Economics ch.1

What is Economics: 1.)It is the way

people make their living.

2.) The Study of the Human effort to satisfy unlimited wants and needs with limited resources.

2 Types of Economics Microeconomics

Ch’s 4,5,&6 A. Economics that ideals

with the behavior of small units like individuals or firms.

B. Microeconomics explain how prices are determined and individual economic decisions are made.

Macroeconomics Ch’s

Ch’s 10,11,&12 Economics that deals with

the economy as a whole and decision making by large units.

Macroeconomics explains decisions in employment, growth, and labor.

Fundamental Economic Problem

• The FUNDAMENTAL Economic problem is that of. Scarcity!!

• Scarcity is the condition of not having enough resources to meet all of a societies wants or needs.

Wants vs. Needs

• Needs: The basic requirements for living.

(i.e.) Food, clothing, shelter.

• Wants: How we try to satisfy those needs.

• Something to Remember: “T.I.N.S.T.A.A.F.L.” There is NO such thing as a FREE lunch.

In the end, someone always

pays for product…. Almost always it’s the COMSUMER.

Three Basic Economic Questions

What to Produce? needs and wants based on available resources.

How to Produce? Choose a method of production that is the most beneficial to the society.

For Whom to Produce? Know your audience.

Four Factors of Production• Land: The Natural

resources • Capital: Capital Goods or

the Goods used in the production of Goods and Services and Financial Capital or the Money used to buy Capital Goods.

• Labor: The people with all their efforts, abilities, and Skill.

• Entrepreneurs: The inventive and innovative risk-takers that create the products a society will produce.

When ALL the factors of production come together……

We create the Goods and Services our society needs and wants to grow and prosper!!!

The Scope of Economics• Economics is a Social Science because it

deals with the behavior of people as they deal with the issue of scarcity!

• There are four elements to the studying of Economics.

Description: we need to know what the rest of the world looks like compared to us.

Analysis: we need to know why things work and how they happen, so we can better problem solve.

Explanation: We have to be able to communicate what we know.

Prediction: We need to be able to make choices based on consequences. Making these choices is the responsibility of all citizens.

Economics Basic Concepts

• Economic Products are Goods and Services that are useful, relatively scarce, and transferable to others.

GOODS: Product that is economically useful or satisfies an economic want.

SERVICE: Work done for someone. Services

tend to be intangible.

What do we Get???• Consumers : Those

who use the Goods and Services to satisfy their wants and needs.

• Consumers indulge in Consumption, which is the process of using up Goods and Services to satisfy their wants and needs!

Value, Utility, and WealthValue is the worth of something expressed in

Dollars and Cents. Paradox of Value: The situation where some

necessities have little value, while some non-necessities have great value.

In order for some things to have value, they must also have UTILITY or the capacity to be useful or provide satisfaction.

Utility can vary from person to person.Therefore Economist say for something to have

real value, it must be scarce and have utility.

Wealth

• Wealth in the economic context is the accumulation of products that are tangible, scarce, useful and transferable.

• A Nations wealth is comprised of ALL items produced to include its natural resources.

• While GOODS count as wealth, SEVRICES do not!

The Market

• The Market: is a theoretical place where all items produced are bought and sold.

• The Market: a location or other mechanism that allows buyers and sellers to exchange certain economic product.

Productivity

• A measure of the amount of output produced by a given amount of inputs in a specific period of time.

• Productivity goes up when you can produce more output with the same amount of inputs in the same amount of time.

Division of Labor and Specialization

• Division of Labor

When work is arranged so that individual workers do fewer task than before.

• Specialization

When factors of production perform task that they can do relatively more efficiently than others.

Human Capital

• Human Capital : is the sum of the Skills, Abilities, Health, and Motivation of a Nation’s people.

• Government’s roll: Education.

• Businesses roll:

1.) Invest in specialized training.

2.) Motivate Employees.

Economic Choices and Making Decisions

• Trade-Offs: Alternative choices. Weigh out the pros and cons in making a decision.

• Opportunity Cost: The cost of the next best alternative use of money, time, and resources when on choice is made rather than another.

Opportunity Cost

• O.C. is not always measured in dollars and cents. Many times it is less tangible.

• Sometimes the cost of idle resources or economic growth factor into the decision making process.

Thinking like an Economist

The most important strategies for an Economist is the Economic Model.

The Economic Model is a simplified theory or picture of how something works.

Mostly, models reduce complex ideas to their most basic elements.

Models!!! One thing to remember is

that models are based on assumptions, or things we take for granted as true.

Models can be revised.

Models that prove to be true can be used again…. Others that are not as accurate must be either changed to be more accurate or discarded as false.

Making those Choices

Most economist use the cost-Benefit analysis model because it compares the cost of an item to the benefits received.

The rational thing to do is to give up those actions or items of lesser value and taking things with greater value.

When you make a decision for yourself alone.. It doesn't matter what others think… but many of our decisions DO affect others, so we want to learn how to do the greatest good.

Conclusion The study of Economics

will make you a better decision maker AND will help you better understand the world you live in!

The study of Economics WILL NOT tell you which decisions to make???

In a FREE society, you have the RIGHT to Succeed or Fail!

Money and Banking ch11

Money is something we all take for granted.

It is something we have had around us all our lives.

Our lives would be greatly different if we didn’t have money.

