Economics Unit Notes Guide

Chapters 18-25

I. Economics is the study of how people use scarce resources to accomplish their needs and wants. A. Needs are things that are required for life.

B. Wants are things that make life more comfortable, but they are not necessary for life.

C. Scarcity exists when we do not have enough money to meet all of our needs and wants.

D. Markets are where suppliers and consumers get together to exchange goods or services for money. Markets bring buyers and sellers together. Goods are products that are supplied by a company. Services are tasks that are preformed by a specialist in a certain field.

E. As you decide what wants and needs that you will meet, you face trade-offs and opportunity costs.

1. A Trade-off is the alternative you face if you decide to do one thing instead of another. For example, you may give up phone time to study for a test. As a result you will do better on the test, and you may be rewarded.

2. Opportunity cost is what you are giving up in order to do something else. For example, you may decide to go to college after high school and give up the opportunity to get a job. The opportunity cost is the amount of money you could have made if you began working after high school. However when finish college; you will have a better job than you would have had after high school.

3. Cost-Benefit Analysis compares marginal costs and marginal benefits. Costs are what you sacrifice as a result of a decision. Benefit is what you gain. When making a decision, you must decide whether the benefits of the decision outweigh what the decision is going to cost you.

F. Resources, Specialization, and Interdependence. 1. In order to produce goods and services, companies need resources.

Resources are the materials used to create goods and services. There are three different kinds of resources.a. Capital resources are money or tools that are used to produce

goods or servicesb. Companies must have people to make goods and provide

services. A human resource is known as labor or the workers. c. A natural resource is anything that comes from the earth that is

used to make goods or provide services.2. The amount of money a company spends to provide goods or

services is known as cost. In order to make a profit, companies must sell their goods or services for more than they spend on costs. In order to have profits, companies must focus on productivity. Productivity occurs when people use scarce resources efficiently, this keeps costs down. To use costs most effectively many companies, states, or countries specialize in goods. Through specialization, companies produce the same goods or the same type of goods in order to be efficient. However, specialization leads to interdependence. For example, if Alabama only grows cotton, then in order to have oranges, we must rely on trade with Florida. Therefore, we are interdependent because of specialization.

II. Economic SystemsA. Resources are limited and human wants are

unlimited. Using resources one way, to satisfy some wants, means those resources cannot be used in other ways, to satisfy other wants. As a result economies must answer three questions. How the questions are answered in a country determines the type of economic system that the country has.

1. What goods and services will be produced?

2. How will goods and services be produced?

3. For whom will these goods and services produced?

B. Market Economy – An economic system in which supply, demand, and prices help people make decisions and allocate resources. Capitalism and Free enterprise are part of a market economy, and in this system, the consumers are sovereign.1. Free enterprise is the freedom of individuals and businesses to

operate and compete with a minimum of government interference. It results in the greatest efficiency and the lowest costs of any economic system. Because consumers have choices, producers want to keep costs low and quality high. Men and women have the opportunity to own economic resources and to use tools to create goods and services for sale

2. Capitalism is an economic system in which people own the means of production and seek a profit

3. Consumer’s role in a market economy is to choose how they will spend their money. They can use their money to buy the goods that they want or they can save their money to meet long term spending goals. Companies want to produce the best product so that consumers will choose their products.

C. Command Economy – A type of economy where the government controls the means of production. The government is responsible for answering the basic economic questions. It is closely associated with communism.

D. Mixed Economy– Is a combination of a Market economy with some governmental controls over the economy.

III. Supply and DemandA. Supply

1. Supply is the different quantities of a good or service that producers are willing to sell at all possible prices

2. Law of Supply – the higher the price, the more chance the producer has to make a profit. In other words, the higher the price, the more likely producers are to make more of a given profit.

3. Supply elasticity is the measure of how much the supply of a good changes based on the price of the good. a. Products that have supply elasticity have a major

supply shift when the price of the product changes. For example, if the price of toy trains goes up and the producers of the trains cannot reorganize to deal with the changes in price, people will decide to buy another type of toy and the supply of trains will increase. Therefore, the trains are supply elastic.

b. Supply inelastic products do not experience changes in supply because of price. Oil is supply inelastic. If the price of oil increases, the amount of oil in supply will not change because people will buy the same amount.

4. There are several factors that may affect supply. a. Profit, the amount of money a company

makes on a product, is the major motivator of supply. Companies make profits when they are able to sell their product for more than it costs them to make it. Companies create products because they hope to make a profit from that product.

b. If the price of a good increases, the supply of that good increases.

c. Productivity deals with how efficiently a company can create its products. If productivity decreases then supply also decreases.

d. Technology makes production of goods easier. If technology advances, a company may be able to produce more of its product, and supply will increase.

B. Demand1. Demand is the desire, willingness, and ability of a person

to buy a good or service.

2. Law of Demand – price and demand move in opposite directions. In other words, the lower the price, the more people want to buy a product.

3. Demand elasticity refers to how much the amount that is demanded of a product is affected by the price of the product.

a. A product has inelastic demand when the demand for the product does not change because of the price. For example, turkey at Thanksgiving has inelastic demand because people buy it no matter the price.

b. A product has elastic demand when the demand of the product is affected by the price of the product. For example, cars have elastic demand. If car dealerships lower the price of cars, the demand for cars increases.

