Unit 1

1. Unit 1 Fundamental Economic Concepts Ch 1 – What is Economics? Ch 2 – Economic Systems and Decision Making Ch 3 – Business Organizations

2. Why Study Economics? • Business jobs • To understand current events • Political debates (minimum wage, recessions, etc) • High oil prices • Stimulus $ • “… to learn how to avoid being deceived by economists.” (or politicians) Joan Robinson

3. Think about the following questions: What are some things that you want to buy/get? How much $ do you think you would need to purchase everything you wanted? What are some things that you think the gov.’t should provide for you + other Americans? What would it cost for the gov.’t to provide those services?

6. So why study economics? Virtually everyone, + certainly every nation, wants more than it can obtain. B/c we have limited resources but unlimited needs/wants, the problem of scarcity arises. Unlimited wants/needs + Limited Resources = Scarcity Scarcity is the problem of not having enough resources to meet our limitless needs/wants. Economics is the study of how people try to satisfy their needs/wants w/ limited resources. Ch 1 – What is Economics?

7. Needs vs. wants A need is a basic requirement for survival. Includes water, food, clothing, + shelter. A want is a way is a way of expressing a need. Includes soda, juice, pizza, fries, a leather jacket, pants 20 sizes too big, a mansion, a yacht, etc…

8. The 3 basic economic questions: B/c of scarcity, societies must deal w/ 3 economic questions: 1. WHAT to produce? Guns vs. butter 2. HOW to produce? Technology vs. people 3. FOR WHOM to produce? How to decide who gets what (based on who can afford it, who needs it the most, who made it, etc). There is no such thing as a free lunch! TINSTAAFL Everything costs something.

10. 1 pound of butter 2 pounds of butter 5 pounds of butter 4 guns 3 guns 1 gun A Production Possibilities Curve A 15 B 14 C 12 D 9 Butter E 5 F 4 7 9 11 12 0 Guns

11. Answering the Basic Economic Questions What? How? For Whom? ______________ 1. Sweden passes a law providing free medical care for all citizens. ______________ 2. Ford Corporation decides to reintroduce the convertible automobile. ______________ 3. All toys at the Toys-R-US factory are made by hand. ______________ 4. General Motors replaces assembly-line workers with robots at its Pontiac plant. ______________ 5. A company decides to extend dental insurance to their workers’ dependents ______________ 6. South American farmers decided to start growing coffee beans.

13. The 4 factors of production: The basic resources required to produce all goods + services. These are necessary in every economy: They take the risks doing something new + aren’t considered part of labor The only factor that assists in production + is a result of earlier production

14. What do economists do? Describe economic activity (measuring GDP, unemployment, inflation, gov.’t spending, etc). Analyze economic activity (Why are some prices higher than others? Why are some people paid more than others? How do taxes effect how much people work + save?). Explain economic activity (Communicate issues to help societies understand problems + reach conclusions). Predict economic activity (Will incomes rise or fall? What happens if businesses are taxed more instead of homeowners? Is the economy improving?). End Section 1

15. Definitions Consumer goods – goods intended for final use by individuals. Capital goods – goods used to produce other goods/services. Ex. Ovens, cash registers, etc. Wealth – in an economic sense, it is the accumulation of all products which are tangible, scarce, useful, + transferable from one person to another. A nation’s wealth includes natural resources, factories, stores, houses, books, highways, furniture, etc… Services are not considered wealth, but instead the source of wealth. Market – a location or other mechanism that allows buyers + sellers to exchange a certain economic product(s). Includes internet markets.

16. Division of labor or specialization – assignment of tasks so that each worker performs fewer functions more frequently. productivity Ex. Henry Ford’s assembly line Economic interdependence – relying on others to help provide goods + services we consume. Human capital is the sum of the skills, abilities, health, + motivation of people. How can a nation its human capital?

17. Source: The New York Times Approx. 2011

18. End section 2

19. Trade-offs Opportunity cost Alternate choices which must be given up when one is chosen rather than another. Ex. You have $100. If you buy concert tickets w/ the money, the trade-off isn’t $100, but a new pair of sneakers, an i-phone, or anything else you could have used that $100 for. It’s what you are giving up. The cost of the NEXT BESTalternative use of $, time, or resources when one choice is made instead of another. Ex. If you use gas instead of solar energy, it’s not just the gas you’re burning but the pollution to the environment as well. It’s the price you pay, but not just in $.

