Economic Economic FoundationsFoundations

3.01 Explain the concept of 3.01 Explain the concept of economicseconomics

ECONOMICSECONOMICS

The study of how to meet the The study of how to meet the unlimited wants of a society with its unlimited wants of a society with its limited resources.limited resources.

RESOURCESRESOURCES

All things used in producing goods All things used in producing goods and services.and services.

ECONOMIC RESOURCESECONOMIC RESOURCES

LandLand LaborLabor CapitalCapital

LANDLAND

Natural ResourcesNatural Resources Includes everything contained in the Includes everything contained in the

earth or found in the sea.earth or found in the sea.

LABORLABOR

Human resourcesHuman resources All the people who work in the All the people who work in the

economy, including full and part-economy, including full and part-time workers, managers, public time workers, managers, public employees, and professional employees, and professional people.people.

CAPITALCAPITAL

The money needed to start and The money needed to start and operate a business.operate a business.

Includes goods used in the Includes goods used in the production of other goods.production of other goods.

Can be limited because they break or Can be limited because they break or are of poor quality.are of poor quality.

SCARCITYSCARCITY

A condition in which more goods and A condition in which more goods and services are desired than are services are desired than are available.available.

Scarcity forces people, businesses Scarcity forces people, businesses and nations to make choices.and nations to make choices.

Unlimited wants-Limited resources = Unlimited wants-Limited resources = SCARCITYSCARCITY

ECONOMIC GOODECONOMIC GOOD

A tangible item.A tangible item. Examples: CD player or sports Examples: CD player or sports

equipmentequipment

ECONOMIC SERVICEECONOMIC SERVICE

IntangibleIntangible Example: going to the circusExample: going to the circus

ENTREPRENEURSHIPENTREPRENEURSHIP

Skills of people who are willing to Skills of people who are willing to take the risk of starting their own take the risk of starting their own business.business.

Entrepreneurs organize the other Entrepreneurs organize the other economic resources in order to economic resources in order to create goods and/or services needed create goods and/or services needed and desired in an economy.and desired in an economy.

FIVE ECONOMIC UTILITIESFIVE ECONOMIC UTILITIES

FormForm PlacePlace TimeTime PossessionPossession InformationInformation

UTILITYUTILITY

Economic term referring to the Economic term referring to the added value or “usefulness” of a added value or “usefulness” of a product.product.

FORM UTILITYFORM UTILITY

Value added by changing raw Value added by changing raw materials or putting parts together to materials or putting parts together to make them more useful.make them more useful.

PLACE UTILITYPLACE UTILITY

Value added by having a product Value added by having a product where customers can buy it.where customers can buy it.

Playing a football game at a stadium.Playing a football game at a stadium.

TIME UTILITYTIME UTILITY

Value added by having a product at a Value added by having a product at a certain time of year or a convenient certain time of year or a convenient time of day.time of day.

POSSESSION UTILITYPOSSESSION UTILITY

Value added by exchanging a Value added by exchanging a product for some monetary value.product for some monetary value.

INFORMATION UTILITYINFORMATION UTILITY

Value added by communicating with Value added by communicating with the consumer.the consumer.

The Three Basic The Three Basic Economic QuestionsEconomic Questions

WhatWhat goods and services should be goods and services should be produced?produced?

HowHow should the goods and services should the goods and services be produced?be produced?

For whomFor whom should the goods and should the goods and services be produced?services be produced?

The Role of Government The Role of Government in:in:

Market EconomyMarket Economy Command EconomyCommand Economy Mixed EconomiesMixed Economies

CapitalismCapitalism SocialismSocialism CommunismCommunism

TraditionalismTraditionalism

Market EconomyMarket Economy

No government involvement in No government involvement in answering the three basic economic answering the three basic economic questions. (What? How? For whom?)questions. (What? How? For whom?)

Market (or the people) answers the Market (or the people) answers the three basic economic questions.three basic economic questions.

Market economy Market economy continued:continued:

Consumers decide what should be Consumers decide what should be produced.produced.

Businesses decide how products Businesses decide how products should be produced.should be produced.

People who have the money to People who have the money to purchase the products determine purchase the products determine for whom the products are for whom the products are produced.produced.

Command EconomyCommand Economy

Government answers the three basic Government answers the three basic economic questionseconomic questions

Officials or leaders decide Officials or leaders decide whatwhat should be produced.should be produced.

Government runs the businesses and Government runs the businesses and employs the workers. (employs the workers. (HowHow))

Government decides who will receive Government decides who will receive the produces. (the produces. (For whomFor whom))

TraditionalismTraditionalism

An economic system based on the An economic system based on the way things have always been doneway things have always been done

Examples:Examples: Amish communityAmish community Indian reservationIndian reservation

Mixed EconomiesMixed Economies

A blend of a market economy and A blend of a market economy and government.government.

All economies are presently mixed.All economies are presently mixed. Mixed economies include:Mixed economies include:

CapitalismCapitalism SocialismSocialism CommunismCommunism

CapitalismCapitalism

People elect the government officials People elect the government officials who are concerned about the peoplewho are concerned about the people

Examples: United States and Japan.Examples: United States and Japan.

SocialismSocialism

Increased government involvementIncreased government involvement Government tries to reduce the Government tries to reduce the

differences between the rich and differences between the rich and poor.poor.

Based on the welfare of people.Based on the welfare of people. Examples: France, Germany, Great Examples: France, Germany, Great

Britain.Britain.

