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Economic Decisions & Systems
Chapter 1
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Satisfying Needs & Wants
Needs- things that are required in order to live.
Can also include: education, safety, transportation & medical care/ medicines
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Wants- things that add comfort and pleasure to life.
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Food for Thought
The United States is the largest producer of goods and services in the world.
The U.S. has 2x as many shopping malls as it does schools!
The U.S. is the largest consumer of goods and services in the world.
Began at the beginning of the 20th centurySkyrocketed by the 1950’s
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Goods vs. Services
Goods- something that can be held or touched.
Services- intangible products.
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How do we get goods & services?
Economic Resources- the means through which goods and services are produced. Also known as Factors of Production.
Three Categories:Natural Resources
Human Resources
Capital Resources
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Natural Resources
Land
Natural resourcesEarth & Sea
Fish in the lake, the lake itselfTrees, plants & soil
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Human Resources
Labor: All the people who work
in the economy.
Full-time & Part-timeManagers, professionals, and public
employees
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Entrepreneurship
The skills of people who are willing to risk their time and money to run a business.
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Capital Resources
The products & money used in the production of goods and services.
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Production Model
Natural Resources
+
Human Resources
+
Capital Resources
= Goods & Services (output)
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Economic Problems
You can’t have everything you want!
Scarcity- not having enough resources to satisfy every need.
*affects everyone*forces choices to be made
*almost EVERYTHING is scarce
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The Choices we make….
All economic decisions are based on scarcity.
Scarcity forces you to make choices!
Individuals, families, governments
Economic Decision Making- the process of choosing which wants, among several options, will be satisfied.
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Tradeoffs vs. Opportunity Costs
Tradeoff- giving up something to choose something else.
Opportunity Costs- the value of the next-best alternative that was not chosen.
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The Decision Making Process
1. Define the Problem
2. Identify the Choices
3. Evaluate the advantages & disadvantages of each choice
4. Choose One
5. Act on your choice
6. Review your decision
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Three Economic Questions
1. What goods and services will be produced?
2. How will the goods and services be produced?
3. What needs and wants will be satisfied with the goods and services produced?
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Types of Economic Systems
Economic System- a nation’s plan for answering the three economic questions.
Two Basic Types:Command Economy- the resources are owned
and controlled by the government.
Market Economy- the resources are owned and controlled by the people of the country.
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Characteristics of Each Economy
Command Development of food
products, vehicles, and houses is controlled by the government.
Personal economic freedom is limited.
Some assign people to specific schools and careers.
Market Three economic
questions are answered by individuals.
Consumers “vote” for products with their dollars.
Business chooses consumer’s wants & needs accurately=profit for business.
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Mixed Economies
Mixed Economy- combines elements of the command and market economies.
All economies in the world today are mixed
Where a country fits on the continuum of market & mixed economies determines its philosophy of governmentRules, laws, treatment of people
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Capitalism
Capitalism- An economic system characterized by private ownership of
businesses and marketplace competition.
Limited social servicesPolitical system= democracyMultiple political parties
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Socialism
Socialism- Economic system with increased government involvement in people’s lives.
Main goal= keep prices low for ALL people Provides employment for many Government runs key industries Provides social services (medical, pensions for
elderly High taxes
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Communism-
Communism- Economic system in which the government has complete control, or
totalitarianism.
One political party- Communist People share common political & economic
goals All who are able to work are assigned jobs= no
unemployment Little to no economic freedom! No motivation!
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Benefits of Capitalism
Competition- The struggle between companies for customers.
Profit- The money earned from conducting business after all costs and expenses have been paid.
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Participating in a Market Economy
Consumers:Have the power to determine who wins & losesDetermine supply & demand
Supply- the amount of goods producers are willing to make and sell.
Demand- refers to consumer willingness and ability to buy products
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What happens when supply & demand interact?
Surplus- When supply exceeds demand.
Shortage- When demand exceeds supply.
Equilibrium- When the amount of a product being supplied is equal to the amount being demanded.
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Economic Conditions Change
Business Cycles- the movement of the economy from one condition to another and back again.
4 Phases:ProsperityRecession DepressionRecovery
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Business Cycles
Prosperity- the peak in the business cycle.
Recession- a period in which the economy begins to slow.
Depression- a deeper recession that is spread throughout the entire economy.
Recovery- follows a depression and is a time of economic improvement.
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Measuring Economic Activity
Gross Domestic Product (GDP)- the total dollar value of all final goods and services produced in a country during one year.
4 categories of economic activity:
1. Consumer spending
2. Business spending
3. Government spending
4. Exports of a country – imports into the country
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Calculating GDP
GDP per capita- output per person.
GDP/Population= GDP per capita
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Labor Activities
Unemployment Rate- the portion of people in the labor force who are not working.
~must be looking for work & able to work
Productivity- the production output in relation to the unit of input, such as a worker.
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Consumer Spending
Consumer Spending- measured through personal income and retail sales.
~retail sales include: automobiles, building materials, furniture, gasoline, clothing, food (grocery & restaurant), & drug stores.
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Inflation vs. Deflation
Inflation- an increase in the general level of prices.
Most harmful on elderly/ fixed incomes
• 1960’s: 1-3%• 1970’s-1980’s: 10-12%• 1990’s – Present: 2-4%
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Deflation- a decrease in the general level of prices.
Recession/Depression periodsPrices are lower/ People have less
moneyBetween 1929-1933, prices declined
25%
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How is Inflation/Deflation Measured?
Consumer Price Index (CPI)- a number that compares prices in one year with some earlier base year.
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Interest Rates
Interest- The price that is paid for the
use of another’s money.
Rates when consumers borrow more money, thereby the demand for money increases.
Rates when consumers increase their savings & investments, thereby increasing the supply of money for others to borrow increases.