What is Economics?

Economics is the study of how people seek to satisfy their needs & wants by making choices.

Scarcity

• What is Scarcity?

• What is a need?

• What is a want?

• Scarcity is the limited quantities of resources to meet unlimited wants.

• Something that is necessary for survival (air, water, etc.)

• An item that we desire that is not essential to survival.

Goods & Services

• What is considered a Good?– Shoes

– Shirts

– cars

• What is considered a Service?– Haircuts

– Dental checkups

– tutoring

Factors of Production

• Land

• All natural resources to produce goods and services

•Labor

•The effort that a person devotes to a task for which that person is paid

•Capital

•Any human-made resource that is used to produce other goods and services

Opportunity Cost

• The most desirable alternative given up as a result of a decision– Example:

• Nations often chose to build up their military (they produce more guns), they give up producing more food and other resources in turn (butter), “Guns or Butter”

Trade-Offs

• Trade-offs are all the alternatives that we give up whenever we choose one course of action over another.– Example:

• If you join the soccer team you give up time watching TV after school

Definitions• Cost of Living:

• the average cost of food, clothing, and other necessary or usual goods and services paid by a person, family, etc., or considered as a standard by the members of a group.

•Real Wage:

•The term real wages refers to wages that have been adjusted for inflation.

•Inflation:

•Inflation is the persistent rise in the general price level as measured against a standard level of purchasing power.

Basic Economic Concepts

Capital: Human (intelligence/skills); Financial (Money); Physical (tools, equipment, buildings/factories)

Entrepreneurs: “Risk Takers” – people who risk savings in order to gain a profit; increase competition by bringing new g/s to the market; lower prices

Land: Consists of any natural resources (raw materials; land for people to build homes/offices; trees, oil)

Labor: Fluctuates (growth/decline; life expectancy; work skills) and can impact an economy’s productivity

What to Produce? Usually based on available FOPs in an economy.

How to Produce? Usually based on available technology and decided based on EFFICIENCY.

For Whom Are we producing?

Go for the “target audience” – where the demand is.

Traditional:

• BEQs dictated by tradition, ritual, habit

• Everyone knows their role

• Little change, no risk, no new ideas, stable

Are individuals Free to make Economic Decisions?

Command:

• BEQs decided by central authority – set the needs and goals of a country (often use quotas)

• ADV: Economies can change quickly (no debate)

• DISAD: doesn’t meet n/w of people; lacks incentives; lack consumer goods; little to no innovation

Are individuals Free to make Economic Decisions?

Market:

• BEQs decided by supply and demand (consumers; producers)

• NO gov’t involvement

• ADV: lots of g/s; Laissez-Faire; satisfies n/w; incentives; innovation; private ownership

• DISAD: mkt failures (monopolies); rewards only productive resources

Are individuals Free to make Economic Decisions?

Mixed-Market:

• Most BEQs are determined by demand

• SOME gov’t interference

• ADV: protects consumers; preserves competition; private AND public ownership; incentives

• DISAD: More gov’t regulation and involvement

Are individuals Free to make Economic Decisions?

There Is No Such Thing As A Free Lunch

Even when a g/s appears to be “free”, there is always a cost involved (labor and wages, RM used to make the g/s, someone else paid along the way)

Ex: “Buy One Get One Free” – you are paying for the first one, but the price had been increased so that profit is still being made on the second; AND somebody somewhere got paid to make that second good…so it’s not “free”

Diamonds VS. Water Theory

Diamonds are rare, limited, and a WANT…..expensive

Water is abundant and a NEED….more affordable

Thus, when something is SCARCE, it creates value (regardless of need or want)

When something is not scarce, it’s cheap.

Economies are DEPENDENT on each other:•Actions in one part of the world or country have an impact on other parts of the world or country.•For example – a candy bar purchased at Stewart’s may have been manufactured in New York, but the sugar, cocoa and corn syrup came from all over the world

Adam Smith: The Wealth of Nations, (1776):

“Economies/Workers are MOST EFFICIENT when they produce what they are best at” (The Invisible Hand)

• Assembly Line – specialize in one task instead of many

• Trade – produce and trade your most efficient FOPS

Topic 2: Day 2

The PPF

The Production Possibilities Frontier

Review: Thinking at the Margin

• When you decide how much more or less to do, you are thinking at the margin.

Options

1st hour of extra study time

2nd hour of extra study time

3rd hour of extra study time

Benefit

Grade of C on test

Grade of B on test

Grade of B+ on test

Opportunity Cost

1 hour of sleep

2 hours ofsleep

3 hours of sleep

The Production Possibilities Frontier

• Axis: categories of goods & services or specific goods or services on 1 axis and 1 on another

• Using the factors of production to make one product means that fewer resources are left to make something else

• The production possibilities frontier is the line that shows the maximum possible output for that economy.

Production Possibilities Frontier

Watermelons (millions of tons)

Shoes(millions of pairs)

Sh

oe

s (m

illi

on

s o

f p

air

s)

25

20

15

10

5

0252015105

Production Possibilities Graph

Watermelons (millions of tons)

0

a (0,15)8b (8,14)

A productionpossibilities frontier

c (14,12)

d (18,9)

e (20,5)

f (21,0)

0 15

8 14

14 12

18 9

20 5

21 0

Production Possibilities Frontier

What does the PPF show?

The various combinations of TWO g/s produced using all FOPS efficiently

A

B

CD

E

ButterButter

Gu

ns

Gu

ns

What does each point represent?

A=

B=

C=

D=

E=

Production Possibilities Frontier

A

B

CD

E

ButterButter

Gu

ns

Gu

ns

Wartime

Attainable; depression

Unattainable;

Without growth

Peacetime

Normal Production

• Point A: normal production 50/50• Point B: wartime (80/20)• Point C: post war (30/70)• Point D: underutilization (unemployment)• Point E: can’t produce enough unless more

factors of production (population growth & borrow money) increase shift right

more FOPs = more production

What does this all mean?

Sh

oe

s (

mil

lio

ns

of

pa

irs

)

25

20

15

10

5

0 252015105

Watermelons (millions of tons)

Production Possibilities Graph

g (5,8)

A point of underutilization

c (14,12)

d (18,9)

e (20,5)

f (21,0)

a (0,15)b (8,14)

S

Efficiency

• Efficiency means using resources in such a way as to maximize the production of goods and services. An economy producing output levels on the production possibilities frontier is operating efficiently.

When the PPF shifts to the right, it means that there was an increase in FOPS (more capital, labor, etc)

What would it mean if the PPF shifted to the left?

Law of Increasing Costs• As production switches from 1

item to another, more and more resources are necessary to increase production of the 2nd item

• Therefore, the opportunity cost increases

Credit Cards & Debt

Factors Considered when Granting Credit

• Income; ability to pay

• Debt

• Bill Payment or Credit History

•Annual feeAnnual fee - A flat, yearly charge similar to a - A flat, yearly charge similar to a membership fee. membership fee.

•Finance chargeFinance charge - The dollar amount you pay to - The dollar amount you pay to use credit. Besides interest costs, this may use credit. Besides interest costs, this may include other charges such as cash-advance fees, include other charges such as cash-advance fees, which are charged against your card when you which are charged against your card when you borrow cash from the lender. borrow cash from the lender.

