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- there IS a need for certain government interference because some needs and wants of society are difficult to address in the market place (Could the market place provide for national defense or a highway system??)
- some needs that markets could meet fall to the government so that ALL members of society can participate (i.e. education)
- governments create laws to protect property rights and enforce contracts (Why would someone develop a new product if they couldn’t patent the product?)
- societies must look at whether their goals could be better addressed by an open market or government action and look at the opportunity cost for each action (are you willing to pay taxes to fund an army?? Give all people an education??)
Adding the government…. the government purchases land, labor, and capital from households in the factor market the government purchases goods and services in the product market (buildings, office supplies, phones, computers, etc.) governments provide goods and services through the factor resources that they combine (i.e. roads) governments collect taxes from both households and businesses
Perfect Competition Many buyers and sellers in the market sellers offer identical products Buyers and sellers are well informed about products sellers are able to enter and exit the market freely
Commodity: a product that is the same no matter who produces it Example: milk, notebook paper, petroleum Perfectly competitive markets are efficient at equilibrium!!
Few markets are perfectly competitive because barriers keep the companies from entering or leaving markets easily start-up costs are high many require high degrees of technology
Monopoly A market dominated by a single seller - No variety of goods and the seller has complete control over prices - Forms when barriers prevent firms from entering a market with only one seller
Natural Monopoly: a market that runs most efficiently when one large firm supplies all of the output Example: public output
Government Monopoly: a monopoly created by the government Ex: allowing a natural monopoly to form Ex: patent: inventor of the new product has exclusive rights to sell it Ex: Franchise: contract issued by a local authority that gives a single firm the right to sell its goods within an exclusive market
(Remember one of the goals of the government in the US has been to encourage competition in the economy)
Antitrust laws: laws that encourage competition in the market (Example: Sherman Antitrust act: banned monopolies and other business combinations that prevented competition 1890)…this act was used to break up companies like AT&T
Oligopoly: a market structure in which a few large firms dominate a market (4 largest firms produce 70-80% of the output) barriers can also create oligopolies…like start-up costs and technology
Monopolistic Competition: a market structure in which many companies sell products that are similar but not identical
Other Vocabulary: Communism: a political system characterized by a centrally planned economy with all economic and political power resting in the hands of the central government (command) Socialism: a system in which the government owns some factors of production and distributes wealth among citizens (command, mixed) Capitalism: a system in which private citizens own most, if not all, of the means of production and decide how to use them with legislated limits (market)
Unskilled labor – requires no specialized skills, education or training Ex. dishwashers, many factory workers, janitors, farm workers
Semi-skilled labor – requires minimal specialized skill and education Ex. short order cooks, some construction workers, lifeguards
Skilled labor – requires specialized abilities and training to do tasks. Ex. mechanics, bank tellers, plumbers, firefighters, chefs, carpenters
Professional labor – demands advanced skills and education. Ex. managers, teachers, bankers, doctors, lawyers, actors, computer programmers
Wage discrimination – occurs when people with the same job, same skills and education, same job performance, and same seniority receive unequal pay. Women and minorities are among those who have experienced wage discrimination.
Labor Unions – an organization that tries to improve working conditions, wages, and benefits for its members
Strike – organized work stoppage intended to force an employer to address union demands
Right-to-work laws – this is a measure that bans mandatory union membership. NC is a right-to work state.
Collective bargaining – the union and company representatives meet to negotiate a new labor contract
To avoid strike, a third party may be called in to settle a dispute: Mediation – neutral mediator meets with each side to try to find some solution. Decision reached by the mediator is nonbinding. Arbitration – a neutral third party reviews the case and imposes a decision that is legally binding for both sides.
Sole proprietorship– a business owned and managed by a single individual. According to the IRS 75% of all businesses in the US are sole-proprietorships but these generate only about 6% of US sales.
Advantages Easy start-up (business licenses, site permit, name of business) Sole receiver of profit Full control of business Easy to discontinue Not subject to special business taxes
Disadvantages Unlimited personal liability Liability is a legally bound obligation to pay debts. Sole proprietors are bound to all of their business debts Limited access to resources Limited life – business lack permanence beyond the life of the sole proprietor
Partnerships– a business organization owned by two or more persons who agree on a specific division of responsibilities and profits.
Advantages Easy start-up Shared decision making Specialization – each partner can bring his or her talents Larger pool of assets – helpful when the business needs to borrow money Not subject to special business taxes
Disadvantages Unlimited liability Each general partner is bound to debt incurred and responsible for paying this debt General partners do not have absolute control over their business Potential for conflict
Corporations – a legal entity owned by individual stockholders. Stockholders own shares of stock – a certificated ownership in a corporations. Stockholders are part owners of the corporation.
Advantages Limited liability for owners Transferable ownership – owners can sell stock and get money in return Long Life – business does not end with the death of the owners. More potential for growth
Disadvantages Expensive and difficult to start up Double taxes Corporations pay taxes on income. Stockholders receive dividends (profits paid out to stockholders) Dividends are also taxed Potential loss of control by the founders – Board of Directors usually run corporations. More legal requirements and regulations
Multinational Corporation – a large corporation that produces and sells its goods and services throughout the world.