4. There are several factors that effect demand.a. The income or the tastes of the consumers may

change.b. New products may act as substitutes for certain

products and affect the demand of those products.

c. The utility, or usefulness of a product, affects the demand. If a product is not useful to the public, there will not be a demand for that product. Diminishing Marginal Utility the more units of a product that are consumed, the more satisfaction will decrease. For example, if you are very hungry and you order a pizza, the first slice will be much better than the third slice.

C. Prices affect supply and demand. For example, if a video game’s price is reduced the demand for the game will increase as the price decreases and the supply of the game will decrease as the price decreases.

D.Surpluses and Shortages1. A surplus occurs when the amount of a product that is

supplied is greater than the amount that is demanded. A surplus indicates that the price is too high.

2. A shortage occurs when the amount of a product that is demanded is greater than the amount that is supplied. A shortage indicates that the price is too low.

3. Over time, surpluses lower prices and shortages raise prices. The equilibrium price is the amount at which there is not a surplus or a shortage.

IV. Business and the Economy A. Types of Businesses

1. Sole-Proprietorships – a business that is owned by a single person.

a. Advantages: They are easy to set up and the owner gets all the profit. One person being responsible for the company allows flexibility.

b. Disadvantages: They have unlimited liability. If anything goes wrong, the proprietor (owner) is responsible. Money must be provided by the proprietor. Proprietorships may have labor problems because people may want to work for a larger company.

2. Partnership – It is a business that is owned by two or more people.

a. Advantages: They usually make more money than a proprietorship.

b. Disadvantage: They are usually complicated. They have unlimited liability which means each owner is fully

financially responsible.

3. Corporations – It is a large business that is recognized by the government. It has many of the same rights and responsibilities as people. a. Advantages: They can easily raise and

borrow money. The company can sell shares of stock in the company to raise money. They have limited liability which means that the owners are not responsible for debt.

b. Disadvantages: They are expensive and complicated. The business owners have very little to say about management, and they face more government regulations. They have to deal with double taxation and pay taxes on profits twice.

4. Cooperatives and Non-Profit Organizations – they promote the interests of their members.

B. Labor Unions are organizations that seed to increase the wages and improve the working conditions of its members. 1. Labor Unions have three levels: local, national, and federation.

a. Local level is made up of members in a factory or company. They monitor companies and negotiate contracts.

b. National level provides lawyers and helps local unions with negotiations. They also help set up local unions.

c. Federation is known as the AFL-CIO the American Federation of Labor – Congress of Industrial Organization. It is the combination of all of the unions in the U.S. They represent 13 million people.

2. When a company and a union disagree about a contract there are two options to resolve the problem; mediation or arbitration.

a. Mediation – a third party tries to settle the disagreement by meeting with both sides and coming up with a compromise.

b. Arbitration – a third party listens to both sides and then decides how to settle the disagreement. Both sides agree ahead of time

to accept whatever decision the Arbiter makes.

3. Historical Labor Leadersa. Cesar Chavez was a migrant worker as a child. In 1965 he

organized a strike against grape growers. He asked Americans to boycott grapes until the growers were willing to sign a union contract. As a result, United Farm Workers became America’s first farm-workers union.

b. Eugene Debs organized the American Railway Union. It had about 150,000 members.

c. Mary Harris Jones was one of the first female members of the Knights of Labor in Illinois. She pushed for equality between working men and women.

C. Roles and Responsibilities of Businesses1. Role as Consumers – They buy products for their business.2. Role as Employers – They employ workers.3. Role as Producers – They produce goods and services.4. Responsibility to Consumers – To sell products that are safe

and do what they are supposed to do.5. Responsibility to the Owners – Important in Corporations

because the managers and owners are not the same person. 6. Responsibility to Employees – Must provide a safe workplace

and protect them from discrimination.7. Responsibility to the Country – They have a social responsibility

to pursue the goals that benefit society.

V. Roles of the Government in the EconomyA. The government provides public goods. A

public good can be consumed by one person without preventing others from consuming it. The Government is responsible for providing public goods and providing money to pay for them (usually by taxes). Examples of public goods are parks, highways, street lights, etc.

B. The government maintains competition. A competitive market protects consumers by keeping prices fair.

1. A monopoly is a sole provider of a good or service. For example, if only one company sells blue jeans then that company can charge whatever price they want because there is not another blue jean provider. Government stops monopolies because competition protects consumers by keeping prices reasonable.

2. A merger is when two companies combine into one. Government can stop mergers if they will hurt competition. For example, the government may not let two major cell phone companies merge into one company because it might reduce competition and result in high prices.

3. The government prevents monopolies and mergers by anti-trust laws.

a.The Sherman Anti-Trust Act banned monopolies and other business combinations that prevented competition.

b.The Clayton Anti-Trust Act further limited monopolies and made striking legal protest labor abuses.

c. In 1914, the Federal Trade Commission was created to monitor business practices. It is still in existence.

