Economics Unit 1
Economics Economics is the study of how
individuals, groups and nations
make choices about how to use
resources to fulfill wants and needs
Goods or services needed to survive Something that is desired but not
needed to survive
Ex. Food, water, shelter Ex. Car, phone, electronics
Scarcity – All goods and services are scarce (possibly run out)
Demands are unlimited Supply of goods and services is
Shortages are temporary Scarcity always exists
Trade offs Opportunity costs
Every economic decision The most desirable thing you
involves exchanging one good give up.
for another. It is the next best thing or use of
It is the alternative if you decide time when you chose to do one
to do one thing rather than the thing over another.
Ex. Study – trade off is time Ex. If you study for two hours you
Buy DVD –trade off is money cannot go to the mall. The mall is your
Ex. Cereal – I buy Capt. Crunch. My
second choice is Fruity Pebbles. Fruity
Pebbles is my 2nd choice/my
4 Factors of Production
Resources necessary to produce goods and services
Land Labor Capital Entrepreneurs
Any natural Any effort for Human made People that start
resource which a person is resources used to businesses
paid to do for the create other goods providing goods
production of or services or services
goods or services
Ex. Trees, water, Ex. Teaching, Ex. Tools, Ex. Business
electricity, oil, fuel landscaping supplies, buildings, owner
4 Costs Businesses Face
Fixed Costs Variable Costs Total Costs Marginal Costs
A costs that does Costs that do Fixed Costs + The amount to
not change if change based on Variable Costs produce one more
production goes production good
Ex. rent Ex. Supplies / Ex. 100 computers
materials costs $3500 to
101 computers costs
$3850 to produce.
3 Key Economic Questions
1. What to produce?
2. How to produce it
3. Who will consume the good or service?
4 Types of Economic Systems
System Facts Examples
Traditional Economy Based on habits, Eskimos
rituals & customs Tribal societies
Market Economy Individual makes The USA is a
economic version of the
decisions Market System
No gov’t control
over the economy
Command Economy Complete gov’t Old Soviet Union
(Centrally Planned) control over the
The gov’t answers
the 3 key economic
Mixed Economy A mixture of the Every system in
Market & the world is a
Command mixed system
Systems Every nation has a
Socialism Social and political philosophy
advocating equal distribution of wealth
throughout a society.
Communism Economic system in which the central
government directs all economic
Guns or Butter The trade-off that nations face
when choosing whether to
produce more or less military or
Deciding how much to spend on
the military and how much to
spend on everything else
Adam Smith Created the Market System
Wrote “The Wealth of Nations”
People should own/control the
resources (Factors of
Production) & make economic
“Laissez Faire” Economics “To let alone”
Government has no control over
Unit 2: Fundamentals of the U.S. Economy
American Free Based on Adam Smith’s Market System
Enterprise The US Economy is guided by “The Invisible
Hand” (consumer demand) – People’s wants &
needs guide the economy
Basic Principles of the Free Market
Profit Motive Goal to make money & improve your well-being.
Largely responsible for the growth of a free-
enterprise system based on capitalism.
Competition (open opportunity) Everyone can compete in the market place.
Private Property People own most of the resources & can do what they
want with them.
Voluntary Exchange People can decide what to buy & when to buy it.
The Government Regulates the Economy for:
3. Well being
Ex. The FDA – Food & Drug Administration
Ways the Government helps the US Economy
Incentives The govt. offers incentives to different groups
Ex. Farm subsidies (money to farmers), college
scholarships, financial aid
Patents The govt. gives patents to inventors to encourage the
creation of new products
Copyrights The govt. offers copyrights on written materials
Specialization The govt. promotes specialization in industry –
concentrating on one or a few tasks to encourage efficiency
Full Employment The govt. promotes the goal of full employment – everyone
who wants a job has a job.
Circular Flow of a Market Economy
Product Market People give businesses money.
The business gives a good or service.
Ex. I give Target my money - in return I get a CD.
Factor Market People give resources (land, labor, capital) to a
The business gives money for the resource.
Ex. I give Target my labor – in return I get $ (a paycheck).
How Businesses Grow (promote growth)
All businesses invest in new resources to make money
Capital Goods Ex. Equipment, machines, supplies
Human Capital Ex. Labor, training
The Goal is to have a favorable balance of Output (what you get out of
your business) vs. Input (what you put into you business).
