Basics of Our Economic System

Chapter 14

Principles of Our Market Economy Circular flow – people exchange their labor to buy

goods and services from many businesses.

Circular Flow - 8 min Call Me Maybe Parody

Supply & Demand

Supply and Dance Man

Law of Demand Demand – the amount of a product or

service that buyers are willing and able to buy at different prices. When the price of a good or service falls,

consumers will buy more of it. As the price of a good or service increases, consumers will buy less.

What factors affect demand?

Market size - # of consumers

Consumer tastes – popularity (is it in style?)

Consumer expectations – will it be cheaper later?

Substitutes – can I buy something else?

Complements – if I buy one item I need something to go with it

Income – make more, buy more

What factors affect demand?

Law of Diminishing Marginal Utility

The benefit for using each additional unit of a good or service during a given time period tends to decline as each is used.

Law of Diminishing Marginal Utility

Law of Supply Supply --- the amount of a product that

producers are willing and able to offer at different prices. Producers are willing to sell more of a good or

service at a higher price than they are at a lower price.

Supply and Demand Market price is the price at which buyers and

sellers agree to trade (where supply and demand meet).

The Law of Supply and Demand - 3 min

Role of Business in the American

Economy Role of the Entrepreneur

A person who starts a business.

Begins with an idea for a new product, a new way of producing something, or a better way of providing a service.

Steve Jobs' Advice

Types of Businesses

Sole Proprietorship

Partnership

Corporation

Sole Proprietorship Business owned by an individual.

Most common form of business.

70% of businesses in U.S. -- most are small businesses such as restaurants, repair shops, small groceries, etc.

Advantages --- freedom, profits belong to owner.

Disadvantages --- owner bears all responsibility for debts, hard to borrow enough money to start, huge responsibility on owner’s shoulders.

Partnership

Two or more people share ownership.

Advantages – more than one person shares the risks and benefits.

Disadvantage – potential for conflict among owners.

Scrub Daddy

Corporation Business that is separate from

the people who own it and legally acts as a single person.

Shares of a corporation are called its stock owned by stockholders.

Many sell stock to the public to raise funds.

Advantages --- raise large quantities of money through selling stock, stockholders are not responsible for company’s debt.

Disadvantages --- more difficult & expensive to start, limited by government regulations.

These 10 corporations control almost

everything we buy…

Labor in the American Economy

Industrialization created change 1800s – improvements in farm

machinery meant that farms needed fewer workers.

Rapid industrialization – machines could produce more goods more cheaply than could people making goods by hand.

Many people became wage laborers – exchanged their labor for payment called wages (worked in mines, factories, workshops).

Labor in the American Economy

(early on) Poor working conditions ---

many wage laborers had to accept whatever work was available at any wage or starve.

Business owners took advantage of the situation.

Paid very low wages. Dangerous working conditions. Wage laborers, many of them children,

worked 6 days a week (12-16 hours a day).

The Rise of Labor Unions

Labor union – organizations of workers that seek to improve wages and working conditions & to protect members’ rights

Collective bargaining – process by which representatives of unions and business try to reach agreement about wages and working conditions

Labor UnionsWeapons of

labor Slowdown – workers stay

on the job, but do job much more slowly

Sit-in strike – stop working, but refuse to leave factory

Boycott – urge people to buy employer’s products

Strike – workers refuse to work unless employers meet certain demands

Weapons of business

Use ‘scabs’ to keep factory running (nonunion workers)

Hire private police to allow scabs in, break-up union meetings, harass union members

Lockout – refuse to let union members enter factory & replace them with scabs

Forced workers to sign “yellow-dog contracts” – promise never to join union