Goal 8 mixed economies

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  • 1. Mixed Economies
  • 2. 3 Economic Questions:
    What goods and services should be produced?
    How should these goods and services be produced?
    For whom should these goods and services be produced?
  • 3. - most contemporary economies are a blend of market with some government interference
  • 4. Remember…..What does laissez faire mean????
  • 5. - 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??)
  • 6. - some needs that markets could meet fall to the government so that ALL members of society can participate
    (i.e. education)
  • 7. - governments create laws to protect property rights and enforce contracts
    (Why would someone develop a new product if they couldn’t patent the product?)
  • 8. - 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??)
  • 9. 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
  • 10. Comparing Mixed Economies
  • 11. Free enterprise:
    economic system characterized by private or corporate ownership of capital goods; investments are determined by private decision rather than state control
  • 12. Transition:
    a period of change in which an economy moves away from central planning toward a market-based system
  • 13. Privatized:
    to make a transition, state firms must sell their businesses to individuals and then allow them to compete with one another in the marketplace
  • 14. THE US HAS A FREE ENTERPRISE SYSTEM!!
    government interferes to provide services, keep order, and promote the general welfare
    US law protects private property
  • 15. Market Structures
  • 16. 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
  • 17. Commodity: a product that is the same no matter who produces it
    Example: milk, notebook paper, petroleum
    Perfectly competitive markets are efficient at equilibrium!!
  • 18. 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
  • 19. 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
  • 20. Natural Monopoly:
    a market that runs most efficiently when one large firm supplies all of the output
    Example: public output
  • 21. 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
  • 22. (Remember one of the goals of the government in the US has been to encourage competition in the economy)
  • 23. 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
  • 24. 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
  • 25. Monopolistic Competition:
    a market structure in which many companies sell products that are similar but not identical
  • 26.
  • 27. 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)
  • 28. Labor
  • 29. Productivity – the value of output.
  • 30. Unskilled labor – requires no specialized skills, education or training
    Ex. dishwashers, many factory workers, janitors, farm workers
  • 31. Semi-skilled labor – requires minimal specialized skill and education
    Ex. short order cooks, some construction workers, lifeguards
  • 32. Skilled labor – requires specialized abilities and training to do tasks.
    Ex. mechanics, bank tellers, plumbers, firefighters, chefs, carpenters
  • 33. Professional labor – demands advanced skills and education.
    Ex. managers, teachers, bankers, doctors, lawyers, actors, computer programmers
  • 34. 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.
  • 35. Labor Unions – an organization that tries to improve working conditions, wages, and benefits for its members
  • 36. Strike – organized work stoppage intended to force an employer to address union demands
  • 37. Right-to-work laws – this is a measure that bans mandatory union membership. NC is a right-to work state.
  • 38. Collective bargaining – the union and company representatives meet to negotiate a new labor contract
  • 39. 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.
  • 40. Business Organizations
  • 41. 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.
  • 42. 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
  • 43. 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
  • 44. Partnerships– a business organization owned by two or more persons who agree on a specific division of responsibilities and profits.
  • 45. 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
  • 46. 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
  • 47. 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.
  • 48. 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
  • 49. 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
  • 50. Corporate Combinations
  • 51. Horizontal Merger– joining of two or more firms competing in the same market with the same good or service
  • 52. Vertical Merger – joining of two or more firms involved in different stages of producing the same good or service.
  • 53. Conglomerate – merging of more than three businesses that make unrelated products
  • 54. Multinational Corporations
  • 55. Multinational Corporation – a large corporation that produces and sells its goods and services throughout the world.
  • 56. 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
  • 57. MONEY
  • 58. 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.
  • 59. 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
  • 60. 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
  • 61. 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.
  • 62. THE FEDERAL RESERVE
  • 63. 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
  • 64. 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)
  • 65. 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
  • 66. BANKING
  • 67. Bank- an institution for receiving, keeping, and lending money
  • 68. 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?
  • 69. 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
  • 70. FUNCTIONS OF BANKS
  • 71. 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)
  • 72. 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.
  • 73. 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
  • 74. Loaning Money-
    banks provide loans, and make money by charging the borrower interest
  • 75. 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.
  • 76. 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
  • 77. Collateral- property used to secure a loan. Lenders require collateral to ensure they will not lose money on defaulted loans.
  • 78. TYPES OF FINANCIAL INSTITUTIONS
  • 79. Commercial Banks-
    offer checking services, accept deposits, and make loans
  • 80. Savings and Loans-
    originally created when members deposited funds into a general fund and then borrowed money to buy their own homes; now serves many of the same functions of a bank
  • 81. Credit Unions-
    cooperative lending associations for particular groups (i.e. state employees), usually small, specialize in home mortgages and car loans, some provide checking/saving
  • 82. Stock Market
  • 83.  Buying Stock:
    Corporations sell stock to raise funds. Stock represents ownership in the corporation and is issued in portions called shares.
  • 84. 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
  • 85. 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.
  • 86. 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
  • 87. Daytraders- buy and sell stock rapidly in hopes of trying to make a profit; very risky
  • 88. 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.
  • 89. 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.