You want more out of your business than you put into it – so you can
In What Ways Does the Government Track the Economy?
Prices The govt. uses the Consumer Price Index (CPI) to track the
prices of consumer goods.
Poverty The govt. tracks the level of poverty in America
The # of families that fall below the Poverty Threshold.
Unemployment The govt. tracks the % of people without a job who are
looking for one.
Keynesian Theory An economist came up with this idea in the 1930’s
If the economy is struggling (a problem in the
economy) in a specific area then the govt. can
step in and help fix the problem.
Unit 3: Supply & Demand
The Law of Demand
When price goes up – demand goes down Price - Demand
When price goes down – demand goes up Price - Demand
Things that cause changes in demand
Number of Consumers - Demand
consumers Consumers - Demand
Changes in Product popular - Demand
consumer tastes Popularity fades - Demand
Consumer Way people think about the future. Ex. If you think it will
expectations snow – demand for milk & bread goes , or If you know
new technology for TV’s is coming out - in demand for
TV’s (waiting for new ones to come out)
Income effect When prices rise, people spend less money, but when
prices fall, people spend more because they feel like they
have more money.
Ex. The price of oranges goes up, you buy less oranges.
Substitution When the price of a good rises, consumers buy less of that
effect item & substitute a cheaper one in its place.
Ex. The Gap clothes are too expensive, so you buy Old
Compliments The demand for a good can increase because it
compliments a product that is in high demand.
Ex. The price of cereal goes down, the price of milk goes
Diminishing Marginal Utility
Utility Every good / product has utility – the pleasure, usefulness or
satisfaction we get from using that product
Almost every good / product experiences Diminishing Marginal Utility – Our
satisfaction usually goes down as more units of a good are consumed.
Ex. Roller coaster ride – first few times you’d rate it a 10 but after the 4th time
you’d rate it a 7.
There are certain things that do not experience diminishing marginal utility.
Ex. Health care, medication (insulin), oxygen
Elasticity of Demand
Elastic This means a change in price causes a greater change in
Ex. Cars (when the price of cars change, there is a large
change in the demand for cars)
Reasons why a It’s a want (If it becomes too expensive, I don’t have to have it);
product would many choices (If it becomes too expensive, I can choose a
have elastic different product; seasonal (winter coats, pumpkins); climate /
demand location; not scarce
Inelastic This means a change in price has little effect on the demand of
demand a good
Ex. Gas (when the price of gas changes, there is little change
Reasons why a It’s a need; not many choices; scarce
product would Other examples: water, medication
Law of Supply The principle that suppliers will normally offer more for
sale at higher prices and less for sale at lower prices
The higher the price the more you sell
The lower the price the less will be sold
Things that cause changes in supply
Cost of resources Resource price supply of products
Resource price supply of products
Productivity The more efficient workers are, the greater the supply
Technology New technology increases productivity & cut costs
Policies Minimum wage
Taxes & subsidies Taxes supply
Subsidies - increase supply always
Elasticity of Supply
Elastic supply (Change easily) Products that can be made quickly without
huge amounts of capital & resources. Ex. candy
Inelastic Products that cannot be made quickly & take large amounts of
supply capital & resources. Ex. oil
Surplus The supply is greater than the demand (too much)
Tells (signals) producers that the price is too high
Shortage The demand is greater than the supply (not enough)
Tells (signals) producers that the price is too low
Equilibrium price Achieving balance between supply & demand
Tells how much to produce & where to set my price
Government control over price
Price ceiling Govt. sets maximum prices
Ex. Rent for low income housing
Price floor Govt. set minimum prices
Ex. Minimum wage
4 Advantages of Prices
Neutral price They don’t favor producers or consumers
Flexible price Can change easily
Freedom of choice Variety of goods; buy what you chose to buy
Familiar price Everyone knows prices
Prices answer the 3 economic questions in America
What to produce
How to produce it
Who will consume it
Unit 4: Business Organizations and Labor
Levels of Competition
Monopoly One firm controls the entire market (no competition)
Complete barriers to entry
Complete control over prices
No variety of goods
Govt. Monopoly Govt. created. It owns it, runs it, & has complete control over it.
Ex. Post office
Natural Monopoly Runs the best when only one company provides the good or
service. Privately owned company that the govt. allows to exist.
