Economics/Business/Free Enterprise

PERIODS 3, HON

Mr. Dunn

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10

20

30

40

50

60

70

80

90

1st Qtr 2nd Qtr 3rd Qtr 4th Qtr

East

West

North

ECONOMICS

ECONOMIC NEEDS

•FOOD

•CLOTHING

•SHELTER

WANTS/NEEDS

WANTS ARE NOT NECESSARY FOR

HUMANS TO LIVE.

SCARCITY

RESULT OF HAVING LIMITED

RESOURCES TO SATISFY

UNLIMITED WANTS

ECONOMICS

The study of people producing and

exchanging to get the goods and

services they want

A FRAMEWORK FOR ECONOMIC ANALYSIS

• People choose.

• People’s choices involve costs.

• People respond to incentives in predictable ways.

• People create economic systems that influence individual choices and incentives.

• People gain when they trade voluntarily.

• People’s choices have consequences that lie in the future.

OPPORTUNITY COST

THE BEST CHOICE

FOREGONE WHEN MAKING

A DECISION

PRODUCTIVE RESOURCES

•NATURAL

•HUMAN

•CAPITAL

FACTORS OF PRODUCTION

•CAPITAL

•ENTREPRENEURSHIP

•LAND

•LABOR

CAPITAL

Buildings, tools, and machines people use to create goods and services

ENTREPRENEURSHIP

• HUMAN RESOURCE WHICH INNOVATES, DEVELOPS, MOTIVATES, DESIGNS, FINANCES, IMPLEMENTS AND/OR ORGANIZES PRODUCTION ELEMENTS AND PROCESSES TO BEGIN OR ENABLE PRODUCTION OF GOODS AND SERVICES.

• ENTREPRENEURS TAKE THE RISK AND BEAR THE BURDEN OF THE ENTERPRISE, EITHER EARNING A PROFIT IF SUCCESSFUL OR TAKING THE LOSS IF ENTERPRISE FAILS

LAND

GIFTS OF NATURE AND THE RAW MATERIALS USED TO PRODUCE GOODS AND SERVICES

LABOR

Human resources or the physical and mental efforts people use to create goods and services

FACTOR PAYMENT$

• CAPITAL INTEREST

• ENTREPRENEURSHIP PROFIT/LOSS

• LAND RENT

• LABOR WAGES/SALARIES

PRODUCTION POSSIBILITIES

• TWO PRODUCTS TO BE PRODUCED

• FIXED (LIMITED) SET OF RESOURCES

• MORE OF ONE—LESS OF THE OTHER

• WHAT IS LOST IS OPPORTUNITY COST

• ON THE FRONTIER-MOST EFFICIENT

• INSIDE THE FRONTIER-INEFFICIENT

• BEYOND THE FRONTIER-IMPOSSIBLE

• PPF SHOWS ALL POSSIBLE PRODUCTION COMBINATIONS WITH CURRENT RESOURCE MIX

• PPF IS ALSO REFERRED TO AS PPC

“GUNS OR BUTTER”

PRODUCING MORE BUTTER MEANS PRODUCING LESS GUNS—TO INCREASE QUANTITY OF X WE MUST DECREASE QUANTITY OF Y.

PPF/PPC SHAPES

BOWED—(CONCAVE FROM

THE ORIGIN) DUE TO THE

LAW OF INCREASING

OPPORTUNITY COSTS

STRAIGHT LINE—DUE TO

CONSTANT OPPORTUNITY

COSTS OR EQUAL AMOUNT

GAINED FROM WHAT IS LOST

EXPANSION/CONTRACTION OF PPF/PPC ONLY POSSIBLE WITH

• CHANGE IN RESOURCES

• CHANGE IN RESOURCE QUALITY

• CHANGE IN TECHNOLOGY

INEFFICIENT (A) & IMPOSSIBLE (E)

GUNS VS BUTTER

BASIC ECONOMIC QUESTIONS

•What goods and services are to be produced and in what quantities?

•How are these goods and services to be produced?

•Who receives / consumes these goods and services?

PILLARS OF FREE ENTERPRISE

•PRIVATE PROPERTY

•PRICE SYSTEM

•COMPETITION

•ENTREPRENEURSHIP

BROAD SOCIAL GOALS

• ECONOMIC EFFICIENCY

• ECONOMIC EQUITY

• ECONOMIC FREEDOM

• ECONOMIC GROWTH

• ECONOMIC SECURITY

• ECONOMIC STABILITY

ECONOMIC FUNCTIONS OF GOVERNMENT

• Maintaining Legal and Social Framework

• Providing Public Goods and Services

• Ensuring Competition

• Redistributing Income

• Correcting for Externalities

• Stabilizing the Economy

ECONOMIC SYSTEMS

•COMMAND

•MARKET

•TRADITIONAL

• “MIXED”

COMMAND OR MARKET?

