Name: Period: Unit 5: Economics (Reading Packet)

Introduction Just as types of government differ from one country to the next, so do economic systems. An economic system is a way of organizing the goods and services that are made, sold, and purchased. Economic systems exist because people must meet certain needs to survive. These survival needs include food, clothing, and shelter. In addition, people have endless wants. Such wants may include things that make life more comfortable, more entertaining, or more satisfying in some way. Economics is the study of how people use their time, energy, and money to satisfy their wants and needs. Some experts call economics “the science of decision­making”!

Learning Targets Not at all Somewhat 100%

1 Explain different economic systems and how they answer the three basic economic questions.

2 Explain the problem of scarcity and how all decisions involve opportunity costs.

3 Identify natural resources, human resources, and capital resources used to make goods and services.

4 Explain the relationship between supply, demand, and price.

5 Explain how specialization leads to global trade, and how global trade leads to interdependence.

6 Explain how the government is involved in the economy, including which goods and services are usually produced by the public sector.

Important Vocabulary: scarcity opportunity cost goods services natural resources human resources import export interdependent globalization specialization capital resources

Write down the definitions of your assigned vocabulary words (they are all in your packet, somewhere). Then, write a sentence making a comparison or connection (an analogy) between each new word and one of the “random” words listed below. (How are the two ideas ALIKE in some way?) Kitten Kim Jong Un Refugee Ring of Fire Waterfall Pizza Math

Word 1.

Definition

Analogy

2.

3.

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Target 1: Explain different economic systems and how they answer the three basic economic questions. Three Basic Economic Questions: What to Produce, How, and for Whom? If a nation’s resources were unlimited, it might be possible to meet all of the people’s wants and needs. But this is never the case. Resources are always limited. As a result, every economic system must answer three basic economic questions: 1. What goods and services should be produced? For example, should a nation’s limited resources be used mainly to provide public goods, such as clean air and water, or to produce private goods, such as homes? 2. How should these goods and services be produced? Should corn and wheat be raised mainly on giant factory farms? Or is farming better done on smaller family farms? 3. For whom should the goods and services be produced? Who should get what? Only those who can afford whatever they want? Or should goods and services go to the people who need them the most? Economic systems differ from one country to another because each society answers these questions in its own way. Types of Economic Systems 1. Traditional Economies: Decision Making by Custom The first and oldest economic system is the traditional economy. In a traditional economy, custom and tradition decide what to produce, how to produce it, and for whom. In a society with a traditional economy, people rely on customs to answer the three fundamental economic questions. They do things the same way their ancestors did. People in traditional economies provide for themselves. Some are hunters and gatherers, as they have been for thousands of years. The majority are farmers. Most people in a traditional economy produce just enough goods to feed, clothe, and house their families. If they have any goods left over, they trade them for other things they need or want. However, the standard of living of most people in traditional economies is very low. Families do not earn enough to do more than meet their most basic needs. They have only limited access to goods such as cars or services like medical care. The highest goals of people in a traditional economy are economic stability and security. Most people just want to live as they always have, following traditional ways of life, in harmony with nature. For most traditional societies, though, this goal is becoming more difficult. As modern economies grow more powerful, traditional societies are struggling to find a path to economic survival. 2. Ancient Command Economies: Decision Making by Powerful Rulers The next economic system to develop is called a command economy. In a command economy, decisions about what, how, and for whom to produce are made by a powerful ruler. The government answers the three basic economic questions. Government planners decide what goods and services should be produced and how. They also decide how goods and services should be distributed to consumers and at what cost. The earliest command economies began in Mesopotamia, Egypt, China, and India about 5,000 years ago. As these civilizations became highly advanced, governments arose that were led by powerful rulers. These rulers made the economic choices for their societies.