Ex. Cable TV, water, electricity
Oligopoly Market dominated by a few large firms.
Ex. Pepsi & Coke, top automakers (Ford, Honda, Saturn)
A few firms
Some control over price
Some variety of goods (produces 70-80% of output
High barrier to entry
Perfect Competition Many firms making identical products at the same price (no
variety). Selling the same thing at the same price.
Ex. Produce (tomatoes)
Many buyers & sellers
No variety (identical products)
Buyers & sellers are well informed about products
Sellers can enter & exit freely
Competitive Market Monopolistic. Market structure in which many companies sell
products. Ex. Pizza restaurants
Low barrier to entry
Little control over price
Sole Business owned by one person
Proprietorship Easiest business to start up
Most common type of business in the USA (73%)
Sole Owner makes all the Owners have all the liability
Proprietorship profits High risk of failure
Owner makes all the Employees are hard to find/keep
decisions Limited capital
Easy to start
Partnerships Businesses with 2 or more owners
Least common type of business in the USA (7%)
Partnerships Share responsibilities Possible conflicts
Share cost Liability
An Article of Partnership must be drawn up to create a legal document
Corporations It’s a business recognized by law; it has many of the rights &
responsibilities of the individual. Ex. A corporation can own
To become a corporation, the govt. must grant a charter to
The charter also specifies the amount of stock that will be issued.
Corporations make up about 20% of the US businesses, but they
produce about 90% of all goods that Americans purchase.
Corporations Easy to raise money Complex & expensive
Easy to transfer More govt. regulations
ownership Double taxation
Room to grow Loss of control
Conglomerates Some corporations become conglomerates. It is a corporation that
controls several companies in different industries.
Ex. Time Warner (owns Cable TV division, Television stations,
professional hockey & baseball teams, a publishing company)
Non Profits Operate to provide a service and do not intend to make money
Ex. Charities, churches, hospitals
Cooperatives Association of people or businesses that carry on business
activities that benefit its members
Ex. Triad Farmers Market
Franchises Ex. McDonalds
Types of Mergers
Vertical Combination of 2 or more firms in different stages of production.
Ex. Car company merges with a steel company (buying your
Horizontal Combination of 2 or more firms in the same stage of production
Ex. A steel company merges with another steels company (its
Ex. Nextel & Sprint
Who Qualifies for the Labor Force? 16 y/o & worked at least 1 hr. within
Worked 15 or more hrs. in a family
Workers on sick leave or vacation
Who is not included? Full time students
Stay @ home parents
Changing Labor Trends: More college graduates
People have multiple careers
More temporary or part time jobs
More high tech. Jobs
More women in the work force
More minorities in the work force
Less manufacturing jobs
More service jobs (banking, teaching)
Labor Unions Labor unions are groups of workers that band together to try to obtain
higher pay and better working conditions.
There are two types:
Craft Unions Unions where all members of a specific trade belong to the same union.
Ex. All carpenters belong to the same union
Industrial Unions Are unions where all workers in the same industry belong to the same
union, regardless of skill. (not real common any more).
Ex. All steel workers at different skill levels belong to the same union
Only 14% of American workers belong to unions
Closed Shop A company that required a worker to belong to a union in order to be hired.
The Taft-Harley Act 1947 – allows individual states to keep unions from forcing workers to
join a union when they are hired (Right to Work Laws).
Closed Shops became illegal.
22 States have Right to Work Laws, including N.C.
Unions only work if all or most workers belong to a union
Union Shop Companies can hire nonunion people, but those workers must join
the union once they begin working
Modified Union Shop Workers do not have to join the union after they are hired but they
can choose to do so.
Collective Bargaining Unions & owners negotiate wages, benefits & working
They sit down & discuss the next labor contract
They discuss holidays, vacations, work rules,
Mediation A 3 party tries to help end a labor dispute (do not
Arbitration A 3rd party tries to help end a labor dispute & decide
how to settle the disagreement (they make a decision)
If an agreement can not be reached, 1 or 2 results will occur:
1. Strike - Where workers walk out on their jobs
2. Lock-out – Where the company owners keep workers from going
Every company has to decide how many workers they need to maximize
Diminishing Marginal Return This is a level where production decreases as
more worker are added
***remember the tennis ball exercise in class
U.S. Government Roles in the Economy
3 ways the govt.’s power to tax is limited
1. Federal taxes must be the same in every state (US govt.)
2. Congress tax powers are limited in who & what they tax.
Ex. Can not tax churches, non-profits or exports
3. Taxes must be for the common good of the country / benefit the entire
Progressive The more you earn, the higher percentage in taxes you pay
Ex. Income tax
Regressive The more you earn, the lower percent in taxes you pay
Ex. Sales tax
Proportional Everyone is taxed the same percentage – called flat tax
Ex. Social Security
Federal Income Tax #1 revenue source for the Federal govt. – It is a
Federal Taxes - Types
Pay as you earn You pay so much income tax each time you earn money
(This is mandatory)
Tax Withholding When your employer withholds tax money from your
paycheck (This is optional)
Tax return Filed each year to determine how much is owed in income
Social Security Taxes Funds old age, survivors and disability insurance
Medicare Taxes A national health care insurance program that helps
pay for health care for people over 65 or with certain
Unemployment Taxes Paid by employers – pays for an insurance policy for
workers – can collect benefits for a fixed # of weeks
Tax incentives The use of taxation to encourage or discourage certain
Ex. Of discourage – tobacco products & alcoholic beverages
Ex. Of encourage – purchase fuel efficient vehicles
What the govt. spends your taxes on
Mandatory Spending Programs the govt. must spend money on by law
Ex. Social Security, Medicare, Medicaid, Interest on the deficit
Discretionary Spending on things the govt. chooses to
Ex. Defense spending (14 -16%), education, law enforcement, student loans,
technology, transportation (roads), housing, scientific research, national parks &
Federal Budget Budget put together each year to determine how much
money will be spent on federal programs
State and local taxes
State taxes spent on: Education, public safety, highways &
transportation, public welfare, arts & recreation,
Different types of state Sales tax, State Income Tax, Corporate taxes
Local taxes spent on: Public schools (most $ spent on), law
enforcement, fire protection, public facilities
(hospitals, libraries), parks & recreation, public
Record keeping (deeds/marriage licenses), social
services (food stamps), child care
Different types of local **property tax, income tax (not in NC), sales tax
The Business Cycle The economy is constantly changing. The Business
Cycle tracks how the economy is doing overall
Phases Contributing Factors Cycle indicators
Expansion Business investments Stock market
Peak Interest rates & credit Interest rates
Contraction Consumer expectations New orders of capital
Trough External shocks
How the govt. measures growth
Gross domestic product The total dollar amount of all goods & services
(GDP) produced within a country’s borders in a given
Per capita GDP The dollar amount each citizens contributes to
Real GDP GDP at current prices calculated
The govt. and fiscal policy
Fiscal Policy Is the govt.’s policy on taxes and spending
Automatic Stabilizers Govt. programs that kick in automatically in times of need /
when economic problems occur
1. Welfare (ex. Medicaid)
2. Unemployment insurance
3. Social security
Automatic stabilizers are in place to avoid long economic contractions
Recession An economic contraction when the economy contracts for 6 straight months
Depression A severe & prolonged recession
Government changes in Fiscal Policy
The govt. will sometimes cut taxes to increase consumer spending & to fight inflation
This will give you more money to spend in the economy
Trickle down Theory Give the wealthiest portion of America the biggest tax cuts
The money saved by cutting that groups taxes will then be
spent and trickle down throughout the economy
Consumer Price Index Typical goods & services that the average
(CPI) consumer purchases
Inflation A general increase in prices
Deflation A sustained drop in prices
The Global Economy
Economic Development & Transition
Levels of Development
Developed Nations Stable govt., high tech., strong economy, strong
education, govt. programs, abundant resources,
basic needs met, transportation
Less Developed Inadequate medical care, low gross domestic
Countries (LDC) product (GDP), no/low tech., lack of education /
illiteracy, basic needs not met, lower life
expectancy, lack of money & resources. Lack of
clean water & irrigation
Issues in Development
Problems in Less Developed Countries (LDC)
Rapid Population Growth Standard of living goes down.
Can't meet Educational needs.
Uneven Global Distribution of Become dependent on other nations.
Lack of Physical Capital Lack tools, machinery & factories needed
Behind in technology.
Low levels of production.
Dependent on other nations.
Lack of Human Capital Lack education & training.