•Grace periodGrace period - A time period, usually about - A time period, usually about 25 days, during which you can pay your 25 days, during which you can pay your credit-card bill without paying a finance credit-card bill without paying a finance charge. charge.

•Annual percentage rate (APR)Annual percentage rate (APR) - The yearly - The yearly percentage rate of the finance charge percentage rate of the finance charge

•Interest rates on credit-card plans change over time. Interest rates on credit-card plans change over time.

•Fixed rateFixed rate - A fixed annual percentage rate of the finance - A fixed annual percentage rate of the finance charge charge •Variable rateVariable rate - Prime rate (which varies) plus an added - Prime rate (which varies) plus an added percentage (For example, your rate may be PR + 3.9 percentage (For example, your rate may be PR + 3.9 percent.) percent.) •Introductory rateIntroductory rate - A temporary, lower APR that usually - A temporary, lower APR that usually lasts for about six months before converting to the normal lasts for about six months before converting to the normal fixed or variable rate (This is a hot topic -- more about it fixed or variable rate (This is a hot topic -- more about it laterlater.) .)

http://www.cnn.com/video/#/video/business/2009/01/06/bts.velshi.calls.cnn?iref=videosearch

http://www.cnn.com/video/#/video/politics/2007/12/04/cafferty.file.debt.cnn?iref=videosearch

http://www.cnn.com/video/#/video/bestoftv/2008/01/11/me.howard.single.mom.tips.cnn?iref=videosearch

http://www.cnn.com/video/#/video/bestoftv/2008/01/29/howard.debt.cnn?iref=videosearch

Other Types of Credit• Outside of credit card, there are many

other ways to obtain credit.

• Both public and private lenders offer loans with varying rates of interest.

Mortgages• When buying a house, most people choose

to take out a mortgage. – Length of mortgages range from 10 to 40 years.

• 20- and 30- year mortgages are most popular.

– Mortgage interest rates are largely dependent on the strength of the national economy.

http://www.cnn.com/video/#/video/business/2009/02/03/dcl.cr.mortgage.debt.cnn?iref=videosearchhttp://www.cnn.com/video/#/video/bestoftv/2008/10/13/soros.financial.crisis.1.cnn?iref=videosearch

Student Loans• Nearly half of all college students

receive some form of federal financial aid.

• Over two thirds of all student loans are lent by the government.

Student Loans• Most student loans are have very low interest,

around five percent. • Loans are determined based on need.• Repayment of loans begins when the student has

finished or stopped attending college.• Student loans can sometimes be forgiven for

people entering the military and careers in education and public service.

Bonds & Other Financial Assets

What are they?

• pay investor a fixed amount of interest at regular intervals for a fixed amount of time

Three Components of Bonds

• interest rate that the bond issuer will pay the bondholder

• time at which payment to the bondholder is due

• amount that an investor pays to purchase the bond & that will be repaid to the investor at maturity

• Not all bonds are held to maturity

• Some may be bought or sold, & their price may change

• Yield is the annual rate of return on the bond if the bond were held to maturity

Advantages to the Issuer

• relatively safe

• Once the bond is sold, the coupon rate doesn’t change

• do not own a part of the company

Disadvantages

• Company must make fixed interest payments, even in bad years when it does not make money

• firm maintains financial health, its bonds may be downgraded to a lower bond rating & thus may be harder to sell unless they are offered at a discount

Savings Bonds

• Low denomination bonds issued by the U.S. government

• help pay for public works

• no risk of default

Treasury Bonds, Bills, & Notes

• U.S. Treasury Department

• Offer different lengths of maturity

• Safest investments in terms of default risk

Municipal Bonds

• finance such improvements as highways, state buildings, libraries, parks, & schools

• Interest paid on these is not subject to income taxes at the federal level or issuing state

Corporate Bonds & Junk Bonds

• Issued by corporations to help raise money to expand their businesses

• Junk Bond: high-yield securities, are lower-rated, & potentially higher paying

Financial Asset Markets

• Classified according to the length of time for which bonds are lent

• Capital Markets– Money is lent for periods longer than a year

• Money markets– Money is lent for periods of less than a year

The Stock Market

Return is the money an investor receives above and beyond the sum of money initially invested.

Risk and Return

Return and Liquidity

• Savings accounts have greater liquidity, but in general have a lower rate of return.

• Certificates of deposit usually have a greater return but liquidity is reduced.

Return and Risk

• Investing in a friend’s Internet company could double your money, but there is the risk of the company failing.

• In general, the higher potential return of the investment, the greater the risk involved.

Other Types of Financial Assets

Certificates of Deposit• Certificates of deposit

(CDs) are available through banks, which use the funds deposited in CDs for a fixed amount of time.

• CDs have various terms of maturity, allowing investors to plan for future financial needs.

Money Market Mutual Funds

• Money market mutual funds are special types of mutual funds.

• Investors receive higher interest on a money market mutual fund than they would receive from a savings account or a CD. However, assets in money market mutual funds are not FDIC insured.

What is the FDIC?

• Ensures customer deposits if a bank fails

• Insure losses up to $100,000

What is the Federal Reserve?

• Influences & controls the money supply

Financial intermediaries accept funds from savers and make loans to investors.

Financial Intermediaries

Commercial banksSavings & loan associations

Savings banksMutual savings banks

Credit unions

Financial Institutions that make loans to…

Life insurance companiesMutual funds

Pension fundsFinance companies

InvestorsSavers make deposits to…

The Flow of Savings and Investments

Diversification

• Spread your money around to reduce the risk of losing your entire investment

• Mutual Funds are the best at this, since the investment can buy shares of up to 120 different companies

Investment Considerations

1. Risk v. Return, High Risk= High Return

2. Objectives: College, Retire, age

DemandDemand

D= demandD= demand

Qd= Quantity DemandedQd= Quantity Demanded

P= priceP= price

DWAP

• Demand = desire, willingness, & ability to purchase; desire to own something & the ability to pay for it

• Why is demand important?– Shows how people are willing to allocate

resources

Law of Demand

• The The law of demand law of demand holds that other things holds that other things equal, as the price of a good or service rises, equal, as the price of a good or service rises, its quantity demanded falls.its quantity demanded falls.– The reverse is also true: as the price of a good The reverse is also true: as the price of a good

or service falls, its quantity demanded or service falls, its quantity demanded increases. increases.

• Inverse relationshipInverse relationship

What is a demand schedule?

• Table that lists the quantity of a good that a person will purchase at each price in a market

• A A market demand schedulemarket demand schedule is a table that is a table that lists the quantity of a good all consumers in lists the quantity of a good all consumers in a market will buy at each different price.a market will buy at each different price.

Demand SchedulesDemand Schedules

Individual Demand Schedule

Price of a Price of a slice of pizzaslice of pizza

Quantity demanded Quantity demanded per dayper day

Market Demand ScheduleMarket Demand Schedule

Price of a Price of a slice of slice of pizzapizza

Quantity Quantity demanded per demanded per

dayday

$.50$.50

$1.00$1.00

$1.50$1.50

$2.00$2.00

$2.50$2.50

$3.$3.0000

55

44

33

22

11

00

$.50$.50

$1.00$1.00

$1.50$1.50

$2.00$2.00

$2.50$2.50

$3.00$3.00

300300

250250

200200

150150

100100

5050

The Demand ScheduleThe Demand Schedule

Law of Demand

• Changes in price will or will not have an Changes in price will or will not have an effect on Quantity demanded? Why?effect on Quantity demanded? Why?

