UNIT 1 NOTES

Fundamental Economic Concepts

1- What is Economics? Economics= the study of man producing and making voluntary exchanges. *Exchanges are voluntary because people do things to benefit themselves. They are Incentives- positive reasons to do something. All exchanges happen in the market place. This is where buyers and sellers meet. 2- 4 Factors of Productions Land- natural resources (gifts of nature) Labor- human provides labor Capital- money or tools used to produce a good or service Entrepreneur- has imagination, innovation, thinking skills, management, and a risk taker. Why do they do it? o Land- rewarded with Rent o Labor- rewarded with a Salary or Wage o Capital- rewarded with Interest o Entrepreneur- rewarded with Profit 3- What to Produce? 1. Good- tangible (can be touched) Examples: shirt, car, desk, pencil. 2. Service- intangible (cannot be touched)- someone does something for you. Examples: bank teller, McDonalds cashier, Ms. Burton 4- 3 Basic Needs of all Humans: 1) Food 2) Clothing 3) Shelter *Needs change based on: 1. Gender 2. Age and 3. Culture 5- Two Free Items 1. Air 2. Sun 6- Choices-What should we choose? Opportunity Cost- item given up (except when graphing) Trade off- give up one or a little of one item to get another 7- Economic Studieso Microeconomics- studies the individual (small things) o Macroeconomics- studies a nation (large things)

1- The US Economy is called: Market Economy- buyers and sellers naturally meet in the market- no one forces them to buy or sell Free-Enterprise- exchanges take place freely and according to ones will Capitalism- capital increases because of free will 2- 6 Pillars of Free-Enterprise 1. P-Private Property- Gives people responsibility (public goods vs. Private goods) 2. C- Competition- creates rivalry and a price check 3. P-Price System- places a value on all goods and services 4. E-Entrepreneur- takes a risk for their own self-interest 5. S- Specialization- divides the work and increase efficiency and productivity (Adam Smith= 1 man, 1 job, 1 product) 6. V-Voluntary Exchange- provides incentives 3- 2 People in the Market Place Buyers and sellers or consumers and producers 4- Major Economics Players in the Past: 1. Mercantilist- merchant wanted government help in the end 2. Physiocrat- believed in laissez faire, means let them do. Government, hands off! What was Adam Smith? How did this influence our economy? 5-3 Types of Economies: 1. Market- based on voluntary exchange 2. Command- authorities decide all economic decisions and usually control resources 3. Traditional- based on traditions and customs * All combined create a Mixed economy, which many consider the United States. How? 6- 3 Questions of Every Economy: 1. What- to make? 2. How- to produce it? 3. Who- to sell to? ----------------------------------------------------------------------------------------------------------Three Types of Economies 1. Traditional Economy Allocation of scarce resources and nearly all other economic activity stems from ritual, habits, or customs. Roles are defined by elders and ancestors (not by individuals) Food is shared

Ex. Australian Aborigines, Canadian Inuits, and African Mbuti Advantages: Everyone knows their role in the economy Little uncertainty of what and how to produce For whom to produce is answered by customs and traditions Disadvantages: Discourage new ideas and new ways Strict rules that push social conformity Lack of progress leads to a lower standard of living 2. Command Economy Central authority makes most of the who, what, how decisions Government makes most of the decisions Government determines needs, goals, production, and quotas for major industries Ex. North Korea and Cuba Advantages: Change direction drastically in a relatively short time Many health and public service are available to everyone with little or no cost Disadvantages: Not designed to meet wants of consumers Does not give an incentive to work hard Requires a large decision-making bureaucracy, which tends to slow down decision making Does not have the flexibility to deal with minor, day-to-day problems Difficult for people with new or unique ideas to progress 3. Market Economy People and firms act in their own best interest to answer the what, how, who questions Allows buyers and sellers to come together to exchange goods and services Peoples decisions act as votes Consumers play a big role in what to produce Ex. United States, Canada, Japan, and South Korea Advantages: Overtime, can adjust High degree of individual freedom Small degree of government control Decision making is decentralized Variety of goods and services are available Consumer satisfaction Disadvantages: Rewards only productive resources Workers/businesses face uncertainty because of competition Does not produce enough public goods

 Must guard against market failure ----------------------------------------------------------------------------------------------------------1- Capital is: Financial (money) Goods (equipment, tools, buildings) Human Capital (education, training) 2- Scarcity- more wants than resources *Makes consumers and producers make choices and leads to the who, what, how questions. 3- Production Possibilities Shows opportunity cost and possible production of two goods 4- Paradox of Value Some necessities have little value (water) Value is created by scarcity and utility Value is measured in dollars and cents-monetary value Utility means useful. The utility of an item is different for everyone, so this changes the value. 5- Durable Goods Last 3 years 6- Circular Flow Chart Shows exchanges between the household and the business -------------------------------------------------------------7 Goals of the US Economy 1) E-Economic Freedom Allows people to make their own economic decisions Choose where and how to produce Choose jobs 2) F-Full Employment Need citizens working and earning an income 3) E- Economic Efficiency Recognize resources are scarce If resources are wasted, fewer goods and services can be produced and fewer needs and wants satisfied Efficiency increase benefits and decrease unit cost (economies of scale) 4) E- Economic Equity (Equality, not Ownership) Illegal to discriminate because of age, sex, race, religion, or disabilities No false claims allowed in advertising 5) S- Price Stability Balance inflation, which is a general rise in prices and a decreased value of the dollar Fixed incomes to balance the economy even if there is an increase in prices Stability create certainty

