Economic Decisions & Systems

Chapter 1

Satisfying Needs & Wants

Needs- things that are required in order to live.

Can also include: education, safety, transportation & medical care/ medicines

Wants- things that add comfort and pleasure to life.

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

Goods vs. Services

Goods- something that can be held or touched.

Services- intangible products.

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

Natural Resources

Land

Natural resourcesEarth & Sea

Fish in the lake, the lake itselfTrees, plants & soil

Human Resources

Labor: All the people who work

in the economy.

Full-time & Part-timeManagers, professionals, and public

employees

Entrepreneurship

The skills of people who are willing to risk their time and money to run a business.

Capital Resources

The products & money used in the production of goods and services.

Production Model

Natural Resources

+

Human Resources

+

Capital Resources

= Goods & Services (output)

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

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.

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.

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

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?

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.

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.

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

Capitalism

Capitalism- An economic system characterized by private ownership of

businesses and marketplace competition.

Limited social servicesPolitical system= democracyMultiple political parties

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

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!

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.

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

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.

Economic Conditions Change

Business Cycles- the movement of the economy from one condition to another and back again.

4 Phases:ProsperityRecession DepressionRecovery

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.

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

Calculating GDP

GDP per capita- output per person.

GDP/Population= GDP per capita

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.

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.

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%

Deflation- a decrease in the general level of prices.

Recession/Depression periodsPrices are lower/ People have less

moneyBetween 1929-1933, prices declined

25%

How is Inflation/Deflation Measured?

Consumer Price Index (CPI)- a number that compares prices in one year with some earlier base year.

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.