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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)
exchanges take place freely and according to one’s will • Capitalism. Mercantilist.provides incentives 3. How. hands off! What was Adam Smith? How did this influence our economy? 5-3 Types of Economies: 1.“merchant” wanted government help in the end 2. 1 job. How? 6. 1 product) 6.6 Pillars of Free-Enterprise 1. or customs.” means let them do. Traditional.1.Competition. Government.to produce it? 3.3 Questions of Every Economy: 1. What.capital increases because of free will 2. Market.divides the work and increase efficiency and productivity (Adam Smith= 1 man.creates rivalry and a price check 3.2 People in the Market Place Buyers and sellers or consumers and producers 4. S. C.to sell to? ----------------------------------------------------------------------------------------------------------Three Types of Economies 1. P-Private Property.authorities decide all economic decisions and usually control resources 3. Who. which many consider the United States.The US Economy is called: • Market Economy.Major Economics Players in the Past: 1. V-Voluntary Exchange.based on traditions and customs * All combined create a Mixed economy. P-Price System. Command.places a value on all goods and services 4.based on voluntary exchange 2. Traditional Economy • Allocation of scarce resources and nearly all other economic activity stems from ritual.Specialization.Gives people responsibility (public goods vs. Private goods) 2.no one forces them to buy or sell • Free-Enterprise. habits.to make? 2.buyers and sellers naturally meet in the market.believed in “laissez faire. E-Entrepreneur. Physiocrat.takes a risk for their own self-interest 5. • Roles are defined by elders and ancestors (not by individuals) • Food is shared .
and South Korea Advantages: • Overtime. who questions • Allows buyers and sellers to come together to exchange goods and services • People’s decisions act as votes • Consumers play a big role in what to produce • Ex. day-to-day problems • Difficult for people with new or unique ideas to progress 3. how decisions • Government makes most of the decisions • Government determines needs.Ex. Canadian Inuits. Command Economy • Central authority makes most of the who. goals. Canada. Australian Aborigines. 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 • . United States. production. how. 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. Japan. which tends to slow down decision making • Does not have the flexibility to deal with minor. 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. what. Market Economy • People and firms act in their own best interest to answer the what. and quotas for major industries • Ex.
Price Stability • Balance inflation. race. The utility of an item is different for everyone.Economic Efficiency • Recognize resources are scarce • If resources are wasted. so this changes the value. sex. religion.more wants than resources *Makes consumers and producers make choices and leads to the who. 5.• Must guard against market failure ----------------------------------------------------------------------------------------------------------1. 3.Durable Goods • Last 3 years 6.Economic Equity (Equality. tools. what. not Ownership) • Illegal to discriminate because of age.Scarcity. 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. or disabilities • No false claims allowed in advertising 5) S.Production Possibilities • Shows opportunity cost and possible production of two goods 4. buildings) • Human Capital (education. training) 2.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.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.Capital is: • Financial (money) • Goods (equipment. 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 . how questions.
more bureaucratic than other forms of businesses o Increased governmental control .owner responsible for losses-debt o Difficulty in raising financial capital o Management knowledge may be limited o Limited life.Partnerships.when owner dies the business is legally terminated 2.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.Economic Security • Protection from layoffs and illnesses • Insurance to cover injury and illness • Social Security.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.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.business that is owned by stockholders and has rights and responsibilities as if it were one person • Benefits o Limited liability.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 everyone’s needs Three Types of Businesses: 1.6) S.
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.simply liquidates and goes out of business 2.government regulation • Decentralized. Chapter 13.Who Makes the Money? Sole Proprietorships.is basic ownership into a corporation • Allowed to vote for decisions of the corporation • 1 vote is 1 share • Proxy.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. Chapter 11 Bankruptcy.Bankruptcy.relaxation or removal of government control -------------------------------------------------------------- .Common Stock.is given one year to reorganize and is allowed to stay in business 3.O.pull 4% of the profits made by businesses Partnerships.pull 90% of the profits made by businesses -------------------------------------------------------------1.Amount of Each Business: Sole Proprietorships.4.18% 5. Chapter 7 Bankruptcy.ballot that gives a shareholders representative the right to vote on corporate matters 3.8% Corporations.74% Partnerships.an I.individuals filing bankruptcy—not available to corporations 5.U issued by a corporation • Loans • The initial amount borrowed is called the principle amount • While money is borrowed the corporation pays interest 6.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.Borrowing Money • Bond.pull 6% of the profits made by businesses Corporations.a court granted permission to an individual or business to cease or delay payments 1.
promote welfare of its members and the community • Better Business Bureau. Fixed expenses.when firms included in different steps of manufacturing join together • Conglomerate.invest more money into the business by using revenue 2.Profit Organizations.keeps small corporations (less than 35 shareholders) from paying double taxes. Car payment. FDIC .expenses/costs that can change • Ex.Non. wage 4. skill levels. expenses.what the firm think it will make in the future 7.income after expenses 5. and public perceptions of their profession—not labor unions. Schools.provides general information on companies and keeps records of consumer complaints 13-Direct/Indirect Role of the Government • Direct.Cooperatives.S-Corporation. churches. not manager • Ex.Mergers • Horizontal Merge. food.a combination of two or more firms to a single firm 2.usually for the common welfare • Ex. Arby’s 10.Business Associations • Chamber of Commerce.organization to further a cause.Growth of Business 1. Reinvestment.1.license to operate as part of a chain-has a store owner. Subway. • Vertical. 12.a report showing a business’s sales.firms join together temporarily for a project 3.Expenses 1.expenses/costs that do not change • Ex. join together. Farmers usually join a co-op to sell their products together because it will ultimately benefit them more. rent. Goodwill 8.corporations that manufactures in a number of countries • Joint Venture. Variable expenses. Postal Service. Merger.two or more unrelated firms merge to create diversity • Multinational. American Red Cross.non-profit organizations that provide goods and services to individuals or groups • Ex. Prospectus • Annual Report.Annual Report vs. They do not have to pay corporate income taxes. Gas.work to improve working conditions.what the firm actually made • Prospectus. Labor unions represent their interest through collective bargaining (negotiation) 11. salary 2. Dairy Queen.takes place when two or more firms.Franchise.Professional Associations.Ocean Spray Cranberry 9. and profits for a certain period 6. who product the same kind of product.Income Statement.Net Income.government corporations supplies goods and services that compete directly with private businesses o Ex.
the government also supervises to ensure competition o Ex.• Indirect. Public Utilities .
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