The system of Money and Banking used in the U.S. Today is called The Free Market System, and those who participate in it are called Capitalist.

Evolution of Money• The earliest form of trade was

known as the Barter System.• In a Barter System people simply

traded one item for another and that works O.K. in a very primitive society.

• However, as people migrated from their homes in order to find more land or better work bartering became difficult.

First, Because not all products are what other people want.

Second, not everything is easy to divide for payment.

A History of Economic Systems

Traditional: Barter system.

Command: Economy controlled by a central authority.

Open Market: Economy based on the private ownership of property and Entrepreneurship.

ENLIGHTENMENT

Enlightenment – began in Europe 1700’s

- Use of reason make government and society better.

- Ideas – Free Speech, Representative Government and Free Market Economics.

Settlers came to the colonies for Greater Economic and Religious Freedoms.

John Locke

1690 Locke publishes his book, Two Treaties on Government .

Locke believed that mankind was born with Natural Rights and those are:

Life

Liberty

Property

Adam Smith• Scottish Economist• 1776 publishes The Wealth

of Nations• Opposed mercantilism,

favored a Free or Open, Market in which all goods could be bought without restraint. In the Open Market, the means of production is privately owned. Those who own the means of production are called Capitalist.

Money• Of Course Money can be

anything as long as it meets the Function of Money.

• It first must be a seen as a Medium of Exchange, it must be accepted by all parties as payment for goods and services.

• It must also have a Measure of Value, that is to say it has to express worth that most people understand.

• Last, the item must keep a Store of Value . Money allows a period of time to pass between earning and spending.

2 types of Early Money One Type of early Money is

called Commodity Money. This is money that has a

alternative use as an economic Good. Examples of commodity money would be: Tea, Salt, Sharks teeth.

The other type of money is called Fiat Money . Or money by government decree! The Phoenicians were one of the earliest groups to use fiat money.

Because they traveled and traded through out the world they needed something that was easily carried.

Money in America• The Economy of the Early

Americans called for a mixture of both Commodity

(used to deal with the local Indians) and Fiat (used for business with Europeans like Britain, France and Spain).

Colonial Times• Paper Money: Individuals were

allowed to print their own money. This paper had to be backed by gold or silver that was deposited in local banks and was good only in the local area.

• The States printed Tax Anticipation Notes. These acted like bonds, in the sense that the state used the money to operate during the year, at the end of the year when taxes were to be paid the notes were redeemed.

• The Continental Congress printed Continental Dollars. They were not backed by gold or silver, they acted like I.O.U.s from the government and became basically worthless after the war.

History of the Dollar• When George Washington became

President in 1789, one of his first jobs was to establish an American money supply.

• He assigned that task to Ben Franklin and Alexander Hamilton.

• In colonial times the most plentiful coinage was the Spanish Peso. Spain had been mining silver out of Mexico for a long time and their peso was an important part of the triangular trade system.

• Pesos were known as “Pieces of Eight” because they were divided into eight bits or parts.

• Because they looked like the Austrian Taler, which the American colonist misspoke as Dollars!

• That name became so popular that Franklin and Hamilton chose it as the name of our currency.

• But they chose to divide American currency into 10 parts not 8.

Characteristics of Money

• It is also important us to understand what gives money its value.

• To be considered real money, the item must be Portable. That means easily transferred from one person to another.

• It must also be Durable. Able to last for some time.

• Money must be Divisible into smaller units. So people can use only that which they need for their transactions.

• Money, like most things will lose its value if there is to much of it so real money must be in Limited Supply.

Economic Systems 2

Economic systems are Rules that govern how we answer the 3 economic questions.

An organized way of providing the Wants and Needs of a society.

3 Types of Economic Systems

• Traditional

• Command

• Open Market

Traditional Economies

• Economic system created out of Habit or Custom.

• Habits handed down from generation to generation. These habits also dictate our social behavior.

• People are not free to make decisions on what they want or like, their roles are defined by the traditions of their parents and ancestors.

The Command Economy• An economic system in which

the economic questions are answered by a central authority or government.

• Citizens have little or no control over the answers to the economic questions.

• Good examples are the Communist and Mercantilist systems.

Open- Market System• An Economic System that

allows citizens to act in their own best interest.

• The Open-Market allows the market place to answer the Economic Questions.

• Examples would be The American economy. However the other prosperous world economies like Japan and Germany rely on an Open-Market.

Economic Goals ofThe United States

FreedomEfficiency

Equity

Security

Full Employment

Stability

Growth

FutureGoals

To make our own economic decisions!

So the benefits gained Are greater than cost incurred!

A sense of justice, impartiality and fairness!

Protection from Adverse Economic Events!

To provide as many jobs as possible!

Stable Prices for budgeting and planning !

To meet the needs of a growing population!

As our nation matures there are other goals to be added along the way!

Civil Rights Act of 1964:

1. Provides NO ONE shall be denied access , or refused services. (title II)

2. prohibits discrimination of any persons (title XI)

3. Forbids employers and labor unions from discrimination of peoples based on, race, color, religion, sex, age, or physical handicap in hiring and all other job related matters. (title VII)

Capitalism and Economic Freedom

Explore the characteristics of the Free Market,

Explain the Roles of the Entrepreneur

Consumer Government

Profit Motive & Competition

• In a Free Market, citizens are free to risk any part of their wealth on Business ventures.