MICROECONOMICS

THE STUDY OF THE INTERACTION BETWEEN INDIVIDUAL COMPONENTS OF AN ECONOMY

• INDIVIDUALS (RESOURCE OWNERS)

• HOUSEHOLDS (CONSUMERS)

• BUSINESSES (FIRMS) (PRODUCERS)

• INSTITUTIONS (BANKS, LABOR, PACS, C of C, ORGS, etc)

SIMPLE CIRCULAR FLOW

COMPONENTS OF SIMPLE CIRCULAR FLOW

SECTORS

HOUSEHOLDS-RESOURCE SUPPLIERS-CONSUMER

BUSINESSES-RESOURCE DEMANDERS-PRODUCER

MARKETS

FACTOR—EXCHANGE RESOURCES FOR PAYMENTS

PRODUCT—PAYMENTS FOR GOODS/SERVICES

DEMAND

The quantities of a good or service consumers are willing and able to buy at different possible prices at a particular time

LAW OF DEMAND

CONSUMERS ARE WILLING TO BUY MORE AT

LOWER PRICES

SHIFTING DEMAND

• PRICE EFFECT/SUBSTITUTION EFFECT

=MOVEMENT ALONG THE CURVE

• CHANGES IN DEMAND

INCOME

CONSUMER EXPECTATIONS

POPULATION

CONSUMER TASTES AND ADVERTISING

=SHIFT OF ENTIRE DEMAND CURVE

SHIFT RIGHT—INCREASED DEMAND

SHIFT LEFT—DECREASED DEMAND

SUPPLY The various amounts of something a producer is willing and able to sell at different possible prices at a particular time

LAW OF SUPPLY

PRODUCERS ARE WILLING TO

PRODUCE MORE AS PRICE RISES

SHIFTING SUPPLY

CAUSES FOR SHIFTS IN SUPPLY

INPUT COSTS

CHANGES IN TECHNOLOGY

REGULATORY POLICY

NUMBER OF SUPPLIERS

PRODUCER EXPECTATIONS

PRICE SYSTEM

•COMPETITION

•COSTS OF PRODUCTION FIXED-(RENT, MANAGEMENT,

INTEREST, OBLIGATIONS)

VARIABLE-(PRODUCTION-BASED, LABOR COSTS, SHIPPING COSTS)

•SUPPLYAND DEMAND • CONSUMER DRIVEN--MARKET FORCES

THE ROLE OF PRICE • INCENTIVE TO CONSUME/PRODUCE

• INFORMATION FOR BUYERS/SELLERS

• SIGNAL TO CONSUME/PRODUCE

• RATIONS GOODS AND SERVICES

• VOLUNTARY EXCHANGE

PROFIT: BUSINESS INCENTIVE

BUSINESS INCOME IS REVENUE

BUSINESS SPENDING IS COSTS

INCOME

TR = P x Q (PRICE X QUANTITY=TOTAL REVENUE)

COSTS (EXPENDITURES)

TC = FC + VC (FIXED COSTS + VARIABLE COSTS = TOTAL

COSTS)

P = TR – TC (PROFIT = TOTAL REVENUE – TOTAL COSTS)

BOTTOM LINE IN BLACK OR IN RED

PROFIT (+) OR LOSS (-)

BREAK-EVEN POINT MR = MC NO PROFIT/LOSS

TYPES OF BUSINESS ORGANIZATIONS

• SOLE PROPRIETORSHIP (75%/20% $) --OWNER KEEPS PROFIT/MAKES ALL DECISIONS --PERSONAL TAX RETURN/NO LEGAL PAPERWORK --UNLIMITED LIABILITY—LIMITED LIFE

• PARTNERSHIP (7%/10% $) --GENERAL—UNLIMITED LIABILITY FOR PARTNERS --LIMITED—(SILENT PARTNER(S) CONTRIBUTE(S) $) --LIMITED LIABILITY (LLP) ALL PARTNERS --SPECIALIZATION/DIVISION OF LABOR

--PROVIDES LARGER POOL OF CAPITAL

• CORPORATION (18%/70% $) -LIMITED LIABILITY/UNLIMITED LIFE AND $ --DOUBLE TAXATION/CORPORATE TAX RETURN --BOARD OF DIRECTORS/LEGAL PAPERWORK