6) S- Economic Security Protection from layoffs and illnesses Insurance to cover injury and illness Social Security- program of disability and retirement benefits 7) G- Economic Growth Growth of goods and service measured by GDP (Gross Domestic Product) Population grows to meet everyones needs Three Types of Businesses: 1- Sole Proprietorship business that is owned and managed by one individual who receives all the profits and bears all the loses Benefits o Ease of starting and going out of business o Control over profits and business operations o Pride of ownership o Lower taxes (pays no corporate income tax) Costs o Unlimited liability- owner responsible for losses-debt o Difficulty in raising financial capital o Management knowledge may be limited o Limited life- when owner dies the business is legally terminated 2- Partnerships- business that is owned and managed by two or more individuals who receive all the profits and bear all the losses Benefits o Easier to raise financial capital o Partners may combine managerial skills o Personal satisfaction o Lower taxes (no corporate income tax) Costs o Unlimited liability o Possible conflicts between partners o Possible instability after death of a partner o Limited life 3- Corporations- business that is owned by stockholders and has rights and responsibilities as if it were one person Benefits o Limited liability- shareholders are responsible for losses o Greater financial capital o Unlimited life o Specialized management Costs o Increased taxation (corporate taxes) o Difficulty starting o May be larger, more bureaucratic than other forms of businesses o Increased governmental control

4- Amount of Each Business: Sole Proprietorships- 74% Partnerships- 8% Corporations- 18% 5- Who Makes the Money? Sole Proprietorships- pull 4% of the profits made by businesses Partnerships- pull 6% of the profits made by businesses Corporations- pull 90% of the profits made by businesses -------------------------------------------------------------1- To Form a Corporation: You must get a charter from the government that states the permission to have shareholders-it gives a specified amount of stocks that may be sold Stocks are given by the primary market (banking investors) and sold in the secondary market (public/private stock market) 2- Common Stock- is basic ownership into a corporation Allowed to vote for decisions of the corporation 1 vote is 1 share Proxy- ballot that gives a shareholders representative the right to vote on corporate matters 3- Preferred Stock Non-voting ownership Receive dividends first (% of the profits) If corporation fails with no debt they get some of their investments back before common stockholders *stock is watch by the SEC (Securities Exchange Commission) 4- Bankruptcy- a court granted permission to an individual or business to cease or delay payments 1. Chapter 7 Bankruptcy- simply liquidates and goes out of business 2. Chapter 11 Bankruptcy- is given one year to reorganize and is allowed to stay in business 3. Chapter 13- individuals filing bankruptcynot available to corporations 5- Borrowing Money Bond- an I.O.U issued by a corporation Loans The initial amount borrowed is called the principle amount While money is borrowed the corporation pays interest 6- Government regulation of Business Began after 1865 to control big business 1890 laws became lenient because big business dominate 20th century consumer wanted control over big business and healthy competition Centralized- government regulation Decentralized- relaxation or removal of government control --------------------------------------------------------------

1- Growth of Business 1. Merger- a combination of two or more firms to a single firm 2. Reinvestment- invest more money into the business by using revenue 2- Mergers Horizontal Merge- takes place when two or more firms, who product the same kind of product, join together. Vertical- when firms included in different steps of manufacturing join together Conglomerate- two or more unrelated firms merge to create diversity Multinational- corporations that manufactures in a number of countries Joint Venture- firms join together temporarily for a project 3- Expenses 1. Fixed expenses- expenses/costs that do not change Ex. Car payment, rent, salary 2. Variable expenses- expenses/costs that can change Ex. Gas, food, wage 4- Net Income- income after expenses 5- Income Statement- a report showing a businesss sales, expenses, and profits for a certain period 6- Annual Report vs. Prospectus Annual Report- what the firm actually made Prospectus- what the firm think it will make in the future 7- Non- Profit Organizations- organization to further a cause- usually for the common welfare Ex. Schools, churches, American Red Cross, Goodwill 8- Cooperatives- non-profit organizations that provide goods and services to individuals or groups Ex. Farmers usually join a co-op to sell their products together because it will ultimately benefit them more- Ocean Spray Cranberry 9- Franchise- license to operate as part of a chain-has a store owner, not manager Ex. Dairy Queen, Subway, Arbys 10- Professional Associations- work to improve working conditions, skill levels, and public perceptions of their professionnot labor unions. Labor unions represent their interest through collective bargaining (negotiation) 11- S-Corporation- keeps small corporations (less than 35 shareholders) from paying double taxes. They do not have to pay corporate income taxes. 12- Business Associations Chamber of Commerce- promote welfare of its members and the community Better Business Bureau- provides general information on companies and keeps records of consumer complaints 13-Direct/Indirect Role of the Government Direct- government corporations supplies goods and services that compete directly with private businesses o Ex. Postal Service, FDIC

Indirect- the government also supervises to ensure competition o Ex. Public Utilities