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Rulers at the top of these early civilizations—kings, pharaohs, emperors—commanded the people to use economic resources to build projects or fight for the military. Many thousands of people might be ordered to build a pyramid, defensive wall, irrigation canal, temple, or road. The goal of these ancient command economies was to build up wealth and goods for the ruler but also have economic stability. The many monuments these societies left behind show both the productive power of these economies and the greed of some of their rulers. 3. Modern Command Economies: Decision Making by the State Modern command economies are also known both as socialism and communism. In these economies, the government owns the factors of production, like land and buildings. Economic planning is done by government committees. They decide what goods and services should be produced. They decide which farms and factories should get which resources to produce what was planned. Committees also control prices and wages and decide how goods and services should be distributed. In theory, this kind of planning is supposed to make the economy fair and secure—two important goals of a modern command economy. Government planners can make sure everyone has a job by coming up with enough projects to employ all members of the workforce. They can also control prices. A command economy can also spread out income more equally than a market economy, so that everyone shares in the nation’s wealth. In the real world, however, the performance of command economies has been disappointing. Because the government controls wages and prices, workers have little motivation to work hard or to produce high­quality goods. Workers who perform badly cannot be fired, and workers who perform well do not get paid more. The goods produced are usually not very high quality. There are often shortages of items people need. Some modern command economies did succeed in increasing economic fairness and security for their people. But what good is a guaranteed income if there is nothing to buy? In recent years, almost all modern command economies have either failed or struggled to become more like market economies. 4. Market Economies: Decision Making by Individuals The newest economic system to emerge in human history is the market economy. A market economy does not depend on tradition or command to make decisions. Instead, in a country with a market economy, individual producers and consumers answer the three basic economic questions. Producers are free to decide what goods and services to produce and how much to charge for them. Consumers are free to decide what to buy. No one—no single person, business, or government agency—tells producers or consumers what to do. Economic decisions are made voluntarily, one at a time, by millions of individuals. Another name for a market economy is capitalism. The goals of a market economy are economic freedom and efficiency. Individuals and businesses can decide what, how, and for whom to produce. Because you are free to buy what you want, producers must compete for your dollars. This competition means that you, the consumer, have many choices. It also forces producers to use resources efficiently. If they do not, a competitor will find a way to offer the same good or service at a price that consumers will be more willing to pay. One advantage of a market system is that it is good at meeting people’s needs. When demand for a product rises, its price in the market goes up. This signals businesses to produce more. Meanwhile, competition among producers of similar goods usually keeps prices from rising too high. Competition also leads to economic growth. Businesses invest in factories and equipment, as well as in research and technology, to stay competitive. This helps the economy grow. One disadvantage of a market economy, some would argue, is its instability. There are times of growth and prosperity in market economies, but then there are times of slowdown in business and employment. During these slowdowns, people who lose their jobs suffer from a loss of income.

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Another disadvantage of a market economy is that wealth is not shared equally. The market divides wealth to people according to how society values what they do. For example, a quarterback whose team wins the Superbowl earns more than a public school teacher. This may seem unfair, but there are more teachers than Superbowl­winning quarterbacks. 5. Mixed Economies: Shared Decision Making Pure forms of traditional, market, and command economic systems do not exist today. In the real world, most countries have mixed economies that fall somewhere in between these options. In a mixed economy, both the government and individuals have a say in economic decisions. But who decides what varies greatly. Some countries, including the United States, have little government involvement in the economy. Others, such as China, still have a lot of government control over economic activities.

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Target 2: Explain the problem of scarcity and how all decisions involve opportunity costs. Vocabulary

Scarcity: the condition that results because people have limited resources but unlimited wants Opportunity cost: the value of the next best alternative that is given up when making a choice

Life is full of choices and decisions. The study of economics helps us see why we have to choose among alternatives.

