Consumer Economics Unit 2

1. Consumer EconomicsUnit 2 Economics & The Consumer

2. Economics Defined • Economics is the study of choices about using resources – Economist • Macroeconomics – global impacts (government decisions) • Microeconomics – Decisions by individuals and businesses

3. Scarcity & Opportunity Costs • The Basic Economic Problem is Scarcity • Limited resources with unlimited wants & needs • Opportunity Cost • The value of the next best alternative foregone as the result of making a decision • Each decision made has an opportunity cost & opportunity benefit • Is the reward worth the cost? • Analyze the costs & benefits of getting a job right out of high school vs. attending college Chapter 1

4. ECONOMIC SYSTEMS

5. WHAT DETERMINES A COUNTRY’S ECONOMIC SYSTEM? • A society’s economic system is the combination of social and individual decision making it uses to answer the three basic economic questions • What to Produce? • Country’s priorities / needs / resources / etc. • How to Produce? • Resources of the country – labor / capital / information / etc. • For Whom to Produce? • Consumers have choices or is there equality

6. TYPES OF ECONOMIC SYSTEMS • Traditional Economy – production decisions passed to generations (Tribes in remote areas) • Command Economy - the government owns resources and makes most economic decisionsin the “BEST INTERESTS” of society (North Korea) • Market Economy - people own the resources and run the businesses – Entrepreneurship & risk (Competition and Profit drive this system) • Mixed Economy– Combination of Market and Command economies (United States)

7. Comparing Economic Systems Chapter 1

8. MARKET ECONOMY • Individuals in the marketplace based on their own best interests – selfish motivations • Consumers “vote” with their dollars – price & quality is directly affected by these “votes” • Competition forces businesses to provide high quality & low prices to attain market share & maintain profitability • Profit drives how they answer the 3 basic economic questions

9. Prices in a Market Economy • In a market economic system, the choices individuals make determine how society’s scarce resources will be used • Prices are determined by the natural forces of supply and demand • Adam Smith – THE INVISIBLE HAND • Competition and “selfishness” are crucial to its effectiveness

10. Adam Smith – The Invisible Hand • “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”

11. Adam Smith – The Invisible Hand • The invisible hand is a metaphor coined by the economistAdam Smith. Once in The Wealth of Nations and other writings, Smith demonstrated that, in a free market, an individual pursuing his own self-interest tends to also promote the good of his community as a whole through a principle that he called “the invisible hand”. He argued that each individual maximizing revenue for himself maximizes the total revenue of society as a whole, as this is identical with the sum total of individual revenues.

12. Group Activity • Create a poem / story / song / etc. representing your understanding of Adam Smith’s Invisible Hand Theory. • Groups will present their “creation” – The best group will receive extra credit

13. The United States Market Economic System • Private Property - Individuals in the marketplace based on their own best interests – selfish motivations • Freedom of Choice - Consumers “vote” with their dollars – price & quality is directly affected by these “votes” • Competition - Businesses provide high quality & low prices to attain market share & maintain profitability • Profit - Ultimately drives how the the 3 basic economic questions are answered Chapter 1

14. Factors of Production(Resources to Produce Goods & Services) • Land • Any “Natural” resource – raw materials • Labor • Human factors - workers • Capital • Previously produced goods used in production (machinery / tools / factories / etc.) • Entrepreneurship • Ownership – organization • Small Business Administration • Technology • Recently added “factor”

15. Productivity • The production output in relation to a unit of input (a worker) - efficiency • Wages vs. Productivity • As wages ↑, productivity must improve • Productivity can be improved through: • Improvements in technology • Better equipment • Training / management techniques Chapter 2

16. Business Organization • Individual (Sole) Proprietorship (1 owner) • Negative = Unlimited Liability • Positive = Tax advantages • Partnership (2 or more owners) • Negative = Unlimited Liability • Positive = Tax advantages • Corporation • Owned by 1 or multiple individuals – considered a separate entity from owners (Limited Liability) • Private vs. Public Corporation (Stock – shareholders) • Negative = Double Taxation

17. SUPPLY AND DEMAND

18. DEMAND – SCHEDULES & CURVES Quantities of a good consumers are willing and able to purchase at various prices during a given time period Demand Schedule: PriceQuantity Demanded $1 1000 $2 800 $3 600 $4 400 $5 200