• The very idea of financial gain creates the Entrepreneurs, or Risk Takers.

• The Profit Motive is the driving force that compels people to improve their material well-being.

• The Profit Motive is responsible for the growth of the Free Market of Capitalist system.

Competition The Market Place thrives of

Competition.

Competition in economic terms is the struggle between sellers to attract consumers while lowering cost.

Because Capitalism is based on freedom and a voluntary exchange, buyers compete to find the lowest prices and product is allocated for those willing and able to pay for them.

Role of The Entrepreneur Entrepreneurs are very important

to the Economic success of the Free Market system.

They organize and manage the means of production in order to gain a profit.

Entrepreneurs want to be their own Boss! So, they start their own businesses.

Some are successful while others fail.

The Success of an entrepreneur will then attract others into his or her field as competition.

Famous Entrepreneurs

Bill Gates

Mary Kay Ash

Donald Trump

Role of The Consumer

The Consumer has a great deal of power in the Free-Market Place because it is he /she that ultimately determines what will be sold and at what price and or Quality.

The term Consumer Sovereignty describes the power of the consumer.

Remember the saying “The Customer is Always Right!”

Role of The Government. The government should reflect

the desired Goals, aspirations of its citizens.

Our government, State/Local/National, have taken on the role of protector and regulator, while attempting to promote our National Goals.

In this process we no longer have a True Free-Market… What we have in The U.S. today is best described as a MIXED-ECONOMY.

Business Organizations 3 Describe the Sole

Proprietorship.

Understand the advantages and disadvantages of the Partnership.

Explain the structure and features of the Corporation.

Sole Proprietorships

Sole Proprietorships are businesses owned and run by one person.

The most numerous and profitable of all businesses. They are tend to be the

smallest businesses.

Forming a Proprietorship

They are the easiest to form because they require almost no legal requirements.

There are occasional licenses or fees.

Most are ready as soon as the business person is set up to go to work.

Advantages of the Proprietorship Ease of Starting.

Ease of Management Owner enjoys ALL the

profits. Owner does not have to

pay a separate business income tax, because the sole Proprietorship is not seen as a separate legal entity.

Personal satisfaction of being your own boss.

Ease of getting out of the business.

Disadvantage of the Sole Proprietorship

Unlimited Liability Difficulty of raising

Capital. Competition with “The

Big Boys”. Limited Managerial

Experience. Difficulty in attracting

qualified employees Limited Life.

Partnerships Partnerships : Businesses

owned by two or more persons.

They possess many of the same strengths and weaknesses as the Sole Proprietorships.

They are the least common type of Business.

2 Types of Partnerships

The most common is the General Partnership. In this case, all partners share equally in the management and financial obligations of the partnership.

In a Limited Partnership, at least one of the partners is not active in the daily running of the business.

Forming the Partnership• While not as simple as the

sole proprietorship, all that is usually needed is some kind of agreement or contract between the partners.

• This contract is called THE ARTICLES of PARTNERSHIP and they set out the responsibilities and obligations of the partners and they state hoe profits and losses will be divided.

Advantages• Ease of start up.• Ease of Management.• No special taxes, partners

divide the profits and pay personal income taxes on their part.

• Easier to get financial help.• Partnerships tend to be

larger than proprietorships and be more efficient .

• More attractive to top talent.

Disadvantages• In the General Partnership, all partners

share full responsibility for the acts of all the partners.

• In a limited Partnership, partners are only responsible for their part of the partnership.

• Limited Life, should a partner leave or die then the partnership must be reformed or dissolved.

• Potential for conflict between the partners.

Corporations

• It is a form of Business Organization recognized by law as a Separate Legal Entity having ALL the legal rights as an individual.

• This status allows corporations to enter into 1.)legal contracts, 2.)buy and sell property, and 3.)to sue and be sued.

• Corporations make up about 20% of all Businesses and 90% of all sales in the U.S.

Forming a Corporation Very legal and formal

arrangement. To INCORPORATE you must

1.)file for permission from the Federal Government and 2.) in the State in which your corporation is to be Headquartered.

If approved, a CHARTER , is granted.

The Charter It is a legal document that

states: The Name of the

Corporation. The Address and

purpose of Business. Describes other specific

features of the Business. Specifies the number of

initial SHARE of the Corporation that are to be sold to INVESTORS.

Stocks• STOCKS are ownership

certificates in a corporation.

• STOCKHOLDERS or SHAREHOLDERS invest money in a corporation. In the hopes of making a profit.

• The money is used to set up the corporation.

• If the corporation is profitable it will issue DIVIDENS , which is a check representing the corporate earnings at the end of the year. To all who currently own stock.

Types of Stock• Common: Basic ownership

in the corporation.

Each share represents one vote used to elect the BOARD of DIRECTORS.

Preferred Stock : Nonvoting membership.

They receive dividends before common stockholders.

Reading the Stock Quotes52Whigh

52Wlow Stock Sym Div

Yield % P/E

Vol00s High Low Close

Netchg

51.25 27.69 Rockwell ROK 1.02 2.1 14.5 6412 47.99 47.00 47.54 +0.24

1 2 3 4 5 6 7 8 9 10 11 12

Columns 1 & 2: 52-Week High and Low - These are the highest and lowest prices at which a stock has traded over the previous 52 weeks (one year). This typically does not include the previous day's trading.