Why Is What We Want Scarce? One of the basic ideas in economics is the problem of scarcity. Most people have unlimited wants (things that they would like to have or do). But we have limited resources available to meet those wants. We have only so much time, energy, money, and other resources to satisfy our many wants. Take time, for example. Whether rich or poor, a person has only 24 hours each day to use in work or play. Money is also limited. Even the very rich can’t afford an endless supply of everything. They, like the rest of us, experience scarcity, a situation in which the supply of something is not enough to satisfy their wants. The problem of scarcity is that our limited resources cannot meet our unlimited wants. For example, everyone in Ohio may want a new home, but there are simply not enough materials, land, or workers available to build new homes for everyone. Opportunity Cost: The Best Thing We Give Up to Get What We Want Each decision made by a person or society involves a cost. When you choose one course of action, you lose the benefits of the alternatives you did not choose. If you were to rank those alternatives, one would likely stand out as more attractive than the rest. This “next best choice,” the one that you had to give up, is your opportunity cost. The opportunity cost of any action is the value of the next best alternative that you could have chosen instead. Whether you have 2 alternatives or 200, your opportunity cost is simply the value of the next best one. The opportunity cost of the automobile company that decided to produce only trucks was the money it would have made by continuing to produce cars. Understanding the opportunity costs of the choices you face every day can help you make better decisions. Put yourself in this situation. There is a new video game you want to buy. You can download the game from an online store for $49.95. You can order the game CD from a computer catalog for $42.95 plus $3.00 shipping, but it will take at least a week to get to your home. Or you can buy it today for only $35.95 at a store in a nearby town, but it will take an hour of your time and about $4.00 of gas to drive there and back. One way to sort through these alternatives is to lay them out on a decision matrix like the one in Figure 2.4. The matrix lists all the alternatives involved in the decision as well as the factors that might be used in evaluating those alternatives. In this instance, the factors are price, delivery cost, transaction time (how long it will take you to complete the purchase), and delivery time. The decision matrix doesn’t tell you which alternative to choose, but it does help you see what you will gain and lose by choosing one over another.

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After looking at the alternatives, you decide you really want to buy the game today. If you choose to download it from the online store, your opportunity cost is the $10 you would have saved by driving to the big box store. If you choose to buy it from the store, your opportunity cost is the hour you would have saved by downloading the game. Knowing the opportunity cost of each alternative still does not tell you what to do. That depends on the value of $10 or an hour’s time to you. If you have a better use for that hour, such as working at a job that pays $15 an hour, you probably would be better off downloading the game. If not, you might decide that trading an hour of your time for a savings of $10 is the better choice. Apply What You Have Learned Think about a decision you made recently.

What were your options? (or what were you deciding between?)

______________________________________________________________________________________

______________________________________________________________________________________

______

What did you choose?

______________________________________________________________________

What was your opportunity cost?

_____________________________________________________________

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Target 3: Identify natural resources, human resources, and capital resources used to make goods and services. Vocabulary

Goods: a physical object made for sale or use (like food or clothing) Services: work done by someone else for which a consumer is willing to pay (like a plumber,

teacher, doctor) Producer: person who makes goods or services to sell Consumer: person who buys/uses these goods or services

The Four Factors of Production Countries differ in how they use what economists call the factors of production. These factors are the resources needed to produce most goods and services. They include the following:

Factors of Production Definition Examples

Natural Resources Resources provided by nature, that people use to create goods and services

Fertile soil, water, plants (like trees and cotton), minerals (like iron and copper), coal, oil

Human Resources The physical and mental work people do to create goods and services

Factory worker, teacher, police officer, CEO, farmer

Capital Resources The money used to start and run a business or the materials used to create goods and services to sell

Money, machinery, tools, buildings, equipment

Entrepreneurship Coming up with an idea and organizing the other factors of production to create and sell goods and services

Business owner, manager

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Target 4: Explain the relationship between supply, demand, and price. Vocabulary

Demand: how much of a good or service consumers are both willing and able to buy at various prices

Supply: how much of a good or service producers are willing and able to sell at various prices Buying and selling are big parts of our economy. An economy is made up of all the businesses in a place. Some businesses sell goods. Goods are items you buy, such as food or computers. Other businesses sell services. Services are tasks you pay people to do, such as cutting your hair. How do sellers decide what prices to charge? Why do some goods and services cost more than others? In this section, you’ll explore these questions. We Buy and Sell Things Suppose that you’re a farmer. It’s early summer. You have ripe green beans to sell. As a farmer, you are a seller at the market. What price will you charge for your beans? You want to get as much money as you can. But you don’t want to charge too much. Customers might not want to pay your price. They might go to another farmer who is selling green beans at a lower price. Now suppose that you’re a customer at the farmers market. You are now a buyer. You want to buy as many green beans as you can. You also want the best green beans. And you want to pay as little money as you can. As a customer, you have choices. You can shop around to see who has the lowest price for green beans. But if lots of people want green beans, the farmers may want to see who will pay the most for them. As you can see, markets bring together people who have different goals. Sellers want prices to be as high as possible. Buyers want prices to be as low as possible. Markets also force people to compete with one another. Sellers compete for the same customers. And buyers sometimes compete to buy the same things. What Happens to Prices When Supply Is High and Demand Is Low? How do prices get set in a market? A big part of the answer is supply and demand. Supply is the total amount of a good or service that is available to buy. At the farmers market, the supply of oranges is made up of all the oranges that are for sale. Demand is the total amount of a good or service the customers in the market will buy at a certain price.