19. DEMAND CURVE PriceQuantity Demanded $1 1000 $2 800 $3 600 $4 400 $5 200

20. SUPPLY – SCHEDULES & CURVES The quantities firms are willing and able to make available for sale at various prices Supply Schedule: PriceQuantity Supplied $1 200 $2 400 $3 600 $4 800 $5 1000

21. SUPPLY CURVE PriceQuantity Supplied $1 200 $2 400 $3 600 $4 800 $5 1000

22. Market Price - Equilibrium Equilibrium Price - the price at which quantity supplied equals quantity demanded GRAPH:

23. SHORTAGE IN THE MARKET If price is set below equilibrium a SHORTAGE will occur – Prices should rise (Forced up) (quantity demanded > quantity supplied) GRAPH:

24. SURPLUS IN THE MARKET If price is set above equilibrium a SURPLUS will occur – Prices should fall (Forced Down) (quantity demanded < quantity supplied) GRAPH:

25. Public Sector in a Market Economy - Government • Provide Public Goods • Redistribute Income • Regulating Business Activity • Ensuring Economic Stability

26. Providing Public Goods & Services • National Defense • Police & Fire Protection • Courts • Parks • Highways & Roads • Public Education • Public Transportation

27. Redistribute Income(Taking care of Disadvantaged) • Social Security • Retirement Benefits • Survivor Benefits • Disability Benefits • Medicare Benefits • Unemployment Insurance • Public Assistance • Welfare (TANF, SSI, Food Stamps, Housing, etc.)

28. Regulating Business Activity • Protecting the Environment (EPA) • Protecting Consumers – safety (CPSC) • Protecting Workers – safety & fairness • Promoting Competition (FTC) • Anti-Trust Laws to maintain fairness & competition to ensure quality & fair prices

29. Ensuring Economic Stability Fiscal Policy • Policies regarding Taxes and Government Spending • Stimulus Plan / Bailouts of Banks Monetary Policy • Interest Rates (Fed Fund Rate)

30. Basics of Taxation (Why do we pay taxes?) • Public Goods and Services • Education / Law Enforcement / Roads / etc. • Redistribution of Income • Wealthy individuals pay taxes at higher levels for public assistance programs (welfare / etc.) • To influence behavior • “Sin Tax” – Alcohol & Tobacco taxed at higher rates • To stabilize the economy • “Fed Fund” rate is adjusted accordingly

31. Tax Categories Progressive Taxes (Income Tax): • The more you earn – the higher amount of tax comes out of your pocket (Tax Brackets) Regressive Taxes (SALES TAX): • Smaller share of income is collected as income grows – SALES TAX is regressive – straight % for sales tax Proportional Taxes (PROPERTY TAX): • FLAT TAX – all members of a community pay the same amount regardless of earnings or value

32. Types of Taxes • Income Tax • Wages / Interest income / etc. • Social Security Tax (FICA) • Mandatory retirement savings program • Sales Tax • Excise Tax • Certain goods (alcohol, tobacco, firearms, air travel) • Property Tax • Estate & Gift Tax • Based on property values after death • Business (License) Tax • Customs Duties / Tariffs • Imported goods may have additional taxes

33. Taxes and Equity Criteria • Benefits principle • Ability-to-pay principle

34. Benefits Principle • The benefits principle is the idea that people should pay taxes based on the benefits they receive from government services. • An example is a gasoline tax: • Tax revenues from a gasoline tax are used to finance our highway system. • People who drive the most also pay themost toward maintaining roads.

35. Ability-to-Pay Principle • The ability-to-pay principle is the idea that taxes should be levied according to an individual’s ability to shoulder the tax burden. • Voluntary Compliance

36. Federal Income Tax Rates: Schedule X – Single Person

37. FRIEDMAN vs. GALBRAITH Milton Friedman • Supported a laissez-faire approach to government involvement in economics • Government attempts to protect consumers usually creates higher prices or lower product quality John Kenneth Galbraith • Supports strong government involvement for government in economic issues • Large corporations have too much influence on modern society inhibiting the natural forces of supply & demand (ex. advertising creates wants & needs)

38. Which Economist is correct? • Research issues pertaining to strong governmental involvement vs. less intrusive policies & formulate an argument in favor of the philosophy you feel is a more effective for economic stability for a country.

39. Stabilizing the Economy