economics & the consumer. economics is the study of choices about using resources – economist...
TRANSCRIPT
Economics Defined
Economics is the study of choices about using resources – Economist
Macroeconomics – global impacts (government decisions)
Microeconomics – Decisions by individuals and businesses
Scarcity & Opportunity Costs
The Basic Economic Problem is Scarcity
Limited resources with unlimited wants & needs
Opportunity Cost The value of the next best alternative foregone
as the result of making a decision Each decision made has an opportunity cost &
opportunity benefit Is the reward worth the cost? Analyze the costs & benefits of getting a job
right out of high school vs. attending college
Chapter 1 Slide 3
WHAT DETERMINES A COUNTRY’S ECONOMIC SYSTEM?
A society’s economic system is the combination of social and individual decision making it uses to answer the three basic economic questions
1. What to Produce? Country’s priorities / needs / resources /
etc.2. How to Produce?
Resources of the country – labor / capital / information / etc.
3. For Whom to Produce? Consumers have choices or is there equality
TYPES OF ECONOMIC SYSTEMS
Traditional Economy – production decisions passed to generations (Tribes in remote areas)
Command Economy - the government owns resources and makes most economic decisions in the “BEST INTERESTS” of society (North Korea)
Market Economy - people own the resources and run the businesses – Entrepreneurship & risk (Competition and Profit drive this system)
Mixed Economy – Combination of Market and Command economies (United States)
Comparing Economic Systems
Chapter 1 Slide 7
MarketEconomic
System
CommandEconomic System
MixedEconomic System
TraditionalEconomic System
What to produce?
Consumers & Producers
based on self-
interests
Government decides – What is
“best” for society
Combination of consumer
and government
decision making
Based on customs How things have always been
done
How to produce?
Consumers & Producers
based on self-
interests
Government decides – What is
“best” for society
Combination of consumer
and government
decision making
Based on customs How things have always been
done
What needs & wants to satisfy?
Consumers & Producers
based on self-
interests
Government decides – What is
“best” for society
Combination of consumer and government
decision making
Based on customs How things have always been
done
MARKET ECONOMY
Individuals in the marketplace based on their own best interests – selfish motivations
Consumers “vote” with their dollars – price & quality is directly affected by these “votes”
Competition forces businesses to provide high quality & low prices to attain market share & maintain profitability
Profit drives how they answer the 3 basic economic questions
Prices in a Market Economy
In a market economic system, the choices individuals make determine how society’s scarce resources will be used
Prices are determined by the natural forces of supply and demand
Adam Smith – THE INVISIBLE HAND Competition and “selfishness” are crucial to
its effectiveness
Adam Smith – The Invisible Hand
“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”
Adam Smith – The Invisible Hand
The invisible hand is a metaphor coined by the economist Adam Smith. Once in The Wealth of Nations and other writings, Smith demonstrated that, in a free market, an individual pursuing his own self-interest tends to also promote the good of his community as a whole through a principle that he called “the invisible hand”. He argued that each individual maximizing revenue for himself maximizes the total revenue of society as a whole, as this is identical with the sum total of individual revenues.
Group Activity Create a poem / story / song / etc.
representing your understanding of Adam Smith’s Invisible Hand Theory.
