The Need for Economic Systems All people have essential needs for survival (food, water, shelter) After needs are met they have wants; things not essential for survival (phone, tv, etc)
Question 1 Name one essential need.
Question 2 How is a want different than a need?
Types of Economic Systems There are three basic systems Traditional economy: economic decisions are based on how economic activity has been done in the past (barter system, making own goods) Common in developing nations
2nd type-Command economy Government makes all economic decisions, and owns all capital, tools and production equipment (communist or Marxist countries)
3rd type-Market economy Economic decisions are made by individuals acting on their own interests (United States) Also known as (aka)FreeMarket or Capitalism: based on freedom to buy and sell goods as you want
3. What economic system has the most government involvement? A. Communism B. Capitalism C. Free Market D. Market
4. How is a market economy different from a command economy? A. More consumer choices B. More government interference C. Private property D. A & B E. A & C
Life in a Market Economy: Competition for Resources People are free to start a business and pursue profit (money a business has left after it has paid its expenses)
Scarcity (lack of a particular resource) creates competition Scarcity also affects prices
Resources are needed to provide service and make profit
Supply and Demand Changes in price are the result of the laws of supply and demand Law of supply: business will produce more products when they can sell them at higher prices and fewer products when prices are low Law of demand: buyers will demand a greater quantity of a good when its price is low and want less when the price is high
Question 5 Why do people establish a business in a market or capitalist economy? A. to make a profit B. to help people C. to provide a service to make the world a better place D. so the government can make more money
Question 6 How are prices determined? A. Businesses pick a number B. Demand by consumers C. Supply by producers D. Supply and Demand
Free Enterprise, Market or Capitalism Is when business owners may operate however they wish in a market economy, with little interference from government Opportunities for huge profit (Bill Gates)…as well has huge losses Competition is vital and pushes for improvement of products
Capitalism An economic system in which productive resources are owned by private citizens (US) Linked to free economy; people buy and sell as they please Encourages investment, innovation, and production of quality goods
Question 7 Under what system do people own private property, discourage government interference and try to make a profit. A. capitalism B. communism C. free market D. both A & C E. both B & C
Monopolies The free-enterprise system does not like businesses that limit competition which can happen if a business has a monopoly. A company has a monopoly if it is the only one selling a particular product or service. They can set prices regardless of supply and demand because they are the only ones that have the supply. Monopolies are illegal.
Question 8 What happens if demand for a product exceeds supply? A. Prices for that product will go up B. Prices for that product will go down C. Prices stay the same D. The government takes over the business in a capitalist nation.
The U.S. Economic System The US has a free Market economy or modified capitalism but there are some instances in which government imposes some regulations (like a command economy) Question 9 Give an example of the US regulating a business.
Some nations have a Mixed Economy aka Socialism An economy that mixes elements of different economic systems Business are free to operate as they wish, but must follow certain regulations that are monitored by the government; include price control and subsidies Intended to protect people and environment Ex. Minimum wage or how much of a chemical can be released into the air
Question 10 What do we call an economy that is a combination of both capitalism and other systems? A. Mixed Up B. Mixed or Socialism C. Communism D. Marxism
Question 11 Why do businesses exist in a capitalist, free enterprise, market economy? A. To provide services to people B. To provide goods to people C. To give people jobs D. To make a profit for themselves and stockholders
Question 12 There are only two companies that produce “Amazing-Gadget-That-Everyone-Wants”. If operating under the US government, would these two companies be allowed to join up and be the sole producer of this product? Yes or no and why?
Business Organizations Businesses may be owned in three different way in US Sole proprietorship Partnership Corporation Each one is slightly different from each other.
Sole Proprietorships A small business owned by one person Advantages: being your own boss, being able to decide business hours, and taking all profits Disadvantages: must have or borrow all money for rend and equipment, must be able to pay employees, personally liable for taxes
Partnership A business in which two or more people share the responsibilities, costs, profits, and losses Allows for more capital (money to invest) and better chances of success Advantages and disadvantages similar to sole proprietorship except that there are multiple people to provide capital and share responsibilities. Owners must cooperate or lose efficiency
Corporations A type of business that is recognized as a separate legal entity from the people who own it (includes large business) Permanent organization(doesn’t end when owner dies)
Question 13 How did most American businesses start out? A. As sole proprietorships B. As partnerships C. As corporations D. The government created them
How Corporations Function:Raising Money Selling stock (shares of ownership) to gain capital Shareholders are people who buy corporate stocks Dividends are corporate profits paid to stockholders Selling bonds (loans) People buy bonds are loaning money to the company, which will then have to pay interest before it pays the stockholders
Question 14 Why would someone buy a bond or stock of a company instead of putting money in a savings account? (hint: what is riskier, what could you more money?)
How Corporations Function: Elected Directors Stockholders elect directors of corporation Law requires that at least one stockholder meeting be held each year Board of directors chosen at this time Votes on changes in the business structure One share = one vote
How a Corporation Functions:Debt Responsibility Neither stockholders or executives are responsible for failure If a corporation goes out of business, its assets (property, building, valuables) are sold Money raised goes towards paying the debt
Question 15, 16 and 17 So let’s say Blockbuster goes out of business and declares bankruptcy (a distinct possibility)-what happens to the stores, employees and stockholders?
Nonprofit Organizations Organizations that provide goods and services without seeking to earn a profit for stockholders Charities, research associations, educational programs Don’t make profit, so don’t pay taxes Large nonprofits are corporations Red Cross, United Way, Girl Scouts
Question 18, 19 and 20. 18.Why don’t nonprofit organizations pay taxes? 19.If you wanted to own a business but not be the only person sharing responsibility, what type of business organization should you create? 20.Explain the difference between bond and a stock.
Factors of Production Countries and companies must decide (1) what they are going to produce, (2) how they are going to produce it and (3) who is going to buy it. To answer these three questions the four factors of production must be taken into consideration-natural resources, capital, labor and entrepreneurship.
Natural Resources Raw materials needed to produce goods found on or in the Earth or atmosphere Limited and only considered a factor when you have to pay for it
Capital The manufactured goods used to make other goods and services Tools, trucks, machines, computers
Labor All human effort, skills, and abilities used to produce goods and services Refers to the actually workers rather than the business owners Paid hourly or with fixed earnings (salary)
Entrepreneurship A person who organizes, manages and assumes the risks of a business Come up with new product, put in their own time and capital and hopes to make a substantial profit
Question 21 and 22 21. Name a famous entrepreneur 22. What do you think is the most important factor of production and why?
The Government’s Role in a Free Market US government does not dictate what type of products are made but they do control: Monopolies Protects personal rights Taxes
Question 23 Why do some businesses pay their workers by the hour as opposed to salaries?
Question 24. Do you think the idea of a minimum wage is a good idea or should employers be able to pay whatever wage they can to fill their needs? Explain
Question 25. The state of Pennsylvania has had a lot of new companies come to our state to extract natural gas in a process known as hydraulic fracturing or “fracking”. Of the four factors of production which one best explains why these companies are locating here. Bonus: What does “aka” stand for?