Column 3: Company Name & Type of Stock - This column lists the name of the company. If there are no special symbols or letters following the name, it is common stock. Different symbols imply different classes of shares. For example, "pf" means the shares are preferred stock. Column 4: Ticker Symbol - This is the unique alphabetic name which identifies the stock. If you watch financial TV, you have seen the ticker tape move across the screen, quoting the latest prices alongside this symbol. If you are looking for stock quotes online, you always search for a company by the ticker symbol. If you don't know what a particular company's ticker is you can search for it at: http://finance.yahoo.com/l.

Column 5: Dividend Per Share - This indicates the annual dividend payment per share. If this space is blank, the company does not currently pay out dividends.

Column 6: Dividend Yield - The percentage return on the dividend. Calculated as annual dividends per share divided by price per share.

Column 7: Price/Earnings Ratio - This is calculated by dividing the current stock price by earnings per share from the last four quarters. For more detail on how to interpret this, see our P/E Ratio tutorial.

Column 8: Trading Volume - This figure shows the total number of shares traded for the day, listed in hundreds. To get the actual number traded, add "00" to the end of the number listed.

Column 9 & 10: Day High and Low - This indicates the price range at which the stock has traded at throughout the day. In other words, these are the maximum and the minimum prices that people have paid for the stock.

Column 11: Close - The close is the last trading price recorded when the market closed on the day. If the closing price is up or down more than 5% than the previous day's close, the entire listing for that stock is bold-faced. Keep in mind, you are not guaranteed to get this price if you buy the stock the next day because the price is constantly changing (even after the exchange is closed for the day). The close is merely an indicator of past performance and except in extreme circumstances serves as a ballpark of what you should expect to pay.

Column 12: Net Change - This is the dollar value change in the stock price from the previous day's closing price. When you hear about a stock being "up for the day," it means the net change was positive.

A Stock’s Graph Ford Motor Company Common Stock(NYSE: F )Real Time 11.02 0.62 (5.36%) 3:10PM EDTLast Trade:10.97Trade Time:2:55PM EDTChange: 0.68 (5.84%)Prev.Close:11.65Open:11.49Bid:10.98 x 6800Ask:10.99 x 333001y Target Est:19.50Day's Range:10.77 - 11.5152wk Range:10.77 - 18.97Volume:117,513,564Avg. Vol.(3m):62,491,400Market Cap:41.67BP/E (ttm):6.19EPS (ttm):1.77Div & Yield: N/A (N/A)

Advantages of A Corporation• Ease of Raising Capital. Stocks: Selling of shares w/

hope of Profits Bonds: A way Corporations

can Borrow Money. Corporations issue a written

promise to pay back the holder of the Bond the amount they borrowed called the Principal, plus Interest which is the price paid for the use of the Bond Holders money.

• Board of Directors hires a professional Management Team.

Advantages of A Corporation

• Limited Liability for its owners. The Corporation not the owners is responsible for its debt and obligations.

• Unlimited Life. The Corporation continues to exist even when ownership changes.

Disadvantages of a Corporation

Difficulty of getting a Charter.

Owners and shareholders have little say in the running of the business.

DOUBLE TAXATION of corporate profits.

Dividends are taxed twice! Once as corporate profits and then as personal income.

Corporations are subject to more Government Regulations.

The Government and Business Regulation

• In the 19th century, many of the States, acting to regulate local businesses, tried to restrict the power of Corporations.

• In the 1890’s legislatures began to loosen their controls over corporations.

• In the 20th century, special Interest Groups began to demand more government control over corporations.

Business Development• Trying to attract new

Businesses to the different areas of the country, Governors and Mayors have become very active in selling their area to businesses.

Help in Relocation Tax incentives Building of

Infrastructure Educational facilities.

Business Growth and Expansion

Explain how Businesses reinvest in order to grow or expand.

Identify the reasons firms merge.

Discover 2 types of Mergers.

Growth through Reinvestment In order for a business to

continue to be successful it must GROW.

Growth in business is measured in several ways.

One important way is by seeing an increase in income .

Income also known as Revenue, is the total earnings produced by a given source.

Growth through Reinvestment

Business people use a INCOME STATEMENT to report sales, income, and profits.

The Income Statement reflects financial activity in a given period.

Part of that statement would be money put into an account for reinvestment

(growth and expansion).

Growth Through Mergers

A Merger is the blending of two corporations or businesses into one legal entity.

When companies merge… one must give up its separate legal identity.

Many times the new company name will reflect identities of both merged companies.

Reasons for Merging

• Seek to grow faster.• Become more

efficient.• To acquire or

deliver a better product.

• Eliminate rivals.• Change image.

Types of Mergers

• Conglomerates: At least 4 businesses, unrelated products.

Multinationals: A corporation with manufacturing or services in several different countries.

Nonprofit Organizations

• Most businesses run with the idea to make a profit for their owners.

• Others are NOT-FOR –PROFIT, they exist to promote the collective interest their members.

• Can we all say “Volunteers”

Community and Civic Organizations

• These organizations are legally incorporated in order to take advantage of limited life and limited liability but they do not issue stock, pay dividends, or pay taxes.

• They produce a good or service while pursuing other rewards such as healing the sick, helping the needy, or educating.