20. Increasing Opportunity Cost

21. Production possibility frontier A diagram representing various combinations of goods +/or services an economy can produce when all productive resources are fully employed. It shows that: There is a limit to what you can achieve given existing institutions, resources, + technology. Every choice has an opportunity cost – you can get more of something only by giving up something else.

22. All points on and below the production curve are possible. At points A + B all resources are fully employed + maximum output is achieved. Point C, while possible, is an inefficient option. Point D is not a possible option given current technology, resources, + labor force.

23. Economic growth • Can occur due to various factors such as population growth, technology is improved, more resources are discovered, etc… End Section 3 Economic growth results in an outward shift of the PPF because production possibilities are expanded. The economy can now produce more of everything. Production is initially at point A (20 fish and 25 coconuts),  it can move to point E (25 fish and 30 coconuts).

24. Economic systems An economy or economic system is an organized way of providing for the wants + needs of a society’s people. The way in which a society answers the 3 economic questions (What, How, + For whom?) determines what type of economic system it has (traditional, market, or command) Ch 2 – Economic Systems and Decision Making

25. Traditional economies In these societies, the allocation of scarce resources, + nearly all other economic activity, comes from ritual, habit, or custom. Habit + custom also dictate most social behavior. Tradition answers the What, How, + For Whom to produce. So individuals are not free to make decisions based on what they want or would like to have. Their roles are defined by the customs of their ancestors. Ex. the Inuit of Canada, the Aborigines of Australia, + the Mbuti of Africa. Advantages: everyone knows their place in society + little uncertainty exists over what, how, or for whom to produce, + usually stable. Disadvantages: discourages new ideas + ways of doing things, strict rules of society punishes those who act differently or break the rules, + lack of progress leads to a lower standard of living than in other economic systems.

26. Command economies In these societies, a central authority makes most of the economic decisions + the people have little, if any, influence. The gov.’t answers the What, How, + For Whom to produce. Individuals are not free to make decisions based on what they want to have + their roles are defined by the gov.’t. Ex. North Korea, Cuba, the former USSR. Advantages: it can change drastically in a relatively short time + many health + other public services are provided for everyone at little or no cost (although quality may not be good). Disadvantages: not designed to meet the wants of consumers, no incentive for people to work hard, requires a large decision-making bureaucracy, doesn’t have the flexibility to deal w/ minor day-to-day problems, + new ideas are discouraged.

27. Market economies In these societies, people + firms act in their own best interests. Buyers + sellers come together to exchange goods + services. Producers + consumers answer the What, How, + For Whom to produce. Includes the largest + most prosperous economies in the world. Ex. The US, Japan, South Korea, Britain, Germany, etc… Advantages: can adjust to change over time, high degree of individual freedom, relatively small degree of gov.’t interference, decision making is decentralized (we all have a say), wide variety of goods + services, + a high degree of consumer satisfaction. Disadvantages: doesn’t provide for the basic needs of everyone in the society, doesn’t provide enough of the goods + services that people value highly, relatively high degree of uncertainty workers + businesses face, + must guard against market failures. End Section 1

28. Economic + social goals Economic freedom – the freedom to make your own economic decisions (where to work, what to buy, whom to hire, what to produce, etc) Economic efficiency – to use resources wisely to produce as many goods + services as possible Economic equity – economic fairness (such as truth in advertisement, equal pay for equal work, no discrimination when hiring, etc) Economic security – protection from adverse economic events like lay-offs, flooding, etc (ex. social security, unemployment checks, Medicare, etc) Full employment Price stability – protection against inflation (particularly difficult for people living on a fixed income – an income that does not increase even when prices do) Economic growth – a sustained period during which a nation’s total output of goods + services increases

29. When goals conflict Ex. Supporters of a minimum wage believe it increases economic equity; however, the opposition believes it goes against the economic freedom of employers to set wages. In addition, employers would be able to employ fewer people +/or may have to cut employee hours. A cost/benefit analysis involves looking at both sides + deciding which side results in greater benefits +/or has a lesser cost. Other examples: tariffs that help people sell goods w/in the country, but harm the sale of exports (full employment vs. economic growth), a company lays off workers + starts using machines (full employment vs. economic efficiency), etc… End Section 2

30. Capitalism + free enterprise A market economy is normally based on capitalism – a system where private citizens own the factors of production. In a free enterprise, competition is allowed to flourish w/ a minimum of gov.’t interference.