Won't be able to advance.
Colonial Dependency Still dependent on other countries (former
Govt. Corruption Leaders make major decisions for their
best interest and not that of the people.
Political Instability Economy cannot be stable when country is
struggling politically (at civil war)
How do you help these countries?
Foreign Aid Provides money, training & other things needed to
help developing nations.
United nations World wide organization that helps provide aid to
Tries to help these developing countries with
International Monetary International organization created to stabilize
Fund (IMF) exchange rates and aids development.
World Bank Provides poor nations with money from developed
nations. Ex. needs money to help industrialize
Why do nations trade?
1. To get goods & services they do not have / cannot produce
2. To get a Comparative Advantage - Ability of a nation to produce a good
at a better cost. Sometimes another country can produce a product more
3. To create jobs - Creates more jobs by increasing production. More trade
creates a need for more workers
International Trade - Why nations trade
Resources that are major 1. Natural resources
influences on a country's or 2. Physical capital (factories)
region's economy: 3. Human capital (education/training)
Reasons why specializing nations Nations need to obtain goods they
need world trade: cannot produce themselves.
Advantages of producing goods & A nation can use the money they
services that a nation has a make to buy other goods they need.
comparative advantage in:
How does international Increases efficiency (very efficient
specialization affect workers: workforce).
Limits job opportunities.
Current World Trade Situations
Effects of trade barriers Manufacturers must buy American
products & materials.
Increased prices for foreign goods.
Advantage of U.S. protection Protects jobs.
Protects new or infant industry.
Safeguards national security.
Trade progress under GATT Lowered global tariffs.
(General Agreement on Tariffs & U.S. tariffs dropped from 59% to 5%
Trade) & WTO (World Trade from 1930-1995.
Affects of NAFTA on the U.S. Some jobs have been created; but
some have been eliminated.
Trade between Canada, Mexico, & the
U.S. has increased significantly.
Advantages of multinational Corporations avoid tariffs & shipping
Benefit from cheaper labor.
Host country gains jobs & tax revenue.
World Trade Organization (WTO) A world wide organization whose goal
is freer global trade & lower tariffs.
North American Free Trade Agreement that will eliminate all tariffs
Agreement (NAFTA) and other trade barriers between
Canada, Mexico & U.S.
General Agreement on Tariffs & Established to reduce tariffs &
Trade (GATT) expand world trade.
European Union (EU) Custom unions - agreements that
abolish tariffs & trade restrictions
among union members & adopt
uniform tariffs for non-member
Has a Parliament & a Council in
which all member nations are
Have own flag, anthem & celebrates
Europe Day on May 9th.
In 2002, 11 member nations went to a
single currency - The Euro.
1. 3B Alex Rodriguez, NYY $ 33,000,000
2. SP/LH CC Sabathia, NYY $ 24,285,714
3. SS Derek Jeter, NYY $ 22,600,000
4. 1B Mark Teixeira, NYY $ 20,625,000
5. SP/LH Johan Santana, NYM $ 20,144,708
6. 1B Miguel Cabrera, DET $ 20,000,000
7. OF Carlos Beltran, NYM $ 19,401,571
8. 1B Ryan Howard, PHI $ 19,000,000
(tie) OF Carlos Lee, HOU $ 19,000,000
(tie) OF Alfonso Soriano, CHC $ 19,000,000
11. SP/RH Carlos Zambrano, CHC $ 18,750,000
12 SP/RH John Lackey, BOS $ 18,700,000
13. OF Manny Ramirez, LA $ 18,695,507
14. OF Torii Hunter, LAA $ 18,500,000
(tie). SP/LH Barry Zito, SF $ 18,500,000
16. OF Ichiro Suzuki, SEA $ 18,000,000
17. OF Magglio Ordonez, DET $ 17,825,976
18. 1B Todd Helton, COL $ 17,775,000
19. 3B Aramis Ramirez, CHC $ 17,000,000
20. SP/RH A.J. Burnett, NYY $ 16,500,000
21. OF Matt Holliday, STL $ 16,333,328
22. OF Vernon Wells, TOR $ 16,142,857
23. SP/RH Chris Carpenter, STL $ 15,840,971
24. SP/RH Roy Halladay, PHI $ 15,750,000
25. SP/RH Hiroki Kuroda, LA $ 15,433,333