• Any extra revenue is put back into the business.

Cooperatives• Also known as a co-op.• A voluntary association of

people formed to carry on some sort of economic activity.

• There are 3 types:

consumer : Buy bulk amounts of goods for its members.

service : Provide a service, ins., baby-sitting, credit to its members.

producer : help producers promote their products.

Labor, Professional, and Business Organizations

• Labor Unions = workers that organize to represent members interest in employment matters. They use COLLECTIVE BARGANING to negotiate with management.

• Professional associations People in a specialized occupation that work to improve working conditions, skill level, or public perception of a profession.

• Businesses = that organize to promote their collective interest.

Government : It’s a Non-Profit Organization!!

Direct Role = when the government provides a goods or service that competes with the private sector.

Indirect role = when the government gives money to people so that they can compete in the market.

In either case, the government is regulating the market place.

Demand 4

What is Demand ???

Demand : Is, not only, the desire, willingness, and ability to buy a product.

You must also wish to COMPETE with others with similar demands.

Intro to Demand We know that businesses

and people act in their own best self-interest.

In order to do that, they answer the What, How, and Whom questions.

Also to have a sound understanding of DEMAND is also important. It’s good to know Who’s buying what and Why!

Demand Illustrated

• The first thing a food businessman should do is figure out his market.

• The what and how may be pretty simple, but the Whom can be more difficult.

• Quantity, Quality, Price, and, “IS there really a market for this product?”

• To answer these questions a business will start with a DEMAND SCHEDULE.

The Demand Curve

• From the Demand schedule we create a DEMAND CURVE.

• It is a graph that shows the quantity demanded at each price that would exist in that market.

Law of Demand• States that demand works inversely with the price of the good or service.

• So, if the price goes UP… DEMAND goes DOWN!

Market Demand Curve

Demand and Marginal Utility• Utility= the amount of

usefulness or satisfaction from a good or service.

• Marginal Utility is the EXTRA usefulness.

• Diminished Marginal Utility simply means that satisfaction becomes less the more we use a product.

• Because of DMU, we are not willing to pay as much the second and third time we purchase an item.

Factors Effecting Demand

Consumer IncomeConsumer tasteSubstitutesComplimentsChange in

ExpectationsNumber of

Consumers

A Change in Demand

Income Effect = The change of quantity demanded because of a change in price that alters the consumer’s real income.

Substitution Effect = the change in demand because of the change in the relative price of the product.

An Increase moves the Demand Curve to the RIGHT!

A Decrease moves the Demand Curve to the LEFT!

Elasticity of Demand Cause-in-effect

relationships are important in a discussion of economics.

One cause-in-effect relationship that is important is that of ELASTICITY.

Elasticity is the measure of responsiveness of a dependent variable to a change in a independent variable.

Demand Elasticity

The relationship between demand and price is very important in business.

While consumers are very sensitive to changes in price, businesses have to be responsive to the demands of their products.

So an understanding of DEMAND ELASTICITY is important.

The extent to which a change in price causes a change in the quantity demanded is Demand elasticity.

Inelastic Demand• To be INELASTIC a change in

price would cause a relatively smaller change in the quantity demanded.

• Typically, SALT is a good example of a good that is inelastic. Higher or lower prices do not change the amount of salt people will buy.

What is Supply? 5 Supply = is the amount of a

product offered for sale at all possible prices that could prevail in the market.

Supply is based on a voluntary decision made by the producers.

Supply is the sellers side of the Economic decision making process, while Demand is the Buyers side.

The Law of Supply• The Law of Supply =

States , suppliers will normally offer more for sale at higher prices and less at lower prices.

• Another way of looking at the law of supply, is sellers want to sell as much as possible for as MUCH as possible.

Introduction into Supply

• So all sellers have to decide how much of a product we are willing to supply at given prices.

• WHAT ARE MY COST? Supplies Salaries/Wages Equipment Profit

Supply Schedules and curves

Changes in Supply

• What causes a Change in Supply?

Cost of Inputs Productivity Technology Taxes/Subsidies Expectations Government Regulations Number of Sellers

(competition)

Supply Elasticity• Just as Demand is

elastic, so to Supply has Elasticity.

• Supply Elasticity is the measure of the way in which quantity supplied responds to a change in price.

Three Elasticity's of Supply

• If a small increase in price causes a relatively large increase in output, Supply is Elastic.

• If the change is relatively small, then supply is said to be Inelastic.

• If the change in price and the change in supply are equal, then supply is Unit Elastic.

Differences• There is very little

differences between Demand/Supply Elasticity.

• If the products are being bought, the concept is Demand.

• If the product is being sold, the concept is Supply.

Theory of Production• The Theory of production deals

with the relationship between the Factors of Production and The Output of Goods and Services.

• The Theory is based on the “Short Run” or a period of Production that allows a producer to change only the amount of the variable input called LABOR.

• The “Long Run” is time long enough to allow producers to adjust ALL of their resources, including Labor.

The Variable Law of Proportions

• The Law of Variable Proportion states that “In the short run, out put will change as one input is varied and all others remain the same”.

• Total Product Rises =

As the number of workers increases so to does the output of the plant.

• Total Product Slows =

Workers are added at a slower rate. At some point there are to many workers in the production process.

• Marginal Product =

The extra output or change in total product caused by the addition of one more unit of variable input.