Groups will present their “creation” – The best group will receive extra credit
The United States Market Economic System
Private Property - Individuals in the marketplace based on their own best interests – selfish motivations
Freedom of Choice - Consumers “vote” with their dollars – price & quality is directly affected by these “votes”
Competition - Businesses provide high quality & low prices to attain market share & maintain profitability
Profit - Ultimately drives how the the 3 basic economic questions are answered
Chapter 1 Slide 13
Factors of Production(Resources to Produce Goods & Services)
Land Any “Natural” resource – raw materials
Labor Human factors - workers
Capital Previously produced goods used in production
(machinery / tools / factories / etc.) Entrepreneurship
Ownership – organization Small Business Administration
Technology Recently added “factor”
Productivity
The production output in relation to a unit of input (a worker) - efficiency
Wages vs. Productivity As wages ↑, productivity must improve
Productivity can be improved through: Improvements in technology Better equipment Training / management techniques
Chapter 2 Slide 15
Business Organization
Individual (Sole) Proprietorship (1 owner) Negative = Unlimited Liability Positive = Tax advantages
Partnership (2 or more owners) Negative = Unlimited Liability Positive = Tax advantages
Corporation Owned by 1 or multiple individuals – considered a
separate entity from owners (Limited Liability) Private vs. Public Corporation (Stock – shareholders) Negative = Double Taxation
DEMAND – SCHEDULES & CURVES
• Quantities of a good consumers are willing and able to purchase at various prices during a given time period
Demand Schedule:Price Quantity Demanded $1 1000 $2 800 $3 600 $4 400 $5 200
SUPPLY – SCHEDULES & CURVES
• The quantities firms are willing and able to make available for sale at various prices
Supply Schedule:
Price Quantity Supplied $1 200 $2 400 $3 600 $4 800 $5 1000
Market Price - Equilibrium
• Equilibrium Price - the price at which quantity supplied equals quantity demanded
• GRAPH:
SHORTAGE IN THE MARKET• If price is set below equilibrium a SHORTAGE will occur –
Prices should rise (Forced up)• (quantity demanded > quantity supplied)• GRAPH:
SURPLUS IN THE MARKET
• If price is set above equilibrium a SURPLUS will occur – Prices should fall (Forced Down)
• (quantity demanded < quantity supplied)• GRAPH:
Public Sector in a Market Economy - Government
1. Provide Public Goods2. Redistribute Income3. Regulating Business Activity4. Ensuring Economic Stability
Providing Public Goods & Services
National Defense Police & Fire Protection Courts Parks Highways & Roads Public Education Public Transportation
Redistribute Income(Taking care of Disadvantaged) Social Security
Retirement Benefits Survivor Benefits Disability Benefits Medicare Benefits
Unemployment Insurance Public Assistance
Welfare (TANF, SSI, Food Stamps, Housing, etc.)
Regulating Business Activity
Protecting the Environment (EPA) Protecting Consumers – safety (CPSC) Protecting Workers – safety & fairness Promoting Competition (FTC)
Anti-Trust Laws to maintain fairness & competition to ensure quality & fair prices
Ensuring Economic Stability
Fiscal Policy Policies regarding Taxes and Government
Spending Stimulus Plan / Bailouts of Banks
Monetary Policy Interest Rates (Fed Fund Rate)
Basics of Taxation (Why do we pay taxes?)
Public Goods and Services Education / Law Enforcement / Roads / etc.
Redistribution of Income Wealthy individuals pay taxes at higher levels
for public assistance programs (welfare / etc.) To influence behavior
“Sin Tax” – Alcohol & Tobacco taxed at higher rates
To stabilize the economy “Fed Fund” rate is adjusted accordingly
Tax Categories
Progressive Taxes (Income Tax): The more you earn – the higher amount of
tax comes out of your pocket (Tax Brackets)
Regressive Taxes (SALES TAX): Smaller share of income is collected as
income grows – SALES TAX is regressive – straight % for sales tax
Proportional Taxes (PROPERTY TAX):
FLAT TAX – all members of a community pay the same amount regardless of earnings or value
Types of Taxes Income Tax
Wages / Interest income / etc. Social Security Tax (FICA)
Mandatory retirement savings program Sales Tax Excise Tax
Certain goods (alcohol, tobacco, firearms, air travel) Property Tax Estate & Gift Tax
Based on property values after death Business (License) Tax Customs Duties / Tariffs
Imported goods may have additional taxes
Benefits Principle
The benefits principle is the idea that people should pay taxes based on the benefits they receive from government services.
An example is a gasoline tax: Tax revenues from a gasoline tax are used
to finance our highway system. People who drive the most also pay the
most toward maintaining roads.
Ability-to-Pay Principle
The ability-to-pay principle is the idea that taxes should be levied according to an individual’s ability to shoulder the tax burden.
Voluntary Compliance
Federal Income Tax Rates:Schedule X – Single Person
If taxable income is over--
But not over-- The tax is:
$0 $7,825 10% of the amount over $0
$7,825 $31,850 $782.50 plus 15% of the amount over 7,825
$31,850 $77,100 $4,386.25 plus 25% of the amount over 31,850
$77,100 $160,850 $15,698.75 plus 28% of the amount over 77,100
$160,850 $349,700 $39,148.75 plus 33% of the amount over 160,850
$349,700 no limit $101,469.25 plus 35% of the amount over 349,700
FRIEDMAN vs. GALBRAITH
Milton Friedman Supported a laissez-faire approach to
government involvement in economics Government attempts to protect consumers
usually creates higher prices or lower product quality
John Kenneth Galbraith Supports strong government involvement for
government in economic issues Large corporations have too much influence on
modern society inhibiting the natural forces of supply & demand (ex. advertising creates wants & needs)
Which Economist is correct?
Research issues pertaining to strong governmental involvement vs. less intrusive policies & formulate an argument in favor of the philosophy you feel is a more effective for economic stability for a country.