• Will because low prices mean more Will because low prices mean more buying power for consumersbuying power for consumers

Demand Curve

• Show how much consumers Show how much consumers will demand at given prices in will demand at given prices in graph formgraph form

Demand Curve for SodaDemand Curve for Soda

What causes a change in quantity demanded?

• Change in quantity demanded: refers to Change in quantity demanded: refers to movement along the curve; a change in movement along the curve; a change in quantity based on pricequantity based on price

SPITESPITE

• SubstitutionSubstitution; complimentary goods used to ; complimentary goods used to replace or with a good or servicereplace or with a good or service

• PopulationPopulation; population increases, demand ; population increases, demand tends to increasetends to increase

• IncomeIncome; more $, more willing to pay more or ; more $, more willing to pay more or buy more quantitybuy more quantity

• Tastes & PreferencesTastes & Preferences: trends, values/ beliefs: trends, values/ beliefs• ExpectationsExpectations; what they expect; what they expect

How the Demand Curve ChangesHow the Demand Curve Changes

• When we have an INCREASE in When we have an INCREASE in demand the curve will shift to the demand the curve will shift to the RIGHT because at the SAME price RIGHT because at the SAME price we are demanding morewe are demanding more

• When we have a DECREASE in When we have a DECREASE in demand the curve will shift to the demand the curve will shift to the left because at the SAME price we left because at the SAME price we are demanded lessare demanded less

Demand ElasticityDemand Elasticity

What is it?What is it?

• Small change in price = great (large) quantity demanded

• The extent in which changes in price cause changes in the quantity demanded

• It is the way consumers respond to price changes

• Elasticity of a good varies at every price level

Elastic DemandElastic Demand

• Consumers care about changes in the price of products with elastic demand

Determinants of Demand Elasticity

• Urgency of need (Necessity v. Luxury)– if it is not a necessity it is elastic

– if it is a need, it is inelastic

• Relative Importance– Ex. Clothing: if you currently spend ½ of your budget on

clothing, an increase in the cost of clothing will cause a large reduction in the quantity you purchase.- Elastic

– Ex. Shoelaces: if the price doubled, would you cut back? Probably not because you may not even notice the difference b/c it is only a small part of your budget-Inelastic

• Substitution availability– If substitutions are available- elastic

• Ex. Butter/ margarine

• Change over time– Can’t react quickly to price increase so it takes time

to find substitutes; so demand is inelastic for a short time until they find substitutes

• Income portion to buy– If goods/services are expensive-elastic

Demand InelasticityDemand Inelasticity

•Change in price has little to no impact on quantity demanded

Inelastic DemandInelastic Demand

• A small change in price causes a very little change in quantity demanded

• A demand for a good you keep buying despite a price increase

• Ex. Gas

Supply

Rules of Supply(Producer)

• 1.1.          S = shelves/ supplyS = shelves/ supply• 2.2.          Supply to the skySupply to the sky• 3.3.          Law of Supply- direct relationshipLaw of Supply- direct relationship• 4.4.          S does not equal Quantity S does not equal Quantity

SuppliedSupplied• 5.5.          Price = change in Quantity Price = change in Quantity

SuppliedSupplied• 6. 6. 8 factors change supply: 8 factors change supply:

GETSTIPSGETSTIPS

What is Supply?

• Quantity available in the Quantity available in the market to be soldmarket to be sold

• desire to maximize profitsdesire to maximize profits• Involves incentivesInvolves incentives

Law of SupplyLaw of Supply

• holds that other things equal, as holds that other things equal, as the price of a good rises, its the price of a good rises, its quantity supplied will rise, and vice quantity supplied will rise, and vice versa.versa.

What is quantity What is quantity supplied?supplied?

• the amount of the good that the amount of the good that producers plan to sell at a producers plan to sell at a particular price.  particular price. 

What is a supply What is a supply schedule?schedule?

• Shows the Shows the relationship relationship between price between price & quantity & quantity suppliedsupplied

What is a supply curve?What is a supply curve?

• A graphical representation of the supply schedule

• Horizontal axis measures the quantity of good supplied

• producer's supply curve shows the producer's supply curve shows the quantity of an item that producers will quantity of an item that producers will supply for given prices.supply for given prices.

EquilibriumEquilibrium

• In economics, an In economics, an equilibriumequilibrium is is a situation in which: a situation in which: – there is no inherent tendency to there is no inherent tendency to

change, change, – quantity demanded equals quantity demanded equals

quantity suppliedquantity supplied

EquilibriumEquilibrium

Equilibrium occurs at a price of $3 and a quantity of 30 units.

Shifts in SupplyShifts in Supply

• A change in any variable other A change in any variable other than price that influences quantity than price that influences quantity supplied produces a supplied produces a shift in the shift in the supply curvesupply curve or a change in supply. or a change in supply.

Government Regulation

Expectations

Technology

Subsidies

Taxes

Inputs (cost of)

Productivity

Sellers (number of)

Government Regulation

Expectations

Technology

Subsidies

Taxes

Inputs (cost of)

Productivity

Sellers (number of)

TABLE 5TABLE 5Change in Supply due to an Change in Supply due to an

Increase in Video CostsIncrease in Video CostsPrice Quantity

DemandedInitial QuantitySupplied

New QuantitySupplied

$5 10 5050 3030

$4 20 4040 2020

$3 30 3030 1010

$2 40 2020 00

$1 50 1010 00

• Elasticity of Supply– Measure of the way suppliers respond to a

change in price– If supply is ELASTIC it means that changes in

price will have a large impact on Quantity supplied

– If supply is INELASTIC, it means price does little to change Quantity Supplied

TimeTime• In the long run, In the long run,

firms are more firms are more flexible, so supply flexible, so supply can become more can become more elastic.elastic.

• In the short run, a firm cannot easily change its output level, so supply is inelastic.

What Affects Elasticity of What Affects Elasticity of Supply?Supply?

Supply Elasticity vs. Demand Elasticity

• If quantities are being purchased, the concept is demand elasticitydemand elasticity

• If quantities are being sold, concept is If quantities are being sold, concept is supply inelasticitysupply inelasticity

Government Influences on Government Influences on SupplySupply

SubsidiesSubsidiesA subsidy is a government payment that supports a business or market. Subsidies cause the supply of a good to increase.

TaxesTaxesThe government can reduce the supply of some goods by placing an excise tax on them. An excise tax is a tax on the production or sale of a good.

RegulationRegulationRegulation occurs when the government steps into a market to affect the price, quantity, or quality of a good. Regulation usually raises costs.