CommunismCommunism

Government is run by one political Government is run by one political party and that party controls party and that party controls everything.everything.

People are assigned jobs.People are assigned jobs. Students are told what type of Students are told what type of

schooling they will receive.schooling they will receive. Examples: Cuba and North KoreaExamples: Cuba and North Korea

Explain supply and Explain supply and demanddemand

SupplySupply

The amount of goods producers are The amount of goods producers are willing and able to produce and sell willing and able to produce and sell at a given price during a certain at a given price during a certain period of time. period of time.

Producers prefer to supply when the Producers prefer to supply when the price is high – known as a seller’s price is high – known as a seller’s market.market.

DemandDemand

A consumer’s willingness and A consumer’s willingness and ability to buy products at a given ability to buy products at a given price during a certain period of price during a certain period of time. time.

Consumers prefer to buy when the Consumers prefer to buy when the price is low – known as a buyer’s price is low – known as a buyer’s market.market.

Law of Supply and Law of Supply and DemandDemand

The economic principle which states The economic principle which states that the supply of a good or service that the supply of a good or service will increase when demand is great will increase when demand is great and decrease when demand is low.and decrease when demand is low.

ElasticityElasticity

The degree to which demand is The degree to which demand is affected by its price.affected by its price.

Elastic DemandElastic Demand

Refers to how changes in the price of Refers to how changes in the price of a product affect demand for that a product affect demand for that product.product.

Example: When the price is reduced Example: When the price is reduced on a CD, the demand for the CD may on a CD, the demand for the CD may increase.increase.

Inelastic DemandInelastic Demand

Changes in the price of a product Changes in the price of a product have little affect on the demand for have little affect on the demand for that product.that product.

Example: People will pay any price Example: People will pay any price for Super Bowl tickets.for Super Bowl tickets.

Factors affecting Factors affecting elasticity of demandelasticity of demand

Availability of substitutesAvailability of substitutes If a substitute is easily obtainable, If a substitute is easily obtainable,

demand becomes more elastic. demand becomes more elastic. Example:Disney World, EPCOT, Sea World, Example:Disney World, EPCOT, Sea World,

Universal Studios, Bush Gardens, etc.Universal Studios, Bush Gardens, etc. Brand loyaltyBrand loyalty

Many customers will only purchase a Many customers will only purchase a certain brand of products. Demand certain brand of products. Demand becomes more inelastic.becomes more inelastic.

Factors affecting Factors affecting elasticity of demand elasticity of demand

continued . . .continued . . . Price relative to incomePrice relative to income

When an increase in the price of a good or When an increase in the price of a good or service does not have a major impact on a service does not have a major impact on a customer’s budget, the demand is usually customer’s budget, the demand is usually inelastic.inelastic.

When an increase in the price of a good or When an increase in the price of a good or service has a major impact on a customer’s service has a major impact on a customer’s budget, the customer most likely will no longer budget, the customer most likely will no longer buy the product. In this case, the demand is buy the product. In this case, the demand is elastic.elastic.

Example: Luxury suite versus general admission.Example: Luxury suite versus general admission.

Factors affecting Factors affecting elasticity of demand elasticity of demand

continued . . .continued . . . Luxury versus necessity (want vs. Luxury versus necessity (want vs.

need)need) When a product is a necessity, demand is When a product is a necessity, demand is

inelastic.inelastic. When a product is a luxury, demand is When a product is a luxury, demand is

most likely elastic.most likely elastic. Urgency of purchaseUrgency of purchase

If a purchase must be made immediately, If a purchase must be made immediately, demand tends to be inelastic.demand tends to be inelastic.

Business CycleBusiness Cycle

Movement of an economy through Movement of an economy through four recurring phasesfour recurring phases ProsperityProsperity RecessionRecession DepressionDepression RecoveryRecovery

Prosperity (Peak)Prosperity (Peak)

1.1. Highest period of economic growthHighest period of economic growth

2.2. Low unemploymentLow unemployment

3.3. High output of goods and servicesHigh output of goods and services

4.4. High consumer spendingHigh consumer spending

5.5. Increased attendance and Increased attendance and purchasing of related merchandisepurchasing of related merchandise

RecessionRecession

1.1. Economic slowdownEconomic slowdown

2.2. Rise in unemploymentRise in unemployment

3.3. Production slows downProduction slows down

4.4. Decrease in consumer spendingDecrease in consumer spending

5.5. Decrease in attendance and Decrease in attendance and purchasing of related merchandisepurchasing of related merchandise

Depression (Trough)Depression (Trough)

1.1. Prolonged recessionProlonged recession2.2. Extremely low consumer spendingExtremely low consumer spending3.3. High unemploymentHigh unemployment4.4. Drastic decrease in production of Drastic decrease in production of

productsproducts5.5. Poverty can resultPoverty can result6.6. Lowest point of attendance and few Lowest point of attendance and few

related items are purchased related items are purchased

RecoveryRecovery

1.1. Renewed economic growth and an Renewed economic growth and an increase in output of goods and servicesincrease in output of goods and services

2.2. Reduced unemploymentReduced unemployment

3.3. Increased consumer spendingIncreased consumer spending

4.4. Moderate business expansionModerate business expansion

5.5. Gradual increase in leisure time Gradual increase in leisure time activities and purchase of related activities and purchase of related merchandise.merchandise.