks) charges a member bank for a loan.
• Open market operations
– Buying and selling of government bonds
Monetary policy
$$$$$$$$$$$$$$$$$$$$$$$
• Loose monetary policy (to help the business cycle
expand)
– Decrease the discount rate, decreases interest rates
– Buy bonds – gives $ to bond holders
• Tight monetary policy (to help the business cycle
contract)
– Increase the discount rate – increases interest rates, fewer
customers/businesses will borrow $
– Sell bonds – takes money from bond holders
Monetary policy
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• Loose monetary policy
– Creates more money
– Long term could cause inflation
• Tight monetary policy
– Reduces the money available
– Long term could cause unemployment if
consumers stop spending and businesses begin to
lay off employees
Fiscal
(freaking, federal, fiscal tax me and spend it on you policy)
• Government spending
– Spending money on infrastructure (roads, bridges,
dams, flood gates…)
– Military, education, Medicare, Social Security
– Unemployment, health care
• Government taxes
– Progressive income taxes
– Excise taxes (gas, alcohol, cigarettes, tanning)
Fiscal
(freaking, federal, fiscal tax me and spend it on you policy)
• Loose fiscal policy
– Increase government spending
– Decrease taxes
• Tight fiscal policy
– Decrease government spending
– Increase taxes
Fiscal
(freaking, federal, fiscal tax me and spend it on you policy)
• Loose fiscal policy effects
– More $ for consumers and businesses
– Business cycle will expand
• Tight fiscal policy effects
– Less $ for consumers and businesses
– Business cycle will contract
the business cycle
• ...
expansion
trough
peak
contraction
trough
the business cycle
• ...
peak
peak
peak
trough
recession, 6
months of
declining GDP
depression, high
unemployment, low
GDP, low CPI
business cycles, examples
• ...
Two major indicators...
GDP = Gross domestic product= total
dollar value of all final goods and services
produced in a country
CPI = Consumer Price Index= measure of
change in price over time of specific
goods/services