CostsCostsFixed Costs Variable

CostsTotal Cost

Costs that don’t Costs that don’t change with outputchange with output

Costs that change withCosts that change withOutputOutput

Ex. Wage workers, Ex. Wage workers, Raw materials, Raw materials,

electricityelectricity

Sum of fixed & Sum of fixed & Variable costsVariable costs

Marginal CostsMarginal Costs

• Costs incurred by making one more unitCosts incurred by making one more unit

Marginal Product

• Extra output made by adding Extra output made by adding one more unit of inputone more unit of input

Theory of Production• Deals w/ relationship between Deals w/ relationship between

Factors of Production and output; Factors of Production and output; it looks at how output changes it looks at how output changes when input changeswhen input changes

• Law of Variable ProportionsLaw of Variable Proportions: : output will change as output will change as oneone input is input is changedchanged

Stages of ProductionStage #1Stage #1 Increasing Increasing

ReturnsReturnsEach input Each input contributes contributes more to total more to total outputoutput

(ex. Labor)(ex. Labor)

Stage # 2Stage # 2 Diminishing Diminishing ReturnsReturns

Output Output increases with increases with each input, but each input, but at a at a slowerslower rate rate

Stage # 3Stage # 3 Negative Negative ReturnsReturns

Each added Each added input makes input makes total output total output decreasedecrease

Pricing & Decision Making

Pricing As Signals:

The role of prices is to act as signals for buyers and sellers in the market

Measure of Value

Signal

Flexible

Cost

Choice of g/s

Efficient

• Standard form of measure for g/s

• for excess or shortage: suppliers inc/dec production for profit; consumers inc/dec spending

• can decrease price to get rid of a surplus

•Can increase price to alleviate shortage problem

• no administrative cost b/c supply and demand determine price

• variety of prices for each g/s

• FOPS adjust based on demand

• Easily understood (universal language)

Allocation without Allocation without Prices: RationingPrices: Rationing

• Government decides everyone’s Government decides everyone’s fair sharefair share– Ex. WWII/ OPEC 1973 Oil EmbargoEx. WWII/ OPEC 1973 Oil Embargo

• Problems with RationingProblems with Rationing– Fairness: small shares for everyoneFairness: small shares for everyone– Diminished incentives: no Diminished incentives: no

motivation to workmotivation to work– Can lead to BLACK MARKETCan lead to BLACK MARKET

How Prices are How Prices are DeterminedDetermined

• The Economic ModelThe Economic Model– Analyzes behaviors Analyzes behaviors – Predicts outcomesPredicts outcomes

• When Quantity Demanded = Quantity When Quantity Demanded = Quantity Supplied, we have a Supplied, we have a market equilibriummarket equilibrium

Surplus

• When Qs>Qd• Effects:

– cause Price to cause Price to decreasedecrease

– Qd to increaseQd to increase

– Qs to decreaseQs to decrease

$.25$.25

$.15$.15

$.05$.05

Surplus

ShortageShortageQuantity supplied is Quantity supplied is less than quantity less than quantity

demanded.demanded.Price goes upPrice goes up

We Don’t Have Equilibrium…• Shortage

– Qs < Qd

EFFECTS of a Shortage EFFECTS of a Shortage (how to return to Eq):(how to return to Eq):

1.1. Increase priceIncrease price

2.2. Quantity Quantity Supplied Supplied increaseincrease

What Happens when prices are fixed?

• Price Ceilings

– Maximum legal price charged b/c Maximum legal price charged b/c the gov’t thinks price is too high the gov’t thinks price is too high

– Effect: SHORTAGEEffect: SHORTAGE

– Example: rent controlExample: rent control

$2.00

$1.00

$.50

Price Ceiling

Price FloorsPrice Floors

– Minimum legal price Minimum legal price charged b/c the gov’t charged b/c the gov’t thinks it is too lowthinks it is too low

– Effect: SURPLUSEffect: SURPLUS– Example: minimum wageExample: minimum wage

$2.00

$1.00

$.50Price Floor

The United States The United States Economic SystemEconomic System

Why can we call it a Why can we call it a “mixed” economic “mixed” economic

system?system?•People & firms are People & firms are

mostly free, but we have mostly free, but we have government interference government interference in economyin economy

The Entrepreneur• Organize & manage land, labor, & Organize & manage land, labor, &

capitalcapital• Search for profitSearch for profit• Bring new products to marketBring new products to market• Increase competitionIncrease competition

– Lower pricesLower prices

• Expanding the market (advertising, international, target market)

• Customer Service

• Customizing Product

• Adapting to new technology

• Efficient Production

• Uniqueness

• Reliability

• Affordable

• Good employee benefits - keeps them happy and working

• Specialization

What characteristics of Free Enterprise do you see here?

Explain how they relate.

The ConsumerThe Consumer• ““Consumer Consumer

sovereignty: to sovereignty: to vote with their vote with their dollarsdollars

•To say what To say what is & isn’t is & isn’t producedproduced

The GovernmentThe Government• To protect consumer; lawsTo protect consumer; laws• Provide goods & services; Provide goods & services;

education, national defense, education, national defense, welfarewelfare

• Regulate; preserve competitionRegulate; preserve competition• Promote national goals; freedom, Promote national goals; freedom,

efficiency, growth, & stabilityefficiency, growth, & stability

What is Free Enterprise?

Firms are free to operate for profit w/o Firms are free to operate for profit w/o gov’t interference beyond necessary gov’t interference beyond necessary regulation to protect public interestregulation to protect public interest

4 Characteristics of Free Enterprise

• Economic FreedomEconomic Freedom; both individuals & ; both individuals & business take chances & risksbusiness take chances & risks

• Voluntary ExchangeVoluntary Exchange; freely & willingly ; freely & willingly engage in market transactionsengage in market transactions

• Private PropertyPrivate Property; people have the right ; people have the right & privilege to control possessions& privilege to control possessions

• Profit motiveProfit motive; to risk savings on ; to risk savings on ventures in hopes of financial gainventures in hopes of financial gain

Economic & Social Economic & Social GoalsGoals

• Economic FreedomEconomic Freedom: make own : make own decisionsdecisions

• Economic EfficiencyEconomic Efficiency: Not wasting : Not wasting the factors of productionthe factors of production– Ex. Record albums vs. CD’sEx. Record albums vs. CD’s

• Economic EquityEconomic Equity: Equal pay for : Equal pay for equal work; no discriminationequal work; no discrimination

• Economic SecurityEconomic Security: protection : protection against economic illnesses; layoffs, against economic illnesses; layoffs, injuryinjury– Social SecuritySocial Security– WelfareWelfare

• Full EmploymentFull Employment: provide as many : provide as many jobs as possible; Unemployment jobs as possible; Unemployment ONLY between 4% and 6%ONLY between 4% and 6%

• Price StabilityPrice Stability: gives certainty in : gives certainty in prices; can expect inflation, protect prices; can expect inflation, protect fixed income individualsfixed income individuals

• Economic GrowthEconomic Growth: more $, more : more $, more jobs, more goodsjobs, more goods

Economic Indicators : Key Terms

Gross Domestic Product (GDP)

• The total dollar value of all goods and services produced in a particular economy in a given year.

Four Components of GDP

1. Consumer Goods and Services: durable (Oven) non-durable: (food)

2. Business Goods and Services

Four Components of GDP

3. Government Goods and Services

4. Net exports/imports of goods

Real GDP vs. Nominal GDP

Real GDP: gross domestic product expressed in in constant, or

unchanging prices.