31. The different roles in a free enterprise society Entrepreneur – organizes + manages the land, capital, + labor to seek a profit. They are the ones who take risks to start up businesses. Many fail, but when they succeed more jobs are created, more products are available for consumers, + the gov.’t collects more taxes to provide more services. Others may try to follow their example which leads to more competition. Consumer – they ultimately determine which products are produced. Every time they make a purchase they “vote” for it. If enough people don’t “vote” for a product, it is no longer produced. (“The customer is always right.”)

32. Gov.’t – (national, state, or local) gets involved in the economy b/c people wish it to. It has many jobs w/in the economy: Protector – protects property rights + enforces laws against false advertising, unsafe food + drugs, environmental hazards, worker discrimination, etc… Provider + Consumer – provides services such as national defense, education, transportation, etc… To create, it must also consume goods as well. Regulator – preserves competition in the market, oversees interstate + foreign trade, makes zoning laws, sets interest rates, etc… Promoter of National Goals – economic freedom, economic efficiency, economic equity, economic security, full employment, price stability, + economic growth. So it created Social Security, minimum wage, child labor laws, etc…

33. Mixed economy B/c the US has some elements of tradition, + b/c the gov.’t is involved in the economy on a limited basis, it’s said to have a mixed economy, one in which people carry on their economic affairs freely, but are subject to some gov.’t intervention + regulation. There is no such thing as a pure market or pure command economy. End Section 3

34. Proprietorship or Sole Proprietorship A business owned + run by 1 person. Most common form of business in the US. Most profitable type of business organization. Advantages: Easiest to start up. Easiest to manage (1 person can quickly make decisions). 1 owner gets to enjoy all of the profits. No separate business income taxes (taxed w/ personal income). Psychological satisfaction – be your own boss. Easiest to get out of. Ch 3 – Business Organizations

35. Disadvantages: Owner has unlimited liability (he/she is fully responsible for all of the business’s debts). If a business goes into debt, the owner’s personal possessions may be confiscated to pay off business debts. Difficulty in raising the financial capital. Size + efficiency (may need a minimum inventory – stock of goods + parts in reserve - to keep the business flowing smoothly). The proprietor often has limited managerial experience. Difficulty of attracting qualified employees (often need them to be qualified in multiple areas + potential employees are usually attracted to bigger businesses that can offer more perks). Limited life – the business ceases to exist when the owner quits or dies.

36. Partnership A business jointly owned by 2 or more people. Least numerous form of business. 2nd most profitable type of business organization. In a general partnership all partners are responsible for the management + financial obligations of the business. In a limited partnership at least 1 partner is not active in the daily running of the business but may have contributed $ to finance the business. Easy to start up, but usually the partners draw up legal papers called articles of partnership which state how profits + losses will be divided (may not be equally). Also describes what will happen if a partner leaves or if a new one joins. Especially important b/c they can be held financially responsible for the business debts of their partners.

37. Advantages: Ease of establishment. Ease of management (partners usually bring different areas of expertise). No separate business income tax. Can usually attract financial capital more easily than proprietorships. Slightly more efficient than proprietorships. Easier to attract qualified employees. Disadvantages: Partners are responsible for the acts of the other partners. Limited life. Potential for conflict b/w partners.

38. Corporations A form of business recognized by law as a separate legal entity having all the rights of an individual. Gives it the right to buy + sell property, enter contracts, + to sue/be sued. To incorporate (form a corporation) people must get permission from the gov.’t. Shares of stock (certificates of ownership) are then sold to stockholders (or shareholders) who “own” the firm. If the firm is profitable, stockholders receive dividends (checks representing a percentage of the firm’s profits). Some states offer incentives like tax credits to encourage firms to come to their state which creates jobs.