BUSINESS FINANCING

•SHORT-TERM LOANS LESS THAN ONE YEAR

•MEDIUM-TERM LOANS 1-10 YEARS

•LONG-TERM LOANS MORE THAN TEN YEARS

MARKET STRUCTURES

• PERFECT COMPETITION

• MONOPOLISTIC

• OLIGOPOLY

• MONOPOLY

MARKET STRUCTURE

• PERFECT COMPETITION --PRICE TAKER-(NO CONTROL OVER PRICE) --FEW IF ANY BARRIERS TO ENTRY

• IMPERFECT COMPETITION

– MONOPOLISTIC COMPETITION

– OLIGOPOLY

--DIFFERENTIATED PRODUCTS --PRICE LEADERSHIP – MONOPOLY

--PRICE MAKER-(TOTAL CONTROL OVER PRICE) --SINGLE PRODUCT --SIGNIFICANT BARRIERS TO ENTRY

MACROECONOMICS

THE STUDY OF AN

ECONOMY AS A

WHOLE USING

AGGREGATE

MEASURES

MACROECONOMIC GOALS

• ECONOMIC GROWTH

• PRICE STABILITY

• FULL EMPLOYMENT

MACROECONOMIC MEASURES

• GROSS DOMESTIC PRODUCT-GDP MEASURES ECONOMIC GROWTH

• CONSUMER PRICE INDEX-CPI MEASURES PRICE STABILITY—MARKET BASKET

• UNEMPLOYMENT RATE-UR MEASURES FULL EMPLOYMENT

GROSS DOMESTIC PRODUCT(GDP)

TOTAL MARKET VALUE OF ALL FINAL GOODS AND SERVICES PRODUCED WITHIN NATIONAL BOUNDARIES ANNUALLY

REAL GDP = GDP INFLATION ADJUSTED

PER CAPITA REAL GDP = REAL GDP DIVIDED BY THE NATIONAL POPULATION: INDICATES STANDARD OF LIVING

GROSS DOMESTIC PRODUCT

EXPENDITURE METHOD

GDP = C + I + G + X(n)

INCOME METHOD

GDP= W + I + R + P

INFLATION • GRADUAL INCREASE IN PRICES

--DEMAND PULL (CONSUMPTION) “TOO MANY DOLLARS CHASING TOO FEW GOODS”

--COST PUSH (PRODUCTION) INCREASED COSTS DUE TO HIGHER INPUT COSTS

• ANTICIPATED(TIME TO REACT)

• UNANTICIPATED(UNFORESEEN)

-HURTS SAVERS/FIXED INCOMES

-HELPS BORROWERS/GOVTS

UNEMPLOYMENT

• FRICTIONAL: BETWEEN JOBS

• STRUCTURAL: MISMATCHED

SKILL SET

• CYCLICAL: BASED ON ECONOMY

UNEMPLOYMENT RATE (UR) LABOR FORCE = EMPLOYED + UNEMPLOYED

EMPLOYED

• OVER 16 YEARS OF AGE

• FULL OR PART-TIME

UNEMPLOYED

• OVER 16 YEARS OF AGE

• LOOKING FOR WORK/LAID OFF

UR = UNEMPLOYED/LABOR FORCE

PHASES OF BUSINESS CYCLE

• EXPANSION (GROWTH) DANGER OF OVERHEATED ECONOMY-INFLATION

• PEAK (BOOM) FULL EMPLOYMENT/POSSIBLE HIGH INFLATION

• CONTRACTION (RECESSION) RECESSION: SIX MONTHS NEGATIVE REAL GDP

• TROUGH (DEPRESSION) LAST DEPRESSION:GREAT DEPRESSION 1930-44

FISCAL POLICY

ACTIONS/DECISIONS BY GOVERNMENT

• INCREASING OR LOWERING TAXES

• INCREASING OR DECREASING SPENDING

• DECISIONS ON WHO AND WHAT TO TAX

• TRANSFER /REDISTRIBUTING INCOME

$$ MONEY $$

•MEDIUM OF EXCHANGE

•STORE OF VALUE

•UNIT OF ACCOUNT

$$ MONEY $$

•PORTABLE •DURABLE •DIVISIBLE •RECOGNIZABLE •ACCEPTED AS PAYMENT •STABLE

THE FEDERAL RESERVE

•BOARD OF GOVERNORS

•12 REGIONAL BANKS

•FEDERAL OPEN MARKET COMMITTEE (FOMC)

MONETARY POLICY

ACTIONS/DECISIONS BY THE FEDERAL RESERVE TO REGULATE GROWTH AND INFLATION BY CONTROL OF MONEY SUPPLY

THREE MONETARY TOOLS

• INCREASE/DECREASE DISCOUNT RATE • INCREASE/DECREASE BANK RESERVE

REQUIREMENTS • BUY OR SELL BONDS/SECURITIES

THE MONEY SUPPLY

• M1= COIN, CURRENCY, CHECKS (LIQUID MONEY)

• M2 = M1 + “NEAR MONIES” (SAVING DEPOSITS(< 100k) + CDS + MONEY MARKET ACCOUNTS + OTHER ASSETS)

• M3 = M2 + > 100K SAVINGS ACCOUNTS

DEPOSIT MULTIPLIER

DEPOSIT MULTIPLIER = 1/RESERVE

EXAMPLE: INITIAL DEPOSIT = $200,000

RESERVE RATIO SET BY FED = 10%

REQUIRED RESERVE = $20,000

DEPOSIT MULTIPLIER = 10

AVAILABLE TO LOAN: $180,000