Chapter 3. Producers AND consumers want to benefit from the system Consumers want the best price...

Chapter 3

Producers AND consumers want to benefit from the system

Consumers want the best price for the greatest quality

Producers can only charge what consumers are willing to pay

Producers want to lower costs to make a greater profit

Increase productivity and efficiency Specialization Division of Labor

Edward Hopper 1942

U.S. Constitution grants certain rights that allow people to engage in business activities.

Recognition of property rights 5th amendment & 14th amendments prevent

government from taking away personal property away from an individual except when there is a public reason.

5th--nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.

14th--All persons born or naturalized in the United States and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside. No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.

Taxation – Constitution sets up clear guidelines on how businesses must be taxed.

Binding contracts – people and businesses have rights to make and enter contracts. They may not use political processes to be excused from contracts. Laws cannot be passed to change a business agreement.

16th Amendment allows for a personal income tax

Profit Motive – force that encourages people and organizations to improve their material well-being rewards innovation and

efficiency. Open Opportunity –

everyone can compete in the marketplace, enabling economic mobility.

Economic rights

Legal equality –

all the same legal rights

Private property rights – ability to control and own possessions

Free contract – decide upon agreements Voluntary exchange – choosing what to buy or sell

when and at what prices Competition – rivalry among sellers

Drives down prices, drives up qualityhttp://www.youtube.com/watch?v=jnjPFZV8Wqo&feature=relmfu

The rate at which a company creates goods and services for sale is called that company’s productivity

Inputs are resources used to make things

Output is the amount of goods/services created Seek to maximize profit

Cut costs, raise prices while delivering quality

Besides lowering costs, producers can become more efficient One of the easiest ways

to be more efficient is to specialize

Specialization is similar to the division of labor

It allows producers to do what they do most efficiently and trade their income for everything else

Freedom to make economic choices

Make desires known through choices (purchases) Producers will respond

Join an interest group– a private organization that lobbies the government in their interest

Gross Domestic Product – (GDP) measure of the country’s economic well-being

Total value of all FINAL goods and services produced in an economy

GDP helps to predict business cycles based on increases or decreases over time

Business cycle Believed natural

cycles of economic growth and decline Expansion -> Contraction Not day to day or weekly activities Cycles may last a 6 months, a year or longer

High Employment

Stable Prices

Steady Growth

Provide jobs for everyone able and willing to work.

Good unemployment rate: 4%-6%

What is the current rate?

Each generation seeks to obtain a higher standard of living than the previous one.

Economy must grow to provide more goods and services.

Gross Domestic Product (GDP) measures this growth.

Stability gives confidence to consumers, producers and investors.

Price levels help indicate stability.

Dramatic price increases hurt consumers while dramatic price decreases hurt producers.

Investment is using resources that could bring immediate benefits for the purpose of gaining greater benefits at a later time

Capital Investment buys new or upgrades machinery, retrains or educates workers making both more productive

The more training and education a worker has the more likely their standard of living will rise.

Achieving productivity and a higher standard of living: Work ethic – commitment

to hard work Specialization – efficient

division of labor Technology –makes us

more efficient lowers costs

Education –leads to more innovation and better decision-making

Protect private property

Enforce contracts and rule of law Protect consumers from dangerous

products and fraud Public disclosure laws – require

companies to provide info about their products

Resolve market failures and improve outcomes

http://www.pbs.org/wgbh/pages/frontline/shows/meat/

Incentives for innovation: Patents, copyrights

Regulation: intervening in a market for a purpose Deregulation: removing

market controls Providing public goods Redistribution of income :

taxation -> social security, welfare

Public good Public good – shared good or service for which it would be inefficient or impractical for consumers to buy individually.

Total benefits to society are greater than the total cost.› Public goods – financed by the public sector

(govt)› Private good – provided by private sector

(individuals/businesses)

Someone who would not choose to pay for a good or service but benefits anyway. “piggybacking”

Market failure – the market does not distribute resources equally. Using someone else’s wifi Listening to public radio without paying for

it

Externalities exist as a gap between the private cost incurred and the social cost that isn’t If the gap between the

two is large individuals have an incentive to do things that make them better off at the expense of others

What are the different costs associated with picking up after your dog in a public park?

http://www.youtube.com/watch?v=zcPRmh5AIrI&list=PLD78A4CA3338CFA7E&index=9&feature=plcp

When externalities aren’t dealt with we say that markets actually are unable within themselves to produce efficient allocations Or others are forced to incur costs which they did

not benefit from or create Governments can resolve these failures

through regulation, taxation or property rights

Do people always take care of the public goods or resources they share?

Economists use the phrase Tragedy of the Commons to illustrate how individuals seeking personal gain will deplete or destroy common resources.

So what is the solution?http://www.youtube.com/watch?v=MLirNeu-A8I&feature=relmfu

In a free market economy wealth is spread unevenly throughout society.

Poverty is the result

Poverty threshold – income level below which is needed to support families or households.

Determined by Federal govt. Welfare – government aid for the poor

Reformed during the Clinton era

Cash transfers – payments redistributing income to the those who lack it

TANF – Temporary Assistance for Needy Families Social Security – to elderly and disabled Unemployment – to those who have lost jobs, must

show efforts to find work Worker’s compensation – to injured workers

In kind benefits – provided for free or at great reduced prices

health insurance: medicare – for those over 65 medicaid – for low income

Education – grants, funding from pre-K to college

Faith Based Initiatives – allowed to compete for federal funds to help the poor and needy