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Together, supply and demand affect prices. Here is an example. Suppose it’s December. Farmers have brought lots of ripe oranges to the market. The supply of oranges is high.

Unfortunately for the farmers, their customers already have lots of oranges. They don’t want more oranges. Demand for oranges is low.

Now the farmers have a problem. They have more oranges than customers want to buy. What do the farmers do?

One thing the farmers can do is lower their prices. If they make their prices low enough, customers might decide to buy some oranges after all. In fact, the farmers can compete with one another by

making their prices lower and lower to attract buyers. So, when supply is high and demand is low, prices go down. What Happens to Prices When Supply Is Low and Demand Is High? Can you guess what happens to prices when supply is low and demand is high? Suppose it is late July. The season for cherries is almost over. Few farmers have ripe cherries to sell. The supply of cherries is low. But many customers at the market want to buy cherries. The demand for cherries is high. Now the customers have a problem. The demand for cherries is greater than the supply. What do the customers do? Customers can compete with one another to get the cherries. They do this by being willing to pay more for the cherries than other customers. The farmers know this, so they raise their prices. In other words, sellers know that buyers will pay more for something they want when there is less of it for sale. So, when demand is high and supply is low, prices go up. Changes in Supply or Demand You’ve seen that supply and demand affect prices. So, what happens when supply or demand changes? Suppose farmers in California have grown a huge crop of watermelons. There are more watermelons than anyone has seen in years. The supply of watermelons is way up. The farmers want to sell all their melons. What do they do? They lower their prices. The farmers know that customers will buy more watermelons if the price is lower. Now suppose that there is freezing weather in Florida. The cold spoils half of the year’s crop of oranges. The supply of oranges is way down. The farmers decide to raise their prices. Why? There aren’t enough oranges for everyone who wants them. The farmers know that customers will pay more to get the oranges they want. What happens to prices when demand changes? Suppose that millions of sports fans see a famous athlete drinking apple juice on television. The fans decide that apple juice can make them strong. The demand for apple juice goes up. So does the price. Why? Sellers know they can charge more for something when lots of people want to buy it.

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Target 5: Explain how specialization leads to global trade, and how global trade leads to interdependence. Vocabulary

Imports: goods and services produced in other countries and sold at home Exports: goods and services produced at home and sold in other countries Specialization: a focus on developing only certain skills or producing only certain goods/services Globalization: the process by which people and economies around the world are becoming

increasingly interconnected Interdependent: when one person or group depends on or relies on another

