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THE Economic SystemCapitalism, Socialism & Communism

Liberty or Equality?

What Is Economics?

Economics is the study of how people make choices to (1)satisfy their wants

For example: You must choose how to spend your time Businesses must choose how many people to hire

Which is more important: Liberty or Equality?

What is Liberty?

-NEEDS AND (2)WHAT YOU MUST HAVE TO SURVIVE

What is Equality?

- WANTS OR (2)THINGS PEOPLE CAN DO WITHOUT BUT BELIEVE IS NECESSARY

Scarcity and Shortages

Scarcity occurs when there are limited quantities of resources to meet unlimited needs or desires ( Always)

Shortages occur when producers will not or cannot offer goods or services at current prices ( Sometimes)

The Factors of Production(3)WHAT?-what are you going to make (3)HOW?- how do you make it

(3)WHOM?-who is going to buy?

(5)How and why you make goods

(4)Land All natural resources that are used to produce goods and services.

(4)Labor Any effort a person devotes to a task for which that person is paid.

(4)Capital Any human-made resource that is used to create other goods and services.

EVERYTHING IN THE USA IS BASED UPON THESE IDEAS

PRODUCTION FACTORS

SCARCITY VS. SHORTAGE

LIBERTY VS. EQUAILTY

-WHY THINGS COST AS MUCH AS THEY DO???

-IS IT THE JOB OF BUSINESS IN THE USA TO HELP PEOPLE OR TO MAKE MONEY???

-IT’S ALL CONNECTED!!!

WHO CARES AND SO WHAT

TEST- Assessment

1. What is the difference between a shortage and scarcity?

(a) A shortage can be temporary or long-term, but scarcity always exists.

(b) A shortage results from rising prices; a scarcity results from falling prices.

(c) A shortage is a lack of all goods and services; a scarcity concerns a single item.

(d) There is no real difference between a shortage and a scarcity.

2. Which of the following is an example of using physical capital to save time and money?

(a) hiring more workers to do a job

(b) building extra space in a factory to simplify production

(c) switching from oil to coal to make production cheaper

(d) lowering workers’ wages to increase profits

Goods and Services

People help the economy by purchasing “goods” and “services.”

Goods are (6)things that we buy that we can use or touch.

Services are (7)jobs that workers do for other people.

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Some people provide goods and services, while (8)others use goods and services.

Producers and Consumers

Circular Flow Concepts

(9)Households – suppliers of the factors of production & demanders of goods and services

(9)Government – providers of public goods and services & demanders of both private goods and services and the factors of production

(9)Businesses / Firms – suppliers of goods and services & demanders of the factors of production

Factor Market – where the factors of production are exchanged

Product Market – where goods and services are exchanged

Product Market

Factor Market

Households Government Businesses / Firms

>>$ taxes $>>>

<<$ taxes $<<

>>>factors of production>>>

<<<public goods<<<

>>>public goods>>>

<<$ factor payments $<<

<<<goods & services<<<>>$ government spending $>>

Growth versus Productivity

• Economic growth may be one aspect of economic development but is not the same

• Economic growth:– (11)A measure of the value of output of goods and

services within a time period

• Productivity– (10)A measure of the welfare of humans in a society

by bringing forth more goods

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Training Methods

Technology Management

What are the factors that affect productivity?

Specialization“(12)Do what you do best; trade for the

rest”• Attempting to produce

everything you want to consume yourself limits both your production and consumption possibilities.

The opposite is Called :

(13)Independence : trying to produce everything yourself

Slide 172005 South-Western Publishing

Production Economics

• Managers must decide not only what to produce for the market, but also how to produce it in the most efficient or least cost manner.

• Economics offers widely accepted tools for judging whether the production choices are least cost.

• A production function or economic product shows (14)the most that can be produced from a given set of inputs or resources.

Slide 18

• The Paradox of Value» (15)Goods critical to life (such as water) are

very cheap, whereas others which have no bearing on human existence (such as diamonds) are very expensive.

» For centuries, philosophers have been puzzled by the fact that water is vital for life but cheap while diamonds are used only for decoration yet are very expensive.

» You can solve this puzzle by distinguishing between total use and marginal use.

» Total use tells us about relative value; marginal utility tells us about relative price.

