1. Mixed Economies

2. 3 Economic Questions:
What goods and services should be produced?
How should these goods and services be produced?
For whom should these goods and services be produced?
3. - most contemporary economies are a blend of market with some government interference
4. Remember..What does laissez faire mean????
5. - there IS a need for certain government interference because some needs and wants of society are difficult to address in the market place
(Could the market place provide for national defense or a highway system??)
6. - some needs that markets could meet fall to the government so that ALL members of society can participate
(i.e. education)
7. - governments create laws to protect property rights and enforce contracts
(Why would someone develop a new product if they couldnt patent the product?)
8. - societies must look at whether their goals could be better addressed by an open market or government action and look at the opportunity cost for each action
(are you willing to pay taxes to fund an army?? Give all people an education??)
9. Adding the government.
the government purchases land, labor, and capital from households in the factor market
the government purchases goods and services in the product market (buildings, office supplies, phones, computers, etc.)
governments provide goods and services through the factor resources that they combine (i.e. roads)
governments collect taxes from both households and businesses
10. Comparing Mixed Economies
11. Free enterprise:
economic system characterized by private or corporate ownership of capital goods; investments are determined by private decision rather than state control
12. Transition:
a period of change in which an economy moves away from central planning toward a market-based system
13. Privatized:
to make a transition, state firms must sell their businesses to individuals and then allow them to compete with one another in the marketplace
14. THE US HAS A FREE ENTERPRISE SYSTEM!!
government interferes to provide services, keep order, and promote the general welfare
US law protects private property
15. Market Structures
16. Perfect Competition
Many buyers and sellers in the market
sellers offer identical products
Buyers and sellers are well informed about products
sellers are able to enter and exit the market freely
17. Commodity: a product that is the same no matter who produces it
Example: milk, notebook paper, petroleum
Perfectly competitive markets are efficient at equilibrium!!
18. Few markets are perfectly competitive because barriers keep the companies from entering or leaving markets easily
start-up costs are high
many require high degrees of technology
19. Monopoly
A market dominated by a single seller
- No variety of goods and the seller has complete control over prices
- Forms when barriers prevent firms from entering a market with only one seller
20. Natural Monopoly:
a market that runs most efficiently when one large firm supplies all of the output
Example: public output
21. Government Monopoly:
a monopoly created by the government
Ex: allowing a natural monopoly to form
Ex: patent: inventor of the new product has exclusive rights to sell it
Ex: Franchise: contract issued by a local authority that gives a single firm the right to sell its goods within an exclusive market
22. (Remember one of the goals of the government in the US has been to encourage competition in the economy)
23. Antitrust laws:
laws that encourage competition in the market
(Example: Sherman Antitrust act: banned monopolies and other business combinations that prevented competition 1890)this act was used to break up companies like AT&T
24. Oligopoly:
a market structure in which a few large firms dominate a market (4 largest firms produce 70-80% of the output)
barriers can also create oligopolieslike start-up costs and technology
25. Monopolistic Competition:
a market structure in which many companies sell products that are similar but not identical
26. 27. Other Vocabulary:
Communism: a political system characterized by a centrally planned economy with all economic and political power resting in the hands of the central government (command)
Socialism: a system in which the government owns some factors of production and distributes wealth among citizens (command, mixed)
Capitalism: a system in which private citizens own most, if not all, of the means of production and decide how to use them with legislated limits (market)
28. Labor
29. Productivity the value of output.
30. Unskilled labor requires no specialized skills, education or training
Ex. dishwashers, many factory workers, janitors, farm workers
31. Semi-skilled labor requires minimal specialized skill and education
Ex. short order cooks, some construction workers, lifeguards
32. Skilled labor requires specialized abilities and training to do tasks.
Ex. mechanics, bank tellers, plumbers, firefighters, chefs, carpenters
33. Professional labor demands advanced skills and education.
Ex. managers, teachers, bankers, doctors, lawyers, actors, computer programmers
34. Wage discrimination occurs when people with the same job, same skills and education, same job performance, and same seniority receive unequal pay.
Women and minorities are among those who have experienced wage discrimination.