Countries Trade What They Have for What They Need Have you ever traded things with your friends? Maybe you traded an apple for a banana at lunch. Or maybe you traded a toy for a game. Trades work when people have things that other people want. This is true for people and for whole countries. For example, Ecuador grows lots of bananas. The United States grows some bananas, but it wants more. So, the United States buys bananas from Ecuador. What does Ecuador need? Farmers in Ecuador need tractors. The United States has many factories that make tractors. So, Ecuador buys tractors from the United States. Ecuador sells bananas to the United States. The United States sells tractors to Ecuador. You could say that Ecuador trades its bananas for tractors. In the same way, the United States trades its tractors for bananas. These kinds of trades go on all over the world. Together, they are called global trade. Today, global trade is bigger than ever before. Different parts of the world have different climates, soils, landforms, bodies of water, and mineral resources. They also have people with different training, education, and experience as well. These resources are not spread out evenly around the world. This encourages specialization. Specialization is the making of only some types of goods and services. A region specializes in what it can do best, or what it can make at the lowest opportunity cost. Ohio does not specialize in growing oranges, because its climate is not suitable for that crop. It would be expensive and difficult to try to grow a large amount of oranges. Specialization Encourages Trade When people specialize, they do not produce everything for themselves. As a result, they must trade with others to get those things they do not produce. They trade not only to satisfy their own wants but also so they can focus on what they do best. If we wanted, we could do many more things for ourselves. We could raise our own livestock, for example, and not have to pay others for meat, milk, and cheese. But that would require an enormous amount of time and energy, and the opportunity cost—all the other things we could be doing—would be very high. After all, what do most of us know about meat and dairy farming? In the end, we are better off when we specialize in activities suited to our skills and trade for everything else. Trade occurs when two people (or groups) give up something in order to get something else they want. People trade because both sides will benefit from the exchange. Countries and regions export products they make and import products from others.

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Trade Creates Economic Interdependence Trade leads to economic interdependence. Interdependent means that we rely on each other. When we specialize and trade, we depend on other people or countries to produce many of the goods and services we want.

You can see an example of economic interdependence in a typical American breakfast. We might begin with a glass of juice made from Florida oranges. We might follow that with toast made from Kansas wheat, eggs from Iowa, or hash browns made from Idaho potatoes. We might also have coffee made from Colombian coffee beans. In other words, our breakfast depends on food produced by people in many different places. Benefits and Costs of Global Trade Global trade brings both benefits and costs. What are some of the benefits? Global trade allows people to buy things from all over the world. It allows people to enjoy quality goods. It also allows people to pay less for some goods. Without global trade, you might not have bananas for breakfast. Your parents might not have such a nice car. And your athletic shoes might cost a lot more. What are some of the costs? Global trade allows companies to move to countries where they can pay their workers less money. This takes jobs away from rich countries. It can also keep pay low for workers in poorer countries. Suppose a shoe company in the United States moves its factories to Thailand. What happens? The company saves money. But the American workers lose their jobs. And the workers in Thailand get low pay. Also, global trade means that people don’t always buy things made locally. So, local companies may lose business. Some may even have to shut down.

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Target 6: Explain how the government is involved in the economy, including which goods and services are usually produced by the public sector. Vocabulary

Public goods: goods and services that are used by everyone and provided by government Private goods: goods and services that are sold in markets for individual buyers

The government plays a limited but important role in the economy. It provides public goods and services. It also protects property rights, makes rules for the marketplace, and helps the economic well­being of the American people. Public Goods and Services Some goods and services a community needs are too expensive to be provided by individuals. For example, every community needs roads, schools, police, and defense. The goods and services are usually provided by the government. Goods and services that the government provides are called public goods and services. A key characteristic of a public good is that many individuals can use it. A person cannot be prevented from using a public good even though he or she has not individually paid for it. For example, a public park and national defense are public goods. However, your cell phone, DVD player, or notebook are private goods. They are owned by a private individual. You paid for them. They are not public goods—they are private property.

Public Goods Private Goods

Who Benefits? Everyone in a community, whether they pay or not

One buyer, who must pay for the item in order to have it

Who Pays? Everyone (through taxes collected by the government)

Individual buyer

Examples?

Other Economic Roles of the Government

Protect Property Rights The government is empowered by the Constitution to protect private property rights. It does this through the court system, police forces, and the Patent and Trademark Office. Making Rules for the Marketplace The government makes regulations (or rules) to maintain competition; keep consumers, savers, and investors safe; and protect workers. It carries out these tasks through regulatory agencies, which create and enforce standards and regulations for industries. Help Economic Well­Being During the Great Depression, the role of the government in the economy greatly expanded. Since then the government has taken on even more responsibility for the economic well­being of its citizens. When necessary to preserve economic stability, the government stimulates the economy by spending more money. The government also redistributes income to fight poverty.

Sources:

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Econ Alive! The Power to Choose. Teacher’s Curriculum Institute, 2010. Social Studies Alive! Our Community and Beyond. Teacher’s Curriculum Institute, 2010.

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