Advantages Provides jobs and products around the world Efforts to spread new technology around the world Increase standard of living in many poor countries Disadvantages Low wages Poor working conditions
As an economy becomes more specialized, people give up bartering (exchanging goods and services for other goods and services) for money. Bartering is most commonly used in traditional economies.
3 USES OF MONEY Medium of Exchange- money determines value during the exchange of goods and services Unit of Account- money provides a means for comparing the values of goods and services Store of Value- money keeps its value if stored rather than used
6 Characteristics of Money Durability- must withstand wear and tear that comes with being used over and over. (We have coins and paper money.) Portability- must be easy to transport and exchange Divisibility- must be easily divided into smaller denominations Uniformity- people must be able to count and measure money accurately Limited Supply- supply must be scarce Acceptability- people must be able to exchange money for goods and services
MONEY’S VALUE Representative Value- Our money has value because it can be exchanged for something else of value. It does not have value in and of itself (if it did have a value in and of itself, it would be called commodity money). In America, money used to be “backed” by gold or silver, but this went out in the 1930s. Fiat Money (also called Legal Tender)- our money is valuable because our government says it is valuable.
Federal Reserve System (Fed) – our nation’s first central bank Created in 1913 by the Federal Reserve Act System is created of 12 regional Federal Reserve Banks throughout the country. NC is part of the Richmond Federal Reserve District Federal Reserve Board – supervises the banks, members appointed by the president
Main Tasks of the Fed Supervise and Regulate Banks Implement Monetary Policy Ex. During times of recession and depression the Fed decreases interest rates. (this encourages lending and discourages savings) During times of inflation, the Fed increase interest rates. (this encourages savings and discourages lending)
Main Tasks of the Fed Control the amount of currency that is made and destroyed on a daily basis Set required reserve ratio for demand deposits Change the discount rate – interest that commercial banks pay the Federal Reserve
Bank- an institution for receiving, keeping, and lending money
Early Banking in the US Very informal banking A merchant would allow customers to deposit money and charge a small fee But this was not always safe… what if the merchant goes out of business or is not trustworthy?
Two Views of Banking Federalists (Alexander Hamilton) Anti-Federalists (Thomas Jefferson) Centralized banking was necessary Hamilton proposed a national bank issue a single currency monitor other banks throughout the country manage the federal government’s funds Decentralized banking system Banks should be created and operated by the states
Storing Money- banks provide a safe, convenient, insured place to store money Federal Deposit Insurance Corporation (FDIC)- created in 1933 to insure customer deposits if a bank fails (up to $250,000 per account)
Saving Money- banks provide 4 ways to save money saving accounts checking accounts money market accounts – money lent to the bank for a short period certificates of deposit (CDs) – money lent to the bank for a longer period of time.
money held in a checking account is a demand deposit, because checks are paid “on demand”; CDs are time deposits, because the money cannot be withdrawn immediately without penalty
Loaning Money- banks provide loans, and make money by charging the borrower interest
Banks use fractional reserve banking- meaning that banks only keep a fraction of funds on hand and lend the remainder. The Federal Reserve establishes the required reserve ratio, or the fraction of deposits that must be held in reserve.
Credit Cards- banks issue credit cards (a card entitling its holder to buy goods and services based on the holder’s promise to pay later), and make money by charging interest
Collateral- property used to secure a loan. Lenders require collateral to ensure they will not lose money on defaulted loans.
Buying Stock: Corporations sell stock to raise funds. Stock represents ownership in the corporation and is issued in portions called shares.
Stockholdersmake money through: dividends- a portion of a corporation’s profit, usually paid out quarterly capital gains- money made when an investor sells stock for more than he/she paid for it and lose money through: capital loss- money lost when an investor sells stock for less than he/she paid for it or when a company doesn’t make a profit, and can’t pay out dividends
Stock split- when each single share of stock splits into more than one share. This is done to encourage investors to buy the stock, and generally results in a rise in stock value afterwards.
Stock Trade: Stockbrokers- link buyers and sellers of stock; usually work for a brokerage firm that specializes in trading stock. Stock is bought and sold on stock exchanges. Most important in the US: New York Stock Exchange (NYSE)- the country’s largest and most powerful exchange; only for the largest and best-known companies (called blue chip companies) OTCMarket- stock sold electronically Nasdaq (National Association of Securities Dealers Automated Quotations)- the American market for over-the counter trades
Daytraders- buy and sell stock rapidly in hopes of trying to make a profit; very risky
Measuring the Stock Market: Bull Market- when the stock market steadily rises over a period of time (1920s and 1980s) Bear Market- when stock market steadily falls over a period of time The picture of stock performance can be determined by looking at the Dow Jones Industrial- which represents about 30 large companies, or the S & P 500 (Standard and Poors)- which tracks price changes in 500 companies.
Great Crash of 1929- After the market reached an all-time high in 9/1929, over-speculation, inflated stock values, and buying on the margin led to a huge and swift fall in stock values. People panicked and rushed to sell their stocks, further lowering prices, ultimately leading to the Great Crash of 1929, and ushering in the Great Depression. An even larger crash occurred in 1987, but the economy recovered much more quickly.