35. Labor Unions an organization that tries to improve working conditions, wages, and benefits for its members
36. Strike organized work stoppage intended to force an employer to address union demands
37. Right-to-work laws this is a measure that bans mandatory union membership. NC is a right-to work state.
38. Collective bargaining the union and company representatives meet to negotiate a new labor contract
39. To avoid strike, a third party may be called in to settle a dispute:
Mediation neutral mediator meets with each side to try to find some solution.
Decision reached by the mediator is nonbinding.
Arbitration a neutral third party reviews the case and imposes a decision that is legally binding for both sides.
40. Business Organizations
41. Sole proprietorship a business owned and managed by a single individual. According to the IRS 75% of all businesses in the US are sole-proprietorships but these generate only about 6% of US sales.
42. Advantages
Easy start-up (business licenses, site permit, name of business)
Sole receiver of profit
Full control of business
Easy to discontinue
Not subject to special business taxes
43. Disadvantages
Unlimited personal liability
Liability is a legally bound obligation to pay debts. Sole proprietors are bound to all of their business debts
Limited access to resources
Limited life business lack permanence beyond the life of the sole proprietor
44. Partnerships a business organization owned by two or more persons who agree on a specific division of responsibilities and profits.
45. Advantages
Easy start-up
Shared decision making
Specialization each partner can bring his or her talents
Larger pool of assets helpful when the business needs to borrow money
Not subject to special business taxes
46. Disadvantages
Unlimited liability
Each general partner is bound to debt incurred and responsible for paying this debt
General partners do not have absolute control over their business
Potential for conflict
47. Corporations a legal entity owned by individual stockholders.
Stockholders own shares of stock a certificated ownership in a corporations.
Stockholders are part owners of the corporation.
48. Advantages
Limited liability for owners
Transferable ownership owners can sell stock and get money in return
Long Life business does not end with the death of the owners.
More potential for growth
49. Disadvantages
Expensive and difficult to start up
Double taxes
Corporations pay taxes on income.
Stockholders receive dividends (profits paid out to stockholders)
Dividends are also taxed
Potential loss of control by the founders Board of Directors usually run corporations.
More legal requirements and regulations
50. Corporate Combinations
51. Horizontal Merger joining of two or more firms competing in the same market with the same good or service
52. Vertical Merger joining of two or more firms involved in different stages of producing the same good or service.
53. Conglomerate merging of more than three businesses that make unrelated products
54. Multinational Corporations
55. Multinational Corporation a large corporation that produces and sells its goods and services throughout the world.
56. Advantages
Provides jobs and products around the world
Efforts to spread new technology around the world
Increase standard of living in many poor countries
Disadvantages
Low wages
Poor working conditions
57. MONEY
58. As an economy becomes more specialized, people give up bartering (exchanging goods and services for other goods and services) for money. Bartering is most commonly used in traditional economies.
59. 3 USES OF MONEY
Medium of Exchange- money determines value during the exchange of goods and services
Unit of Account- money provides a means for comparing the values of goods and services
Store of Value- money keeps its value if stored rather than used
60. 6 Characteristics of Money
Durability- must withstand wear and tear that comes with being used over and over.(We have coins and paper money.)
Portability- must be easy to transport and exchange
Divisibility- must be easily divided into smaller denominations
Uniformity- people must be able to count and measure money accurately
Limited Supply- supply must be scarce
Acceptability- people must be able to exchange money for goods and services
61. MONEYS VALUE
Representative Value- Our money has value because it can be exchanged for something else of value.It does not have value in and of itself (if it did have a value in and of itself, it would be called commodity money).In America, money used to be backed by gold or silver, but this went out in the 1930s.
Fiat Money (also called Legal Tender)- our money is valuable because our government says it is valuable.
62. THE FEDERAL RESERVE
63. Federal Reserve System (Fed)
our nations first central bank
Created in 1913 by the Federal Reserve Act
System is created of 12 regional Federal Reserve Banks throughout the country. NC is part of the Richmond Federal Reserve District
Federal Reserve Board supervises the banks, members appointed by the president
64. Main Tasks of the Fed
Supervise and Regulate Banks
Implement Monetary Policy
Ex. During times of recession and depression the Fed decreases interest rates. (this encourages lending and discourages savings)
During times of inflation, the Fed increase interest rates. (this encourages savings and discourages lending)
65. Main Tasks of the Fed
Control the amount of currency that is made and destroyed on a daily basis
Set required reserve ratio for demand deposits
Change the discount rate interest that commercial banks pay the Federal Reserve
66. BANKING
67. Bank- an institution for receiving, keeping, and lending money
68. Early Banking in the US
Very informal banking
A merchant would allow customers to deposit money and charge a small fee
But this was not always safe what if the merchant goes out of business or is not trustworthy?
