Government & the Economy

Wall Street, Manhattan is the location of the New York Stock Exchange and is often used as a symbol for the world of business.

Private Goods

• A good that is consumed by one person, so it cannot be consumed by anyone else

• Exclusion Principle – You are excluded from using private goods unless you pay for them

Govt. provides “Public Goods”• Goods that can be

consumed by more than one person at a time.

• Non-exclusion Principle – Can be used by all people at the same time. No charge for these goods.

• No one is excluded from using public goods, whether or not he or she pays for it

Public Parks

Street Lights

Public Libraries

Highways and Interstates

Public Goods, Cont’d.

• Very difficult to charge for public goods, so govt. provides them

• Private businesses would not provide adequate amount of public goods b/c it’s so difficult to get people to pay for them, so govt. provides them instead

• Govt. pay for these through taxes

Govt. Deals with “Externalities”

• Unintended side effect of an action that affects someone not involved in the action

• Ex: A company pays its employees a year-end bonus. Stores in the area near the company’s offices see sales go up because the employees spent their extra money there. The stores benefitted - a “positive externality.”

• Ex: Electric power plants create acid rain that pollutes the air we breath and kills trees at high elevations

Preventing Negative Externalities

• Also a role of the govt.

• Ex: Chemical company that dumps waste into a river to cut costs. People using the river water will sufferUnion Carbide, a U.S. company operating

in India, was found negligent in its safety procedures for its operations in Bhopal, India. 3,000 died in the initial “accident.” Tens of thousands have been disabled or died since then from exposure to the toxic gases that were released.

Govt. Provides Public Goods – To Create Positive Externalities

• Ex: Good highway systems = cheaper transportation = cheaper goods

• Cheaper transportation costs for businesses mean lower prices for everyone at the stores

Govt. Maintains Competition

• Monopoly: When only one company provides a good or service

• Can charge any price it wants

• Kills competition

• Sherman Anti-Trust Act

• Goal: Preserve competition

Merger

• Combination of two or more companies to form a single business

• If govt. thinks a merger will hurt competition, it may block the merger

Govt. regulates the market to (sometimes). . .

• Govt. wants to cut down on “negative externalities” whenever it can. . .

• Goal is to make sure businesses act fairly so competition can happen (effect: lower prices, everyone is happy, etc.)

• HOWEVER… . . . . .

Natural Monopolies

• Sometimes it makes sense to let one firm produce all of a good/service

• Industries where it’s cheaper for one firm to be the only producer of the industry output, rather than lots of businesses making small portions of the output.

• In exchange for being the only company in the market, the co. agrees to serious govt. regulation – Gas, Electric, Water

Begin notes Thurs., Dec. 8

• 4th Block

Other Areas of Govt. Involvement:

• Truth in Advertising

• Product Safety

Begin Notes – Friday, May 24

• All Classes (Spring 2013)

Measuring the Economy

Obj. 9.08: Analyze the influence of environmental factors, economic conditions, and policy decisions on the individual.

The Business Cycle

• The economy goes through slumps & growth periods

• Govt. uses “fiscal policy” (govt. spending or taxing) to deal w/ changes in our economy

Fiscal Policy – Govt. taxes & spending

• Often used to deal with unemployment

Real GDP• Shows nation’s true output level after adjustments for

price increases are taken into account• GDP might seem to have grown, even though output

remained the same, if prices for all the goods/services had gone up.

Begin Notes Friday, May 24

Business Fluctuations• Business Cycle - Ups

and downs in business activity

• Expansions – Real GDP goes up

• Peak – Highest point of an expansion

Begin notes Wed., May 2

• 4th Block only

Begin notes Wed., May 2

Business Fluctuations, Cont’d.• Recession – Real GDP goes down for

6 months straight

Unemployment

• Another way to measure the economy

• Unemployment rate – percentage of people who do not have jobs but are looking for work

• Rises during recessions

Price Stability

• Inflation – Sustained increase in overall price levels over time

• Reduces purchasing power of consumers

• Consumer Price Index (CPI) – keeps track of price levels

Who’s Hit Hardest by Inflation?

• People on Fixed Incomes

Stocks & the Stock Market

• Investors make money by buying stocks in two ways:

– Dividends: Share of a corporation’s profits that are paid to the stockholders

– Capital Gains: When a stock can be sold for more than it originally cost.

Changes in Stock Prices

• Driven by supply and demand

• Increased demand = increased price per share

• Changes in sales, profits, technological breakthroughs, scandals, etc., can all change the demand for a company’s stock

Stock Market Indexes

• They track stock prices over time

• Two most popular are:– Dow-Jones

Industrial Average

– Standard and Poor’s (S&P)

Stock Exchanges• Stocks in publicly

traded companies are bought and sold on stock exchanges

• Specific location where shares of stock are bought and sold

• You call a broker, and he or she buys or sells for you

Stock Market and the Economy• Bull Market (stock prices go

up)

– Investors optimistic about economy

– Investors expect the economy to grow, unemployment to be low, and high profits

• Bear Market (stock prices go down)

– Investors pessimistic

• Evaluate the investment decisions made by individuals, businesses, and the govt.

Income Inequality• Differences in how much $$ people

make depends on:

– Education

– Wealth

– Discrimination

Poverty

• Major problem in U.S.

• Govt. programs are in place to help the very poorest Americans

• Poverty Line – Adjusted each year

Poverty, Cont’d.

• Welfare Programs– WIC, Food Stamps

• Income Assistance– Social Security– Temp. Assistance to Needy Families

• Workfare Programs– Requires welfare recipients to exchange labor

for benefits

Tax Policies• U.S. has a

“Progressive Income Tax”

• – Tax rate (% of

your income you must pay taxes on) is lower for lower incomes, higher for higher incomes

Tax Policies, Cont’d.

• Earned Income Credit

– For lower income families– Gives tax credits and cash payments to

qualified workers