Nominal GDP: gross domestic product measured in current prices.

What Is a Business Cycle?

• A macroeconomic period of expansion followed by a period of contraction.– A modern industrial economy experiences

cycles of goods times, then bad times, then good times again.

– There are four main phases of the business cycle: expansion, peak, contraction, and trough.

The Business Cycle

Phases of the Business Cycle

Expansion

• An expansion is a period of economic growth as measured by a rise in real GDP. Economic growth is a steady, long-term rise in real GDP.

Peak

• When real GDP stops rising, the economy has reached its peak, the height of its economic expansion.

Phases of the Business Cycle

Contraction

• Following its peak, the economy enters a period of contraction, an economic decline marked by a fall in real GDP. A recession is a prolonged economic contraction. An especially long or severe recession may be called a depression.

Trough

• The trough is the lowest point of economic decline, when real GDP stops falling.

Recession

a period of reduced economic activity during which the level of unemployment rises, GDP falls, and general prosperity lags.Usually lasts 6 to 18 months.

Recession

Depression

A recession that is especially long and severe.

Stagflation

A decline in real GDP combined with a rise in the price level.

Inflation

• A general increase in prices.

Inflation

Consumer Price Index (CPI)

• Measure of the changes in prices of goods and services over a give time period. – Based on a “market basket” of goods and

services.

Producer Price Index (PPI)

A comprehensive index of price changes at the wholesale level. Because wholesale price changes eventually find their way into consumer prices, the producer price index is closely watched as an early indicator of future retail price changes. Formerly called wholesale price index.

Inflation: Purchasing Power, Income, & Interest Rates

Purchasing Power: Is the ability to purchase goods and services. As prices rise, the purchasing power of

money declines.

Income (fixed): As income remains the same, and prices rise, the less purchasing power an individual

has.

Interest Rates: the greater the difference in percentage between one’s interest rate and the

inflation rate equals greater monetary gains & vice versa.

Making Fiscal Policy & Monetary Policy

United States Fiscal Policy

• Fiscal policy is the federal government’s use of taxing and spending to keep the economy stable.

Important Definitions

• Capital Deepening-process of increasing the amount of capital per worker (p. 320)

• Cost-Push Theory-theory that inflation occurs when producers raise prices to meet increased costs (p. 341)

• Crowding-Out Effect-the loss of funds for private investment due to government borrowing (p. 406)

• Market Basket-a representative collection of goods and services (p. 339)

Federal Budget

• A document written every year (fiscal year) that projects government revenue and authorizes where that money is spent.

• Congress writes the budget– The federal budget for FY 2006 is $2.5 million.

Federal agencies send requests for money to the Office of Management and Budget.

The Office of Management and Budget works with the President to create a budget. In January or February, the President sends this budget to Congress.

Congress makes changes to the budget and sends this new budget to the President.

The President signs the budget into law.

The President vetoes the budget. If Congress cannot get a majority to override the President’s veto, Congress and the President must work together to create a new, compromise, budget.

2⁄3

The Budget ProcessThe Budget Process

*Congress and the White House work together to develop a federal budget.

Surplus, Deficits, & Balance

• A budget surplus occurs when revenues exceed expenditures.

• A budget deficit occurs when expenditures exceed revenues.

• A balanced budget occurs when revenues are equal to spending.

Debt vs. Deficit

• The difference between debt and deficit:– The federal deficit is the amount that the

government owes from one fiscal year to the next.

– The national debt is the total amount the government owes from all years.

• It is owed to people/business who own US savings bonds, treasury bills, bank notes.

http://www.toptips.com/debtclock.html

Responding to Budget Deficits

Creating Money• The government can

pay for budget deficits by creating money. Creating money, however, increases demand for goods and services and can lead to inflation.

Borrowing Money• The government can also

pay for budget deficits by borrowing money.

• The government borrows money by selling bonds, such as United States Savings Bonds, Treasury bonds, Treasury bills, or Treasury notes. The government then pays the bondholders back at a later date.

The National Debt

The national debt is the total amount of money the federal government owes. The national debt is owed to anyone who holds U.S. Savings Bonds or Treasury bills, bonds, or notes.

http://www.brillig.com/debt_clock/

Monetary Policy & the Monetary Policy & the Federal Reserve SystemFederal Reserve System

What is Monetary Policy?

• Actions that the Fed takes to influence the level of real GDP and the rate of inflation in the economy

What is the Fed?

• Chairman Ben Bernanke

• The Government’s Bank

– Maintains the Treasury Department's checking account, and clears checks

– Reserve Board has great control because it has power to regulate the money supply

• As Regulators

– Supervise and regulate the nation's banks to ensure their financial soundness and are following banking, consumer, and other laws.

• As LendersAs Lenders

• Provides credit to depository institutions

• Lender of last resort to the nation's banks

• If banks or other FDIC banks are forced to close, depositors are protected by the FDIC up to the legal limit of $100,000 per depositor.

•most critical role is to keep the economy healthy through the proper application of monetary policy

•to promote stable prices maximum sustainable employment and steady economic growth

Market Failures

Ideal Market ConditionsIdeal Market Conditions

1.1.Adequate competition in all Adequate competition in all marketsmarkets

2.2.Buyers & sellers are informedBuyers & sellers are informed

3.3.Reasonable pricesReasonable prices

4.4.Free movement of resourcesFree movement of resources

Market Failures occur if one of the four ideal market conditions are altered

significantly.

Market Failures

There are two types of externalities:

1.Positive Externalities

2. Negative Externalities

Externalities

Positive Externalities

Public goods generate benefits to many people, not just those who pay for the goods

Negative Externalities• Some decisions to produce goods & services

generate unintended costs• Causes part of the cost of producing a good

or service to be paid for by someone other than the producer– Ex. Pollution, traffic from producing a corporation in a

neighborhood, crime

Public Goods

• Shared good/service for which it would be inefficient or impractical to make consumers pay individually & to exclude non payers

The Role of The Role of GovernmentGovernment

Why do we need it?

• Control the market power; prevent Control the market power; prevent large firms from taking overlarge firms from taking over

• To prevent cartels, mergers, or To prevent cartels, mergers, or predatory pricingpredatory pricing

• Predatory Pricing: set the market Predatory Pricing: set the market price below their costs for the price below their costs for the short term to drive competitors short term to drive competitors out of business.out of business.

What is the purpose of anti-trust legislation?

To make sure that businesses do not unfairly force out its competitors

Anti-Trust LegislationAnti-Trust Legislation

1. 1. Sherman Anti-Trust ActSherman Anti-Trust Act (1890): outlawed (1890): outlawed mergers & monopolies that limit trade mergers & monopolies that limit trade between statesbetween states

– Gave gov’t power to regulate industryGave gov’t power to regulate industry

– Stop firms from forming cartels or Stop firms from forming cartels or monopoliesmonopolies

– Break up existing monopoliesBreak up existing monopolies

2. 2. Clayton Anti Trust ActClayton Anti Trust Act (1914): Outlawed (1914): Outlawed practices that limit competition or lead to practices that limit competition or lead to monopolymonopoly

3. 3. Federal Trade Commission ActFederal Trade Commission Act (1914): (1914): Established the FTC to regulate unfair Established the FTC to regulate unfair methods of competition in interstate methods of competition in interstate commerce by issuing cease & desist orderscommerce by issuing cease & desist orders

4. National Recovery Act (NRA)-(1933-1935): designed to strengthen trade associations, and raise prices, profits and wages at the same time.