C. The government regulates market activity. They make sure that businesses and organizations follow laws and treat consumers fairly. Natural monopolies sometimes occur, for example, it wouldn’t make sense for four telephone companies to run lines and offer phone service to a city. One company will provide service, and the government will monitor the company to ensure that they do not abuse the consumer by charging high prices.

D. The government measures the economy. The government watches the economy to try to keep it healthy. They look at several different parts of the economy to see if it is healthy: Business Cycles (GDP, and Real GDP), unemployment, inflation, and the stock market.

1. The government watches to decide whether the economy is growing. Business cycles are the periods of change that businesses go through. The se cycle include Expansions and Recessions. Expansions (growth) occur when real GDP goes up. Recessions (shrinking) occur when real GDP goes down. A growing economy, or an expansion, is when businesses produce more goods and services and hire more people therefore people have money and buy more. A recession is when businesses produce and buy less.

a. GDP – Gross Domestic Product – measure of the economy’s output. It is a money value of all of the final goods and services produced in a country in a year.

b. Real GDP – shows production without prices. Inflation can cause GDP to rise without an actual increase in production. Real GDP gives a very clear judge of the economy.

2. Unemployment rate is another way that the government can measure the economy. The Civilian Labor Force includes workers, 16 years old or older, who are working or actively looking for work. The unemployment rate is the percent of people in the civilian labor force who are looking for work but cannot find it. Unemployment usually rises when the economy is in a recession. When people are out of work, they have less money therefore they spend less money which hurts the economy. The government may use fiscal policy to try and stabilize the economy. Fiscal policy is when the government changes its spending or tax policies to help the economy. For example, if the unemployment rate is high, the government may cut taxes so that people will have more money to spend.

3. Inflation helps the government measure the economy. It is a sustained increase in the level of prices. It is dangerous because it reduces the purchasing power of money. To measure inflation we use the Consumer Price Index. It is a price sample of 400 common items each month.

4. The stock market is also an indication about how the economy is doing. When a person buys stock, he or she buys a piece of a corporation. The stock market is where buyers and sellers of stocks come together.

a. You can make profits in stocks in two ways, dividends and capital gains. Dividends are sent to each person who owns stock in the company. It is the stock holder’s portion of the company’s profits. Capital gains are the profits that a person makes from selling a stock

b. Stock market indexes are a measure of how stocks do over time. For example the Dow Jones Industrial Average gives an idea about the stock market as a whole. Stock exchange is a location where shares of stock are bought or sold. You do not have to go to the stock market to buy stock; a stock broker can buy or sell stock for you. Most of the stocks in the U.S. are sold on the New York Stock Exchange located on Wall Street in New York City.

VI. Money and BankingA. Money has three functions.

1. It can be exchanged for goods and services.

2. It can serve as a store of value that holds wealth.

3. It helps us determine the value of something.

B. Money comes in two forms: currency and coins. It has value because people believe it is valuable.

C. The U.S. Financial System is a circular process. People and businesses take money to financial institutions to save it. Those institutions use that money to make loans to people who need money. The financial institutions make money off of the interest from the loans and from loan fees. The U.S. system of banking is safe because of regulations and insurance. Banks have rules and regulations that prevent them from taking unnecessary risks, and the Federal Deposit Insurance Company (FDIC) insures a person’s money in financial institutions for up to $100,000.00. It protects consumers from losing their money if the financial institutions fail.

D. Types of Financial Institutions

1. Commercial Banks offer banking services for individuals and businesses. They make profits because of fees and interest payments on loans.

2. Savings and Loan Associates usually loan people money who are buying homes. They also have savings accounts and provide other services that banks do.

3. Credit Unions are not for profit. They are sponsored by a group and the benefits are only open to members of the group.

E. The Federal Reserve System “The Fed” is the central bank of the United States.1. The U.S. is divided into 12 banking districts. Each one of

those districts has one Federal Reserve Bank. Very few banks within the district are not members of the Federal Bank. The Federal Reserve is run by seven board members that are appointed by the President and confirmed by the Senate to serve a 14 year term. The Federal Reserve is not under the control of the President or Congress.

2. The jobs of the Federal Reserve. a. The Fed regulates banking to protect consumers. b. The Fed acts as the government’s bank. First, when

the government raises money, it is deposited into the Fed banks, and it spends its money through those accounts. Second, it sells the government bonds and treasury bills. These help the government raise money. Finally, they issue the national currency

3. Monetary Policy involves controlling the supply of money and the cost of borrowing money based on the needs of the economy. It is implemented by the Federal Reserve Board.

a. The Federal Reserve Board can change the discount rate. The discount rate is the interest rate that the Federal banks charge to member banks when they want a loan. The lower rates encourage banks to borrow money from the Fed at a lower rate, and loan money to their customers at a lower rate. When people have more money to spend, the economy expands. If the Fed wants to slow expansion, they can raise the discount and lower the flow of money

b. The Fed requires that its members store a certain amount of their money in the Federal Bank. This is called the reserve requirement. If the Fed raises the requirement, it limits the amount of money that banks have to lend.

c. The fed can change the money supply through Open-Market Operations. It can buy or sale bonds or Treasury bills to change the amount of money in supply.