Essential Standard 1.00

Understand the role of business in the global economy.

Objective: 1.01 Understand economic systems.

1

Topics• Satisfying needs and wants• Basic economic problem• Six steps of economic decision-making• Main types for economic systems• Market economy self-regulating principles

2

Satisfying Needs and Wants

• What are needs?– Things that are required in order to live– Food, water, clothing, clean air, shelter– Examples: Food, water, clothing, clean air, shelter

• What are wants? – Things that add pleasure or comfort to your life– Movies, sports cars, luxury homes

3

Satisfying Needs and WantsNeeds and wants are satisfied by purchasing goods and services.

• What are goods? – Products that you can see and touch.– Examples: Pencils, cell phones, shoes

• What are services? – Activities that are consumed at the same time they are produced.– They are intangible, which means they have no physical

characteristics.– Examples: haircut, taxi ride, car wash

• The United States economy is the largest producer of goods and services in the world. 4

Satisfying Needs and Wants

Economic resources, also called factors of production, are the means through which goods and services are produced

• The types of economic resources are:– Natural– Human– Capital

5

Satisfying Needs and Wants• Natural resources are raw

materials supplied by nature from the air, the earth, and water.

• Examples: Water, trees, oil, minerals

• What is the difference between renewable and non renewable resources?– Renewable can be replaced,

like trees– Nonrenewable can’t be

replaced, like oil

• Human resources are the people producing goods and services. They contribute physical and mental energy to the production process.

• Examples: Factory workers, farmers, truck drivers, sales people

6

Satisfying Needs and Wants

Capital resources are the tools, equipment, and buildings and money that are used to produce goods and services.

Examples: Hammers, buildings, cash, bulldozers, ovens

7

Satisfying Needs and Wants

Entrepreneurial resource is the initiative to take a risk and combine capital, human and natural resources to develop a new product or a new business

Examples: Sam Walton (Wal-Mart), Bill Gates (Microsoft)

8

Satisfying Needs and Wants continuedTHE BASIC ECONOMIC PROBLEM:

Limited resources and unlimited wants and needs

• What is the relationship between scarcity and the basic economic problem?– Scarcity is not having enough resources to satisfy every

need or want.– Scarcity IS the economic problem.

• As individuals and nations, we must make CHOICES about how to use our resources and this requires DECISION-MAKING.

9

Satisfying Needs and Wants• What is the economic decision-making process?

– It is choosing which wants and needs, among several options, will be satisfied.

– Remember, because of scarcity, all wants and needs cannot be met.

• What happens to choices in a tradeoff?– A tradeoff is when you give up something to have something

else.– Example: You can’t purchase the new Iphone you had been

saving for because you spent $150 on last minute concert tickets last weekend.

• What is opportunity cost ?– It is the value of what you give up in a trade off; the value of the

next best alternative you did not choose. 10

Six steps of economic decision-making

11

Economic Decision-Making

The six steps in the economic decision- making process are:1. Defining the problem2. Identifying choices3. Evaluating the advantages and disadvantages of

each choice4. Choosing one choice5. Acting on the choice6. Reviewing the decision

12

Economic Systems• All nations face the basic economic problem of

scarcity of resources. • An economic system is a nation’s plan for how

their available resources will be used to meet the needs and wants of its citizens.

• The main types of economic systems are:– Command– Market– Traditional– Mixed

13

Economic Systems

• Each nation’s economic system answers 3 main questions:

– What goods and services will be produced?– How will those goods and services be

produced?– For whom will goods and services be

produced?

14

Economic Systems

Command Economy • An economics system in which the government

owns resources and dictates what is produced• Who answers the 3 economic questions?

– The government• Examples: Cuba, North Korea

15

Economic Systems

Market Economy• An economics system where goods and services

are owned and controlled by the people of the country.

• Who answers the 3 economic questions?– Individuals through buying and selling of goods

and services in the marketplace (anywhere that goods and services are exchanged)

• Examples: United States, Japan16

Economic Systems

Traditional Economy• An economic system in which goods & services

are produced the way they always have been (customs) & centered on meeting the basic needs of each family

• Who answers the 3 economic questions?– Each family

• Examples: Third world countries in South America and Africa

17

Economic Systems

Mixed Economy• Combines the elements of the command and

market economies.• Varying degrees of government involvement in

the marketplace• China, Canada, France

18

The United States Economic System

• Businesses and individuals answer the 3 major economic questions, so it is considered a market economy.

• Other concepts of the U.S. economy– Capitalism: Refers to the private ownership of

resources by individuals rather than the government– Free enterprise or private enterprise: Businesses

can decide what to produce and consumers can decide what to purchase

19

The Principles of the U.S. Economic System

• Private property – We can own, use, or dispose of things of value • Freedom of choice – We can make decisions independently but

we must accept consequences of those decisions. (The government only regulates choice when individual decisions may harm others.)

• Profit – money left from sales after all of the costs of operating a business have been paid. – To make a profit is the reason people and businesses take risks!

• Competition – the rivalry among businesses to sell their goods and services. – Competition forces businesses to keep costs low, provide good customers service

and search for new ideas.

20

21

Supply and Demand

Consumers: • buy and use goods and services• include individuals, businesses, and government. Consumers decide: • what to buy, where to buy, and from whom to

buy • what price they are willing to pay.

22

Supply and Demand

Producers: • individuals and organizations that determine

what products and services will be available for sale

• invest resources and take risks to make a profit

23

Supply and Demand

The market economy is based on the principles of supply and demand.

Demand: the quantity of goods or services that consumers are willing and able to buy.

– Consumers set the demand for goods and services. – Demand influences how much producers will supply.– Examples: iPods, a restaurant that sells good food at a

low price

24

Supply and DemandThe market economy is based on the principles of

supply and demand.Supply refers to the quantity of goods or services that

businesses are willing and able to provide.– Producers establish the quantity of goods or services that

will be produced to meet the demands of consumers.– Example: If people really want a product and are willing

to pay a high price for it, a business will make enough to meet the consumers’ needs. If there is heavy competition and a low price, businesses are less likely to want to offer the product for sale.

25

Supply and Demand Graphs

Intro to Business, 6e, Thomson South-Western

26

Supply and Demand Graphs

Intro to Business, 6e, Thomson South-Western

27

Supply and Demand Graphs

Market (equilibrium) price is the point where supply and demand are equal.– Consumers are satisfied with the price they

have to pay– Businesses are satisfied

with the profit they are making

Intro to Business, 6e, Thomson South-Western