Economics

Chapter 3

Economy• Organized way a nation provides for the

needs and wants of its people.– Resources – all the things used in producing

goods and services.• Three factors of production:

1. Land – natural resources are used as the raw material for making goods and creating services that are marketed to customers.

2. Labor – all the people who work.3. Capital – includes money to start and operate a

business. Capital can also include infrastructure (physical development of a country – roads, ports, sanitation facilities, telecommunications)

Entrepreneurship

• Skills of people who are willing to invest their time and money to run a business.

• They are the employers of a population.

Scarcity

• Defined as the difference between wants and needs and available resources.

• Forces nations to make economic choices.• Different economies have different resources.

– Example: U.S. has an educated labor force, great deal of capital, an abundance of entrepreneurs, and many natural resources. Most underdeveloped countries are not that fortunate.

Type of Economies

1. Traditional – traditions and rituals answer the basic questions of what, how and for whom. (based on cultural or religious practices)

2. Market – no government involvement in economic decisions. Individuals and companies own the means of production and businesses compete for consumers.

Types Continued

3. Command Economy – Country’s government makes economic decisions and decides what, when and how much will be produced and distributed.

Restrictions on Business

• Environmental• How and where they operate

– Most businesses are zoned out of areas intended for private housing

• Intellectual property rights are included in freedom– Patent on inventions – you own the property

rights. People who would manufacture product would have to pay for its use through licensing agreement.

Licensing Agreements

• Patents have to be ensured through the US Patent and Trademark Office– When company uses another’s name,

symbol, or product, it must get permission to do so and pay a fee for the use.

• Licensing agreements protects the originator's name and products.– NFL t-shirts and logos– Professional athletes protect their names and

images

Productivity

• Output per worker hour that is measured over a defined period of time, such as a week, month, or year.

• Business can increase productivity by:– Investing in new equipment or facilities– Provide additional training for financial

incentives– Reduce their work force and increase the

responsibilities of the workers who remain.

Gross Domestic Product

• The output of goods and services produced by labor and property located within a country.– GDP is made up of the following:

1. Private investment: spending by businesses for things like equipment and software as well as home construction.

2. Government spending: money spent by local state and federal governments.

3. Personal spending: all consumer expenditures for goods and services.

Gross National Product

• The total dollar value of goods and services produced by a nation, including goods and services produced abroad by U.S. citizens and companies.– For example: Ford is a U.S. corporation that

has a plant in England. The portion of Ford’s production that occurs in England is included in the U.S. GNP, but not in its GDP.

Inflation Rate

• Rising prices of goods and services.– A low inflation rate is good because it shows

an economy is stable.– Double-digit inflation (10 percent or higher), on

the other hand, devastates an economy.• Two measure of inflation:

– Consumer Price Index: measures the change in price over a period of time (food, housing, utilities, transportation and medical care).

– Producer Price Index: measures wholesale price levels in the economy.

Business Cycle

• Expansion – time where economy is at it’s high. Low unemployment, consumer confidence and spending are high.

• Recession – period of economic slow down that lasts for at least six months. Companies reduce their workforces and consumers have less money to spend.

Business Cycle Continued

• Depression – a period of prolong recession. During this stage it becomes nearly impossible to find a job, and many businesses are forced to shut down. Again, consumer spending is low.

• Recovery – a period of renewed economic growth following a recession or depression. During this stage business picks up, people find jobs and the demand for goods increases.

Competition

• Struggle between companies for customers.

• Essential for free enterprise system (benefits consumers).

• Competition forces businesses to produce better-quality goods and services at reasonable prices.

Price Competition

• Focuses on sale price of a product.

• Theory is that consumers will buy the products that are lowest in price.

Nonprice Competition

• Businesses choose to compete on the basis of factors that are not related to price.– Factors include:

• Quality of products• Service and financing• Business location• Reputation

Monopolies

• Happens where there is no competition and one firm controls the market for a given product.

• Are not permitted under free enterprise system because they prevent competition.

• Most publicized monopoly: Microsoft.

Risk

• Potential for loss or failure in relation to the potential for improved earnings.

• Businesses take risks all the time by starting a new business.– One out of three businesses in the US fails

after one year of operation.– Product introductions are costly and risky; up

to 85 percent of new products fail in the first year.

Profit

• Money earned from conducting business after all costs and expenses have been paid.

• Range of profit for most businesses is 1-5 percent of sales; remaining 95-99 percent goes to pay costs, expenses, and business taxes (20 percent of expenses come from marketing alone).

Role of Government

Provides general services, supports businesses, regulates

industry, and acts as a competitor.

Provider of Services

• Provides military, police, and fire protection

• Free public education• Provides retraining for some people who

have lost jobs as a result of changes in marketplace

• Supports building of roads and bridges, public libraries, and social welfare system

Supporter of Business

• Government provides disaster assistance to help both businesses and home owners rebuild

• Loan guarantees for some business owners who can’t get conventional loans

• Government is the single largest consumer of goods and services in the US.– Government projects require purchases of goods and

services produced by US companies (products range from uniforms for military personnel to defense equipment and systems)

Regulator• Most laws are designed to protect safety, health,

and welfare of individuals and freedom of businesses.– Consumer and worker protection

• OSHA, FDA, EEOC (Equal Employment), CPSC (consumer product safety commission)

• Require licensing of people who perform certain services– Business protection

• Patents, copyrights, and trademarks• Theft by foreign and domestic companies• Sherman Antitrust Act (outlaws all contracts and agreements

that would limit trade or competition in interstate commerce)

Government as Competitor

• Government owns three business operations:– Tennessee Valley Authority (provides

electricity to parts of the rural South)– US Postal Service– Amtrak

Role of the Consumer

• Consumers do two major things in the marketplace:

1. They pick the winners (consumers have the power to decide which products will be produced and which companies will stay in business)

2. Determine the demand for any given product, and therefore help determine prices

Determining Prices

• Supply: Amount of goods producers are willing to make and sell.

• Demand: consumer willingness and ability to buy products.

• Surpluses: occur when supply exceeds demand (example: produce grocery).

• Shortages: when demand exceeds supply.• Equilibrium: amount of a product being supplied

is equal to the amount being demanded.