5. The Robinson-Patman Act -1936 sought to protect local retailers against the onslaught of the more

efficient chain stores, by making it illegal to discount prices.

Government Regulation of Mergers:

The government can block mergers (prevent) in order to avoid the creation of a monopoly.

Public Disclosure LawsPublic Disclosure Laws

• Require companies to give Require companies to give consumers important consumers important information about their information about their productsproducts

• Ex. Fuel efficiency labels on Ex. Fuel efficiency labels on new carsnew cars

• Consumers use information to Consumers use information to evaluate aspects of a productevaluate aspects of a product

Goals of Gov’t RegulationGoals of Gov’t Regulation

• regulate industries whose goods & regulate industries whose goods & services affect the well-being of the publicservices affect the well-being of the public

• environmental protection rulesenvironmental protection rules

Negative Effects of Gov’t Negative Effects of Gov’t RegulationRegulation

• Costly to implement=cutting into profits, Costly to implement=cutting into profits, slowing growth, & forcing businesses to slowing growth, & forcing businesses to charge unnecessarily high pricescharge unnecessarily high prices

• Stifle competitionStifle competition

• Raised gov’t spendingRaised gov’t spending

Abbreviation Name Function

SEC     

FCC     

FDA     

NLRB  

National Labor National Labor Relations BoardRelations Board

  

FTC     

ICC     

EPA     

Securities & Exchange Securities & Exchange CommissionCommission

Federal Federal Communications Communications CommissionCommission

Food & Drug Food & Drug AdministrationAdministration

Federal Trade Federal Trade CommissionCommission

Interstate Commerce Interstate Commerce CommissionCommission

environmental environmental Protection AgencyProtection Agency

Regulates & supervises the sale of listed and unlisted securities and the brokers, dealers, & bankers who sell them.

Licenses & regulates radio & television stations & regulates interstate telephone rates & services.

Enforce laws to ensure purity, effectiveness and truthful label of drugs, food, and cosmetics.Administers federal labor-management relations laws; settles disputes; prevents unfair labor practices.

Administers anti-trust laws forbidding unfair competition, price-fixing, and other deceptive practices.Regulates rates & other aspects of commercial transportation by railroad, highway, and waterway.

Coordinates federal environmental programs to fight air and water pollution.

Business Organizations

What is a business organization?

A business organization is an establishment formed to carry on commercial enterprise.

Key Terms

Business License- Authorization to start a business issued by the local government.

Zoning Law- Law in a city or town that designates separate areas for residency and for business.

Liability- The legally bound obligation to pay debts.

Fringe Benefit- Payment other than wages or salary.

Diversification- Spreading out investments to reduce risk.

Sole Proprietorship

• A business owned and managed by a single individual

• Individual earns all the profits and is responsible for all the debts

• Most popular business organization in the US-75% all businesses in US

• Advantages:– Simple to establish– Almost anyone can establish– Total control of business– Least regulated business form, however must abide by some

government regulation– Easy to discontinue or end business – Need to obtain:

• Business license• Site Permit• Business Name

Sole Proprietorship

• Disadvantages:– High degree of responsibility– Unlimited personal liability– Limited access to resources/capital– Limited skills (education, training, etc.)– May have to turn down work due to limited human capital– Can be personally and financially exhausting – A limited life-when owner dies or shop closes the

business ceases to exist

Sole Proprietorship

What is it?

A conglomerate occurs when firms buy other companies that produce totally unrelated goods or services

(three or more businesses).

Conglomerate Mergers

• Result from 1 corporation buying another in a completely different industry

• Corporation X buys Corporation Y to add to its financial assets & overall profits

• X may absorb Y or allow Y to operate independently as a subsidiary with X taking Y’s profits

Partnerships

• A partnership is a business organization owned by two or more persons who agree on a specific division of responsibilities and profits.

• Three categories: general partnerships, limited partnerships, and limited liability partnerships

Partnerships• Advantages:

– easy and inexpensive to establish– no written agreement required (however it is advised), & little

government regulation, shared decision making and specialization, larger pool of assets, and no additional taxation

• Disadvantages:– Potential for conflict– Many of the same disadvantaged as sole proprietorships– Unlimited liability

General Partnerships• Most common type of partnership• Both partners are equally liable• Examples:

– Most doctor offices– Lawyers– Accountants– Farms– Etc.

Limited Partnership

• Only one partner is required to be a general partner (unlimited liability)

• The remaining partners contribute only money-and only can lose amount invested

• Main advantage is being a general partner of the business

• Drawbacks: the extent of liability

Limited Liability Partnership

• New type of partnership• An LLP functions like a general partnership, except that all

partners are limited from personal liability in certain situations: such as another partner's mistakes.

• Only certain types of businesses are allowed to register as LLPs:– Attorneys– Physicians– Dentists– Accountants

Corporations • Legal entity, or being, owned by individual stockholders,

each of whom faces limited liability for the firm's debts• Most complex business organization• Stockholders own stock, a certificate of ownership in a

corporation-stockholders are part owners• Corporation pays taxes, may engage in business, make

contracts, sue others, and get sued• 20% of all US businesses-90% of all products sold in US

are from corporations• 70% of nation’s income comes from corporations

Corporation

• Closely held corporations-corporations held within families (privately held corporations)

• Publicly held corporations- has many shareholders and they sell stocks on the open market (Stock exchanges)

• Corporations have a board of directors-make all major decisions for the corporation

Corporation

• Disadvantages:– Expense and difficulty to start-up– Double taxation– Potential loss of control by the founders– More legal requirements and regulations

• Advantages:– Limited liability for owners– Transferable ownership– Ability to attract capital– Long life – More potential for growth

Multinational Corporations• A corporation that operate in more than one

country at a time• Headquarters in one country and branches

in another• Must obey laws and pay taxes in each

country in which they operate• 2000-63,000 multinational firms existed

with 690,000 foreign branches • $3 trillion in worldwide assets

• Advantages:– Provide jobs and products all over the world

– Spread new technologies and production across the globe

– Increase Standard of Living in poorer countries

• Disadvantages:– Can influence the culture and politics in the countries in

which they operate

– Concerns about low wages and poor working conditions in third world countries

Multinational Corporations

What is it?