3 Stages of Production:

Increase Returns: Too many resources

per worker. Diminishing Returns: Output increases at a

diminished rate. Decreased Output: Too many workers

causes decrease in work output.

Cost and Revenue • Measures of Cost: The cost of things is important to

the production process.

In order to make these decisions easier, Cost is divided into 2 categories:

1. Fixed or Overhead; The cost for the business even if the plant is idle and output is zero.

They always remain the same.

Examples would be:

Salaries for executives

Rent or properties

Taxes.

Cost and Revenue 2. Variable Cost; These are cost that change

due to the rate of operation.While fixed Cost deal with

machines and capital goods, Variable cost deal with labor and raw materials.

Examples are: Wage Earners Electricity, to run the plant Freight Charges for raw

materials

Price and Decision Making 6

Price is a signal that helps us make economic decisions.

Price = The monetary value of a product as established by supply and demand.

Price communicates information and provides incentives to both buyer and seller.

Advantages of Price• Price is a link between buyer

and seller.• Price helps to answer the three

economic questions (What, How, & For Whom ) all markets must answer.

• Price performs the allocation function in the market place.

WHY?

1. In an open market, price is a neutral factor, Because it is the product of competition between buyer and seller. Everyone in that market has a hand in fixing price.

2. Price is Flexible. That is, price can change for many reasons, some seen and some unforeseen. Both buyers and sellers adjust their buying and production to the change and move on.

• It is this flexibility that allows the free market to accommodate change.

3. Price has no cost of administration. Markets decide on their cost for items naturally without any help or interference.

• Price is something we have been aware of all of our lives.

• Price is not hard to understand…. Price is the PRICE! You either choose to spend your money or, the choice is yours.

Allocation w/out Price?• In a free market it is impossible

to make economic decisions w/out a Price.

• In a command economy the government answers the economic questions and allocates rescores.

• Sometimes they use a system whereby resources are RATIONED, here the government would decide what was your fair share and the consumer is issued coupons or tickets that only allow you to purchase so much of a product.

The Idea of Rationing

• Dividing things up equally seems a good idea, but there are some issues you should know.

1. Who’s doing the dividing? Sometimes, some people are more equal than others.

2. High cost of Fairness. Someone will have to pay for the administration of rationing and Because we are human, there will be those who try to subvert the system. All of that cost money.

3. Rationing has a negative impact on people’s insensitive to work and produce things!

It is our nature to work towards success. If no matter how much we produce it makes no difference in the outcome. We move toward minimum amount required.

The Price System Because of the problems with

non price allocation systems, Economist favor using price as the measure for allocating resources.

So! Price conveys information to both buyers and sellers in a given market.

It also helps buyers and sellers allocate their resources.

Links all markets in the economy.

The Adjustment Process• Because the transaction in

business is voluntary, the compromise that takes place must benefit both buyer and seller.

• To illustrate this process we use an economic model.

• An Economic Model is a set of assumptions used to analyze behavior and predict outcomes.

• The model that is used to show price adjustments uses both a demand graph and a supply graph.

Market Equilibrium

• The a competitive market the adjustment works toward Market equilibrium.

• Market equilibrium is a situation where prices are relatively stable and supply and demand equal each other.

Macroeconomics: Institutions• Macroeconomics is the part of

economic theory dealing with the economy as a whole and decision making by large units such as Governments and Labor Unions.

• It takes lots of money to run the many government systems in the U.S. today.

• The ONLY way any Government makes money is through the taxation process.

• According to the latest figures, the 2012 Federal budget is $3.7 Trillion!

Labor Movement 8• Labor unions are legally

recognized as representatives of workers in many industries.

• Today, The most prominent unions are among Public Sector employees such as Teachers and Police.

• Activities by labor unions in the U.S. today centers on Collective Bargaining over:

• (A.) wages, benefits, and working conditions for their membership.

• (B) on representing their members if management attempts to violate contract provisions.

Just the facts!!

• Union membership had been steadily declining in the US since 1983.

• In 2007, the labor department reported the first increase in union memberships in 25 years.

• Most of the recent gains in union membership have been in the service sector while the number of unionized employees in the manufacturing sector has declined.

• A national average of about 12.1%.

Labor Today• Today most labor unions in the United

States are members of one of two larger umbrella organizations:

• The American Federation of Labor–Congress of Industrial Organizations (AFL-CIO) or

• The Change to Win Federation, which split from the AFL-CIO in 2005-2006.

• Both organizations advocate policies and legislation favorable to workers in the United States and Canada, and take an active role in politics favoring the Democratic Party.

• After WWII , because of perceived communist insertion, a loss of production resulted from strikes and work stoppages, people began to see management as the victim.

Antiunion Legislation

1947- Taft/Hartley Act

Allowed employers the right to sue unions for breaking contracts.

Prohibits unions from making it mandatory to join a union before being employed.

Allowed for an 80 day cooling off period that the federal courts could use in case of National Emergencies.

Allowed individual States to pass Right-To-Work Laws.

Union Arrangements 4 ways Unions organize

to deal with management.

• 1. Closed Shop: employer agrees to hire only union members.

• 2.Union shop: here workers do not have to be members to gain employment but agree to join and remain members as long as they are employed at this shop.

• 3. Modified Union Shop: workers do not have to join any union, if they choose to join, they must remain members as long as they are employed at that shop.