39. Advantages: Ease of raising financial capital (sell additional stock to investors). Can hire professional managers to run the firm. So the stockholders don’t have to know much about the firm. Limited liability – the corporation, NOT the stockholders, is fully responsible for its debts. Unlimited life – continues after ownership changes. Disadvantages: Difficulty + expense of getting a charter. The owners (stockholders) have little say in how the business is run. Double taxation (1st as corporate profit + 2nd as personal income). Subject to more gov.’t regulation. End Section 1

40. Business growth 2 ways for businesses to grow: 1. Reinvestment – to use profits to expand/improve a business. Allows firms to produce more goods +/or produce goods more efficiently. - Ex. Renovate a factory, buy new machines, train employees in new technology, etc…

41. 2. Merger – combining 2 or more businesses into a single firm. One firm gives up its separate legal identity. - Ex. AT&T & Cingular & cable - Why merge? - To grow faster, to become more efficient, to acquire a new product, to eliminate a rival, to change an image, etc… 2 types of mergers: 1. Horizontal merger – 2 firms that produce the same kind of product. 2. Vertical merger – 2 firms that produce goods at 2 or more different steps of production. Ex. Automaker + tire company, or an ice cream company + a dairy farm, etc…

42. Conglomerates A firm that has at least 4 businesses that each make unrelated products, none of which make up a majority of its sales. The idea is to avoid “putting all your eggs in one basket”. That way, if there is a decline in a particular segment of the economy, the entire corporation won’t suffer. Percentage of sales for businesses in a conglomerate producing:

43. Multinationals Corporations that make goods +/or provide services in different countries. Subject to the laws of all the countries it operates in. Must pay taxes in all the countries it operates in. Able to move resources, goods, services, + $ across national borders. Can also be conglomerates. Can be beneficial b/c they transfer new technology, create new jobs, generate more tax $. Can be detrimental b/c they may pay low wages to workers, export scarce natural resources, +/or interfere w/ the development of local businesses. End Section 2

44. Nonprofit organizations Community + civic organizations An organization that operates in a businesslike way to promote the collective interests of its members instead of trying to make a profit for its owners. Ex: Community + civic organizations, co-ops, labor unions, professional + business associations, + gov.’ts. Ex. Schools, churches, hospitals, welfare groups, etc… They don’t issue stocks or pay income taxes. They provide goods + services, but instead of trying to make a profit, pursue another more charitable goal. However, the workers for these organizations are often paid. These organizations may take in more $ than they spend, but they use the extra $ to further their goals.

45. Cooperatives or co-ops A type of nonprofit organization where a voluntary association of people form to carry on some kind of economic activity that will benefit its members. 3 types: Consumer – buys goods in bulk to offer discounts to members (members usually contribute some of their own time to make it successful). Service – provides services to its members (instead of goods) at better rates than they could get from a profit organization. ex. credit union, babysitting, etc Producer – helps members promote +/or sell their products (like farmers).

46. Labor, professional, + business organizations These groups work to promote the interests of its members. A labor union is an organization of workers formed to represent its members’ interests in employment matters. They use collective bargaining (it negotiates w/ management on behalf of its members) to improve pay, working conditions, hours, benefits, etc… They may also pressure the gov.’t to pass laws beneficial to their members. A professional association is a group of people in a specialized occupation that works to improve working conditions, skill levels, + public perception of the profession. They also seek to influence gov.’t policy on issues important to them. Ex. American Medical Association, American Bar Association, etc… A business association is when several or more businesses work together to promote their interests. Ex. The Better Business Bureau – sponsored by local businesses to provide general information on companies.

47. The gov.’t Direct roles in the economy: produces + provides goods + services to consumers. Ex. at the national level include the postal service, FDIC, TVA, etc… “Profits” go back into the agency, but losses are covered by Congress. Ex. at the state/local level include schools, police, rescue services, etc… Indirect roles: acts as an “umpire” to prevent monopolies from forming + charging unreasonable rates. Also grants $ to people for various reasons (social security, college financial aid, unemployment, etc). End Section 3