» (16) The cost it takes to train and maintain any learning while improving the value, and price of an economy is our Human capital

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All-factors Goods or Services producedmeasure All inputs used to produce them

If we produce only one product, the top number can be either the total units of product or total $ value of the product.

If we produce several products, the numerator is the total

$ value of all products.

Usually, the numerator is the total $ value of all outputs.

The bottom number is total $ value of all inputs.

All Factors

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10,000 Units Produced

Sold for $10/unit

500 labor hours

Labor rate: $9/hr

What is the labor productivity?

Example: Single Factor Productivity

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10,000 Units Produced Cost of raw material: $30,000

Sold for $10/unit Overhead: $15,500

500 labor hours Labor rate: $9/hr

Example

Output Labor + Materials + Overhead (costs)

AFP =

AFP =(10,000 units) * ($10)

(500)*($9) + ($30,000) + ($15,500)

AFP = 2.0

Who Cares and So What• Everything is connected

• Decisions by one affects decisions of another

• You will make most financial decisions usually based off of one factor of production or growth

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For your own practice

13. A milk factory seeks advice from an external consulting company concerning its business and production processes. The final consulting report describes several steps to increase productivity including implementation of cutting-edge processing techniques through more powerful filtering systems.

a) Calculate the labor productivity for the existing as well as the proposed system.b) Find the All-Factor Productivity for both systems.

Existing System Proposed System

Workers 12 9

Milk Output/hour 1,000 gallons 1,400 gallons

Wage Rate/hour $12 $12

Filtration Cost/hour $120 $170

Price 2.00 2.50

Macro & Micro EconomicsBIG and small

(17)Macro- study of large scale money factors on a national or worldwide level

(17)Micro- study of individual money decisions on a more personal level

Macroeconomics vs. Microeconomics 25

To understand the scope and sweep of macroeconomics, let’s begin by looking more carefully at the difference between microeconomic and macroeconomic questions.

#18 -MICROECONOMIC QUESTION(s)

#18-MACROECONOMIC QUESTION(s)

Go to business school or take a job?

How many people are employed in the economy as a whole?

What determines the salary offered by Citibank to a new UTC grad?

What determines the overall salary levels paid to workers in a given year?

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Macroeconomics vs. Microeconomics

MICROECONOMIC QUESTION

MACROECONOMIC QUESTION

What determines the cost to a university or college of offering a new course?

What determines the overall level of prices in the economy as a whole?

What government policies should be adopted to make it easier for low-income students to attend college?

What government policies should be adopted to promote full employment and growth in the economy as a whole?

What determines whether Citibank opens a new office in Shanghai?

What determines the overall trade in goods, services and financial assets between the US and the rest of the world?

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Four Principal Ways that Macroeconomics Differs from Microeconomics:

1.In macroeconomics, the behavior of the whole macro economy is, indeed, (19)greater than the individual actions and market outcomes.

2.Macroeconomics is widely viewed as providing a rationale for continual (19)government intervention to manage short-term fluctuations and adverse events in the economy. monetary policy fiscal policy

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Four Principal Ways that Macroeconomics Differs from Microeconomics (cont.):

3.Macroeconomics is the study of (19)long-run growth: What factors lead to a higher long-run growth rate? And are there government policies capable of increasing the long-run growth rate?

4.The theory and policy implementation focus on (19)economic shifts -- economic measures that summarize data across many different markets for goods, services, workers, and assets.

Consider this…. When one person saves, that person’s wealth is

increased, meaning that he or she can consume more in the future. But when everyone saves, everyone’s income falls, meaning that everyone must consume less today.

“Paradox of Thrift”- (20)success for microeconomics doesn’t always mean success for macroeconomics. Just because the small does well doesn’t mean the big does well

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Explain why there is usually less government interference in microeconomics than in macroeconomics.

IN your answer(s) to your readings be sure to use at least one of the 4 differences to explain your answer

WHO CARES AND SO WHAT??

Consider this….

Capitalism

Maximizes liberty Adam Smith – 1776 – “The Wealth of Nations” “Free Enterprise” – everyone is free to pursue

any economic activity Laissez-Faire – do not interfere in the economy Freedom to succeed and freedom to fail Private ownership of capital (means of

production)