• 4. Agency shop: workers are not required to join a union, but must pay union dues to help pay for collective bargaining cost.

Collective Bargaining• Mediation: Bringing in a Third Party

to find a solution both parties will accept.

• Arbitration: both parties place their differences with a third party whose decision will be considered final.

• Fact-Finding: The third party collects facts and presents nonbinding recommendations.

• Injunction/Seizure: The injunction is a court order NOT to act, in extreme cases the government my have to seize operations and allow the government to negotiate with the unions.

• Presidential Intervention: The President of the United States can also intervene and ask for calm, fire striking federal employees, and order strikers back to work.

Types of Labor

• Unskilled: Lack training and skills for higher paying jobs. They usually work with their hands.

• Semiskilled: Those who have enough training or mechanical abilities that with supervision can operate some machines. Ex. Farm/ yard machines.

• Skilled: workers who can operate complex machines with little or no supervision.

• Professional Labor: Workers with the highest levels of knowledge-based education and managerial skills. Ex. Doctors lawyers, teachers.

Other Issues• Lower wages for women

and Minorities.

“Glass Ceiling”

Legal remedies:

1. Equal pay for equal work act of 1963.

2. Civil Rights act of 1964.

Equal Employment Opportunity Commission or E.E.O.C.

Part time work. The Minimum wage.

Economics of Taxation 9

• Taxes influence our economy by affecting, RESOURCE ALLOCATION, CONSUMER BEHAVIOR, NATIONAL PRODUCTIVITY and GROWTH.

• Also, the tax burden does not always fall on the person being taxed !!!

Impact of Taxation.• Resource Allocation: Factors of production are affected whenever a tax is levied. Taxes raise the cost of the goods or services being produces, that increase is handed off to the consumer in the form of higher prices. Consumers then react by buying less of the product.

• Behavior adjustment: Taxes are also used by the government to encourage of discourage certain types of activities.

Incentives are used to compel consumers to engage in certain behaviors.

Sin Taxes are used to reduce consumption.

Impact• Productivity and Growth. Taxes can change the willingness of citizens to save, invest, or even work.

Many people today argue that if their labor is to be consumed in taxes there is no real reason to work.

• Remember the party being taxed is not always the one who bears the burden of the tax. The incidence of a Tax, or final burden, can be predicted.

Effective Taxes

• Since a Government has no ability to create its own wealth, ALL Governments MUST Tax their citizens.

• The argument then becomes How much? and For what purposes?

• So in order for taxes to be effective, they must be:

• Equal ? Fair ? Just ?• Simple?• Efficient?

Equality…Fairness….Justice ????????

• Most people feel that good taxation policy should be impartial. Taxes are viewed as fairer if there are fewer loopholes.

• There is no guide to how we make taxes fair. Loopholes seem to exist in most systems. So people and businesses use these as a way to not pay taxes.

Simplicity

• Tax codes should be written so that both the tax payer and the tax collector can understand them.

• Individual income tax: Taxes on people’s earnings.

• Sales Tax: Tax levied on consumers at the time of purchase.

Efficiency

• Taxes should be relative easy to administer.

• They should be able to raise enough revenue to be effective.

Two Principles of Taxation

• Benefits= taxes should pay for the benefits the government is asked to take care of.

• Ability-to-Pay= People should be taxed according to their ability to pay.

Types of Taxes

Our Federal Tax System In 1913, the 16th amendment to the

U.S. Constitution allowed the U.S. government to levy or place an income tax on the working citizens of the U.S.

Since then the government has relied heavily on its citizens to finance its operations.

Today our government collects almost 50% of its revenues from taxes on people’s earnings.

The federal Government collects taxes from a number of sources.

The 3 most important sources are: Individual Income Taxes, Social Security Taxes, Corporate Income Taxes.

Federal Tax Brackets

• Your Tax Bracket, is the rate you pay on the “Last Dollar” you earn!

• BUT, as a percentage of your income, your tax rate is usually less than that.

• First, here are the tax rates and the income ranges where they apply.

• Tax Year: 2010• Filing Status: Single

Income Between…………..Tax Bracket

0 and 8,500…………10%

8,500 and 34,500 …..15%

34,500 and 83,600….25%

83,600 and 174,000…28%

174,000 and 379,150..33%

370,000 and above….38%

FICA Taxes

• The Second most important tax is FICA tax or Federal Insurance Contributions Act Tax. This is a tax placed on citizens to pay for Social security and Medicare.

• Medicare is a health-care program available to all senior citizens regardless of income.

Government Spending 10

Government Spending: Just the Facts

2012 U.S. Federal Budget = $3.7 Trillion

U.S. GDP = $14.6 Trillion

Per Capita Income = $47,400.00

U.S. Labor force = 154.9 Million

Unemployment = 9.7% Foreign Debt = $13.98

Trillion

Spending in the Public Sector

Since the 1920”s the Progressive movement in the U.S. has changed the way Americans see the role of their government in their economic lives.

Many Americans have become accustom to intervention (intrusion) of government in their lives. There are those who believe they are entitled to the wealth of others.

Others question exactly what role and services the government should provide.

2 Kinds of Government Spending

• Purchase of Goods or Services: ( Guns or Butter)

• Transfer Payments Which is a payment for which the government receives neither goods or services. These we call Entitlements. A government program or benefit using established eligibility requirements to provide health, nutritional, or income supplements to citizens.