69. Two Views of Banking
Federalists (Alexander Hamilton)
Anti-Federalists (Thomas Jefferson)
Centralized banking was necessary
Hamilton proposed a national bank
issue a single currency
monitor other banks throughout the country
manage the federal governments funds
Decentralized banking system
Banks should be created and operated by the states
70. FUNCTIONS OF BANKS
71. Storing Money-
banks provide a safe, convenient, insured place to store money
Federal Deposit Insurance Corporation (FDIC)- created in 1933 to insure customer deposits if a bank fails (up to $250,000 per account)
72. Saving Money-
banks provide 4 ways to save money
saving accounts
checking accounts
money market accounts money lent to the bank for a short period
certificates of deposit (CDs) money lent to the bank for a longer period of time.
73. money held in a checking account is a demand deposit, because checks are paid on demand; CDs are time deposits, because the money cannot be withdrawn immediately without penalty
74. Loaning Money-
banks provide loans, and make money by charging the borrower interest
75. Banks use fractional reserve banking- meaning that banks only keep a fraction of funds on hand and lend the remainder.The Federal Reserve establishes the required reserve ratio, or the fraction of deposits that must be held in reserve.
76. Credit Cards- banks issue credit cards (a card entitling its holder to buy goods and services based on the holders promise to pay later), and make money by charging interest
77. Collateral- property used to secure a loan.Lenders require collateral to ensure they will not lose money on defaulted loans.
78. TYPES OF FINANCIAL INSTITUTIONS
79. Commercial Banks-
offer checking services, accept deposits, and make loans
80. Savings and Loans-
originally created when members deposited funds into a general fund and then borrowed money to buy their own homes; now serves many of the same functions of a bank
81. Credit Unions-
cooperative lending associations for particular groups (i.e. state employees), usually small, specialize in home mortgages and car loans, some provide checking/saving
82. Stock Market
83. Buying Stock:
Corporations sell stock to raise funds.Stock represents ownership in the corporation and is issued in portions called shares.
84. Stockholdersmake money through:
dividends- a portion of a corporations profit, usually paid out quarterly
capital gains- money made when an investor sells stock for more than he/she paid for it and lose money through:
capital loss- money lost when an investor sells stock for less than he/she paid for it or when a company doesnt make a profit, and cant pay out dividends
85. Stock split- when each single share of stock splits into more than one share.This is done to encourage investors to buy the stock, and generally results in a rise in stock value afterwards.
86. Stock Trade:
Stockbrokers- link buyers and sellers of stock; usually work for a brokerage firm that specializes in trading stock.
Stock is bought and sold on stock exchanges.Most important in the US:
New York Stock Exchange (NYSE)- the countrys largest and most powerful exchange; only for the largest and best-known companies (called blue chip companies)
OTCMarket- stock sold electronically
Nasdaq (National Association of Securities Dealers Automated Quotations)- the American market for over-the counter trades
87. Daytraders- buy and sell stock rapidly in hopes of trying to make a profit; very risky
88. Measuring the Stock Market:
Bull Market- when the stock market steadily rises over a period of time (1920s and 1980s)
Bear Market- when stock market steadily falls over a period of time
The picture of stock performance can be determined by looking at the Dow Jones Industrial- which represents about 30 large companies, or the S & P 500 (Standard and Poors)- which tracks price changes in 500 companies.
89. Great Crash of 1929- After the market reached an all-time high in 9/1929, over-speculation, inflated stock values, and buying on the margin led to a huge and swift fall in stock values.People panicked and rushed to sell their stocks, further lowering prices, ultimately leading to the Great Crash of 1929, and ushering in the Great Depression.An even larger crash occurred in 1987, but the economy recovered much more quickly.