• The union of 2 or more commercial interests or corporations

• Takes place when 1 company acquires another or when 2 join to form a new company

Horizontal Merger

• One corporation combines with another in the same industry

• Ex. Chrysler bought American Motors in the 1980’s– Jeep & Eagle vehicle lines & production

facilities were added to the Chrysler line

Effects of Horizontal Merger

• Increase the market share of the combined firm; competition will be reduced

• Generally prohibited except in cases where 1 participant in the merger is near bankruptcy

Vertical Mergers

• A corporation buys another in a related phase of its business

• Saves $ & adds to productivity

• Combine operations that go into making the main product

• Ex. Carnegie built Carnegie Steel by buying mines & RR’s

Effects of Vertical Mergers

• Increase efficiency

• Provide guaranteed source of supply

• Enable the streamlining of activities to the special requirements of the final product

• Force other sellers out of business

Franchise

• A semi-independent business that pays fees to a parent company and in turn is granted exclusive tight to sell a certain product or service in a given area

• Parent companies are called franchisers-franchisers develop the products and the business systems

Franchise• Advantage:

– Built-in reputation– Management and training– Standardized quality– National advertising programs– Financial assistance– Centralized buying power

• Disadvantage: – High franchise fees and royalties– Strict operating standards– Purchasing restrictions– Limited product line

Cooperative

• A business organization owned and operated by a group of individuals for their shared benefit

• Three main categories: consumer or purchasing cooperatives; service cooperatives; and producer cooperatives

• The main benefits of cooperatives are that members can obtain goods/services at discounted prices and when selling g/s they can get the highest prices possible

Nonprofit Organizations

• Function much like a business organization but do not operate for the purpose of generating profit

• Exempt from income taxes• Many operate with partial government support• Provide services rather than goods• Businesses that benefit society

– Examples:• Museums, Red Cross, hospitals, churches, synagogues YMCA,

labor unions,etc.

Other Nonprofit Organizations• Professional Organizations-nonprofit organization that works

to improve the image, workings conditions, and skill levels or people in particular occupations

• Business Associations-nonprofit organization that promotes collective business interests for a city, state, or other geographical area, or for a group of similar businesses

• Trade Associations-nonprofit organizations that promotes the interests of a particular industry

• Labor Unions-organized group of workers whose aim is to improve working conditions, hours, wages, and fringe benefits.

Government Revenue

& SpendingTaxes

What are Taxes?

• Required payment to local, state, or national gov’t

• Primary way the gov’t collects money

• Congress has the power to tax

The Power to TaxThe Power to Tax

• Article 1, Section 8, Clause 1 of the Article 1, Section 8, Clause 1 of the Constitution grants Congress the power Constitution grants Congress the power to tax.to tax.

• The Sixteenth Amendment gives The Sixteenth Amendment gives Congress the power to levy an income Congress the power to levy an income tax.tax.

Revenue

• Income received by a gov’t from taxes & other non tax sources

• Helps gov’t provide goods & services

Limits on Taxes

• Purpose must be for the “common defense & general welfare”

• Federal taxes must be the same in every state

Types of Taxes Types of Taxes • Proportional Taxes

– Taxes that remain the same regardless of income.

– Example: • 15 percent flat income tax for all Americans

Types of Taxes Types of Taxes • Progressive Taxes

– Taxes that increase as income increases. – Income taxes are progressive taxes; the more

you earn, the more you pay.

Types of Taxes Types of Taxes • Regressive Taxes

– Taxes that decrease in proportion to income. Has a greater burden on lower income-earners than higher-income earners.

– Example:• Sales Tax: Paying a seven percent tax on a cup of

coffee hurts me more than in hurts Bill Gates.

Types of Taxes

Type Description

Proportional

Ex. Property taxes

The percentage of income paid in taxes remains the same for all income levels. “Flat tax”. The more you make the more you pay. The more you spend the more you pay.

Progressive

Ex. Income

The percentage of income paid in taxes increases as income increases

Ex. Income rises, taxes rise

Regressive

Ex. Sales Tax

The percentage of income paid in taxes decreases as income increases

Sources of Government Revenue

• Individual & corporate income taxes

• Social insurance taxes

• Excise taxes

• Estate & gift taxes

• Taxes on imports

Taxes Taxes • Taxes are often used by the government to change

people’s behavior.– Raise on cigarettes to stop people from smoking.

– Lower taxes on business to stimulate economic activity.

– Give homeowners a tax cut to encourage homeownership.

– Cut capital gains taxes to encourage investments.

Taxable Income

• Person’s gross (or total) income minus exemptions & deductions

• Includes salaries, wages, tips, and commissions

• Includes income from investments

Misc. Definitions

• Personal ExemptionsPersonal Exemptions: Set amounts that you subtract from your gross income for yourself, your spouse, and any dependents

• DeductionsDeductions: variable amounts that you can subtract, or deduct, from your gross income– Ex. Interest on mortgage, donations to charity,

state & local tax payments

Other Sources of Gov’t Revenue

Social Security Tax Taxes to FICA that go to the Social Security Administration to fund old age, survivors, & disability insurance

Medicare National health insurance program that helps pay for health care for people over the age of 65

Property Taxes/Estate Taxes Tax on total value of the money & property of a person who has died

Excise Taxes Tax on the sale & manufacture of a good

Gift Taxes Tax on money or property that one living person gives another

Ways Taxing Influences Economic Behavior

• Tax Incentive: use of taxation to encourage or discourage behavior

• Sin taxes: federal taxes on tobacco and alcohol

• Certain tax deductions encourage energy conservation

The Flow of TaxesThe Flow of Taxes

• Money is collected from people and businesses then redistributed in the areas where Money is collected from people and businesses then redistributed in the areas where the government sees need. the government sees need.

• Money is collected from people and businesses then redistributed in the areas where Money is collected from people and businesses then redistributed in the areas where the government sees need. the government sees need.

SpendingFederal, State, & Local Governments

•Discretionary Spending- Spending category about which government planners can make choices.

-Examples: Defense, education, training, student loans, environment, technology, etc.

Federal Spending

Mandatory Spending- Spending on certain programs that is mandated, or required by existing law.

Entitlement Programs(Sub-category of Mandatory Spending)

Social welfare program that people are “entitled to” of they meet certain eligibility

requirements.

Examples:

Social Security

Medicare (Over 65 yrs.)

Medicaid (low income families)

How are state taxes spent?

•Education, Public Safety, Highways & Transportation, Public Welfare, Recreation, Administration (State Workers)

State Tax RevenueHow does the state make money?

•Income taxes, Corporate Income Tax, Sales Tax, & Excise Tax

Local Government RevenueHow does the local government make money?•Property taxes, school taxes, other local taxes

Local SpendingWhat are local taxes spent on?•Public schools, roads, libraries, jails, salaries (teachers and administrators)

The Work Force & Wages

Chapters 9 & 13

What does it mean to be “employed”?

• 16 yrs.+ working for pay at least 1 hr./wk.

• 15 yrs.+ w/o pay for family business

• Held jobs but didn’t work due to illness, vacation, strike, weather

Labor Force

• All non military people age 16-65 who are employed or seeking it

Occupational Trends

• 1800-1900’s: shift from agriculture to Industrial Revolution which created factory jobs

• 1900’s-1960’s: heavy manufacturing• 1970’s- present: boom in electronics led to new

factory jobs; revolution in computers created new jobs

• Future: Shift from manufacturing to service economy

What is Outsourcing?