Impact of Government Spending

Affecting Resource Allocation (Guns or Butter)

Redistribution of Income ( The way income is Distributed among designated groups within the country)

Competition with Private Sector (When the government produces Goods and Services it must compete with private sector as in Education and Health Care.)

Expenditures of the Federal Government

• The Federal Government creates a Budget or an annual plan outlining proposed expenditures and revenues for the coming year.

• There is two types of spending that the government is apart of: Mandatory and Discretionary spending.

Establishing a Federal Budget

The federal budget is prepared for a FISCAL YEAR , which is a financial planning period of one year that may or may not coincide with a calendar year.

Our governments fiscal year runs from October 1 to September 30.

The first step is called the Executive Formulation , The President establishes general budget guidelines for multiple years with a focus on the next fiscal year.

Office of Budget and Management Next, the budget is turned over

to the OFFICE of MANAGEMENT and BUDGET (OMB), The OMB then assembles the budget under the guidelines the President sets.

By law, the budget is to be sent to the Congress no later than early February, but in practice that almost never happens.

The budget is then looked over by the congress and is debated and eventually passed.

This passing is done with considerable, give-and take, from both the Executive and Legislative Branches of government.

Budgets• Budgets will be shown as: a Surplus = more revenue

than expenditures. a Deficit = more

expenditures than revenue. A Balance = where the

expenditures and revenue equal each other.

Whether the budget turns out to be accurate depends on a number of factors, but two important ones are:

1. the Health of the American economy.

2. the “WILL” of the U.S. Congress!

Final Approval

• If all goes well, the House and the Senate will approve the compromised bill and will send it top the President for his signature.

• The President may or may not sign the Bill. If he thinks that it is too far from his original Bill, he will send it back to the Congress to be revised closer to his original Budget.

• Once signed, the Budget becomes the official Budget for the next fiscal year.

Federal Govt. Expenditures

State and Local Expenditures• State and Local Governments

must also gain approval before revenue dollars can be released.

• The process for approval is loosely modeled after the federal system.

• Some states have Balanced Budget amendments in their State Constitutions.

• This means the State CAN NOT spend more than it takes in, in revenue.

• Texas has a balanced Budget Amendment.

Deficit to Debt

• Historically, Our government’s budget has been characterized by a practice of Deficit Spending.

• Deficit Spending is the practice of spending more money than what is available from revenues.

• Many in the Government believe this is a reasonable practice in order to pay for programs or because of unexpected drops in revenue or increases in expenditures.

Deficits add to the Debt

• When the Government runs a deficit, it pays for the shortage by Borrowing.

• The Dept. of Treasury then sells U.S. Bonds and other forms of Government debt to the public.

• When we add up all the Government Bonds and other debt obligations we have an idea of the National Debt.

• National Debt is the total amount borrowed from investors to finance the deficit spending.

A Balanced Budget

• The debt grows whenever the Government spends more than it collects in revenue.

• If the government has a balanced budget where expenditures equals revenue the debt will not change!

• ONLY if the budget generates a surplus will the debt go down.

• So how Big is our National Debt? Currently it stands just over 15 Trillion Dollars!

• The bulk of the debt is owed to other countries, China and Germany being the largest.

• .

National DebtUnderstanding what happened

requires understanding two concepts of what makes up the national debt.

The national debt is made up of public debt and intragovernmental holdings.

The Public Debt is debt held by the public, normally including things such as treasury bills, savings bonds, and other instruments the public can purchase from the government.

Intragovernmental Holdings, on the other hand, when the government borrows money from itself--mostly borrowing money from Social Security.

Social Security Act of 1935

• On August 14, 1935, President Franklin D. Roosevelt signed into law the Social Security Act.

• Designed as a n Insurance program to provide protection against Social ills such as, Poverty, Unemployment, Disability, and Old Age.

• It is a PAY-AS-YOU- GO program which means today’s workers pay today’s beneficiaries.

• In 2009, 162 million workers paid SSI for 57.6 million American Recipients.

• Currently, 1 in 4 homes in the U.S. receive some sort of SSI payment.

Social Security

• The Social Security Administration is legally required to take all its surpluses and buy U.S. Government Securities.

• The U.S. Government readily sells those securities--which automatically and immediately becomes intragovernmental holdings.

• Over the past 25 years, the government has gotten used to the fact that Social Security is providing free money to make the rest of the deficit look smaller,"

Impact of the National Debt• 1. Federal debt has a significant impact

on the distribution of wealth.

a. if the govt. borrows from the wealthy and the tax burden falls on the middle class and poor, taxes would transfer to the rich to pay in order to pay the interest on those loans.

• 2. Public debt causes a transfer of purchasing power from the private sector to the government.

a. when people pay more in taxes, they have less to spend on themselves.

• 3. Paying taxes to pay off the national debt can reduce the incentives to work, save or invest.

a. people are less inclined to work if they believe their industry is not a benefit to them.

Taming the National Debt

• 1985- Gramm-Rudman-Hollings Act: Mandated congress to balance it budget by 1991.

• 1090- Budget Enforcement Act:

Pay-As-You-Go.• 1993- Omnibus Budget

Reconciliation Act: Intended to reduce the rate of growth not the deficit.