• Sending jobs abroad

Advantages Disadvantages

• Provides jobs to people in Provides jobs to people in other countriesother countries

• Lower prices for Lower prices for consumersconsumers

• Bigger profit marginsBigger profit margins

• Lower costs of productionLower costs of production

• Better, higher paying corp. Better, higher paying corp. jobs in USjobs in US

• Loss of domestic jobsLoss of domestic jobs• Weakens strength of Weakens strength of

domestic economydomestic economy• Less tax revenue for Less tax revenue for

countrycountry• Loss of power/ #’s in Loss of power/ #’s in

unionsunions• Plant ClosingsPlant Closings

Impact of Outsourcing

• Skilled workers & professionals: increased Skilled workers & professionals: increased demand, wages increasedemand, wages increase

• Unskilled/lower skilled: Lowered Demand, Unskilled/lower skilled: Lowered Demand, Increased SupplyIncreased Supply Lower Pay Lower Pay Surplus of Surplus of unskilled workersunskilled workers

• Temporary/Contingent workers: People working Temporary/Contingent workers: People working free lance; as contracted ex. Engineers, attorneysfree lance; as contracted ex. Engineers, attorneysIncreased Demand- can adjust for peak seasons, Increased Demand- can adjust for peak seasons, fewer rights, paid less, flexiblefewer rights, paid less, flexible

How are wages determined?

• Supply & demand…AGAIN

• Demand for product changes, so does demand for the labor that produces it

Factors that Affect Wages

• Education• Opportunity• Initiative• Discrimination

– Women/minorities

– Glass ceiling

• Laws• Employers• Region• Labor Unions

Consumerism:Definition 1

Organized-efforts by individuals, groups, and governments to help protect consumers from policies and practices that infringe consumer rights to fair business practices.Definition 2Doctrine that ever-increasing consumption of goods and services fforms the basis of a sound economy.

Definition 3Continual expansion of one's wants and needs for goods and services.

Organized Labor

Types of Laborers

• Unskilled: requires no specialized skills, education, & training; hrly wage

• Semi Skilled: requires minimal specialized skills & education

• Skilled: requires specialized abilities & training

• Professional: demands advanced skills & education

Labor Unions

• Impact: Fight for higher wages and better working conditions

• Tend to produce higher wages than non-union workers

• Strength in Numbers

Craft Union

• Association of skilled workers who perform the same kind of work

• Ex. NYSUT-teachers

Industrial Union

• All workers in a given industry regardless of what job they perform

• Ex. UAW: any worker in the auto industry

Types of Union Activities

Types of Union Activities Purpose of Union Activity

Strike: Most common; refusal to work Strike: Most common; refusal to work until demands are metuntil demands are met

slows efficiency; tool used to slows efficiency; tool used to increase bargaining powerincrease bargaining power

Pickett: ParadePickett: Parade vocalize disputed issues; cut vocalize disputed issues; cut off patrons, supplies; off patrons, supplies; intimidate; informintimidate; inform

boycottboycott Mass refusal to buy product or Mass refusal to buy product or service from a targetservice from a target

Hurts income and reputationHurts income and reputation

Roles of Labor UnionsRolesCollectively BargainCollectively Bargain Use strength in numbersUse strength in numbers

Union and company reps meet to Union and company reps meet to negotiate a new labor contractnegotiate a new labor contract

11stst steps unions take steps unions take

Get favorable legislation passedGet favorable legislation passed Endorse candidates that will support Endorse candidates that will support the unions causethe unions cause

Secure better working conditionsSecure better working conditions WagesWages

HoursHours

Seniority Rights (LIFO)Seniority Rights (LIFO)

Safety and ComfortSafety and Comfort

Job SecurityJob Security

Resolving Differences

ConciliationConciliation 33rdrd party brought in to party brought in to encourageencourage talks talks between mgmt. And workersbetween mgmt. And workers

Role is to bring two sides togetherRole is to bring two sides together

ArbitrationArbitration Binding decisionBinding decision

Union and mgmt. Turn case over to a Union and mgmt. Turn case over to a 33rdrd party to party to resolveresolve dispute dispute

Seldom usedSeldom used

MediationMediation Union and mgmt. Union and mgmt. Help settleHelp settle dispute dispute

Mediator is neutral and knows concessions Mediator is neutral and knows concessions to agree onto agree on

Non bindingNon binding

Major Issues in Contract Disputes

• Wages and Fringe Benefits

• Working Conditions

• Job Security

Right to Work Laws

Ban mandatory union membership.

Unemployment & Poverty

Unemployment

• One who is actively seeking but not finding a job.

How do we figure out the unemployment rate?

The total number unemployed in proportion to the total

civilian labor force (16-65)

(Percentage)

Types of Unemployment

• Frictional UnemploymentFrictional Unemployment– Unemployment that comes from moving

between careers, jobs and/or relocation.

Types of Unemployment

• Seasonal UnemploymentSeasonal Unemployment– Unemployment that occurs when industries

slow or shut down for a season or make seasonal changes in production.

Types of Unemployment

• Structural UnemploymentStructural Unemployment– Occurs when a worker’s skills do not match the

jobs that are available; often occurs because of technological advances.

Types of Unemployment

• Cyclical UnemploymentCyclical Unemployment– Unemployment that rises during economic

downturns and falls during periods of economic growth.

Technological Unemployment

• Replacement Replacement by machinesby machines

Full Employment

• Lowest possible Lowest possible unemployment unemployment rate with growth rate with growth & all factors of & all factors of production used production used efficientlyefficiently

• ECO. GOAL- ECO. GOAL- between 4 & 6 %between 4 & 6 %

Causes of Income Inequality & Poverty

• EducationEducation

• WealthWealth

• DiscriminationDiscrimination

• AbilityAbility

• LocationLocation

• Family Family StructureStructure

Income Distribution Problem

• Richest 20% have 13x’s the Richest 20% have 13x’s the income as the 20% poorestincome as the 20% poorest

• Uneven Distribution of WealthUneven Distribution of Wealth

Poverty

• Those living on or below the Those living on or below the poverty line or threshold.poverty line or threshold.(Annual dollar amount needed (Annual dollar amount needed to sustain life with basic needs.)to sustain life with basic needs.)

http://www.usccb.org/cchd/povertyusa/tour2.htm

Poverty Rate

• % of people who live below the % of people who live below the poverty thresholdpoverty threshold

• Differs by race and ethnic origin, Differs by race and ethnic origin, type of family, age, residencetype of family, age, residence

Welfare ProgramsIncome Income AssistanceAssistance

Direct CashDirect Cash

Comes with guidelinesComes with guidelines

General General AssistanceAssistance

Food StampsFood Stamps

MedicaidMedicaid

Based on IncomeBased on Income

Social ServiceSocial Service Family PlanningFamily Planning

DaycareDaycare

Child WelfareChild Welfare

Job TrainingJob Training

WorkfareWorkfare Exchange labor for benefitsExchange labor for benefits

Community service, build skillsCommunity service, build skills

TANF: Temporary TANF: Temporary Assistance for Needy Assistance for Needy Families Families

Eliminated abuses of the system (got rid of cash Eliminated abuses of the system (got rid of cash abuses)abuses)

Limited time to receive benefits to 5 yearsLimited time to receive benefits to 5 years

Questions?

ECONOMICS FINAL:

Monday, June 15, 2009

Time: 10am

Room:

Webpage: www.cohen@pbwiki.com

Email: mcohen@bscsd.org