Unit 2

I. Traditional EconomiesDef: Economic

Questions answered by customs

Predominately Agricultural

Developing or “3rd World”

Trade and barter oriented

Low GDP & PCI (per capita income = avg. inc.)

The Circular Flow ModelII. Concepts to Understand

II. Concepts to UnderstandA measure of the production of an entire

country in one year is

GDPThe total $ value of ALL final Goods and

Services produced in a country in a year.(GROSS DOMESTIC PRODUCT)

II. Concepts to UnderstandWorld GDP

Total GDP 2005(millions of US dollars)

1 United States 12,455,0682 Japan 4,505,9123 Germany 2,781,9004 China 2,228,8625 United Kingdom 2,192,5536 France 2,110,185 a7 Italy 1,723,0448 Spain 1,123,6919 Canada 1,115,19210 Brazil 794,098

11 Korea, Rep. 787,62412 India 785,46813 Mexico 768,43814 Russian Federation 763,72015 Australia 700,67216 Netherlands 594,75517 Switzerland 365,93718 Belgium 364,73519 Turkey 363,30020 Sweden 354,11521 Saudi Arabia 309,778

II. Concepts to UnderstandA. Cost and Revenue

1. Cost – the total amount of money it takes to produce an item (to pay for ALL Factors of Production).

II. Concepts to Understand

2. Revenues – the total amount of $ a company or the government takes in.

II. Concepts to Understand3. Fixed Costs – the amount of money a business MUST pay each month or year (like rent and Capital expenses).

II. Concepts to Understand4. Variable Costs – the amount of money a business pays that changes over time (Labor and Raw Materials).

II. Concepts to Understand5. Total Costs = Fixed + Variable Costs.

II. Concepts to Understand7. Marginal Costs – the additional Cost of the NEXT UNIT produced.

Margin=Extra Space

Costs and Revenues8. Profit – the difference between Total Costs and Revenues. This is WHY you’re in BUSINESS (Profit Motive!)

Profit=Revenues-Total cost

Profit Motive=why you are in business---to make MONEY (principles of Capitalism)

II. Concepts to Understand9. Cost Benefit Analysis – weighing the Marginal Costs vs. the Marginal Benefits of producing an item or making any economic decision. If the Benefit is GREATER than the Cost, then business does it.

Marginal Benefits

Marginal Costs

II. Concepts to Understand10. When Production DecreasesDownsizing – laying off employees to save costs.

Outsourcing – sending jobs and manufacturing overseas or contracting to outside companies to save money.

Bankruptcy – government allows business to restructure it’s debt, but now all profits go to paying off debt rather than to the owners/investors.

Out of Business – lose all your business, money, and profits.

The current trend in the U.S. is that manufacturing jobs are declining

II. Concepts to Understand11. LABORWages – what

companies pay employees for their labor (usually based upon an hourly rate).

Blue CollarManufacturing, work

with handsUsually the ‘labor’ in

production

Salary – the amount of pay a person gets over a year (especially for “professional” jobs).

White Collar‘Office’ jobsUsually control

production

II. Concepts to Understand12. Labor Unions: organization of workers who have banded together to achieve common goals

Wage protectionWorkplace safetyBenefitsJob protection

II. Concepts to Understand13. Collective Bargaining

Representatives of the Union and the company negotiate a contract for the workers; usually they rely on compromise

14. StrikesWhen an agreement

can’t be reached, workers stop working to try to force the hand of the company

I. There are 3 main types of economies present in the world today

A. CapitalismB. SocialismC. Communism

II. Market EconomyA. Also known as free enterprise

or Capitalism

B. Practiced in the USC. Individuals own the productive resources

i.People can own their own businesses and resourcesii.People run the economy, not the governmentiii.Can result in corporations- business managed on the behalf of stockholders

II. Market EconomyA. Held together by the Pillars of Free Enterprise

i. Private Property- Resources and businesses owned and ran by Individuals, not the government

ii. Price System- Prices are used to allocate scarce resources

1. Ex. Diamonds and poor people2. When people exchange goods or money for

something, they are setting the price3. People being willing to buy something at a

certain price

II. Market Economyi. Market Competition- Competition in market

for resources and products1. Companies compete to own and sell

resources2. Companies Compete to sell their products

ii. Entrepreneurship- skills needed to start and operate a business

1. Entrepreneurs are competitive and willing to take risk

2. Entrepreneurs see a product and try to make it better or try to come up with something to buy instead

II. Market EconomyFree Market (Capitalist) Economies

Economic questions answered by producers and consumers

Limited government involvement

Private property rights

Wide variety of choices and products

U.S., Japan

III. Mixed Economy/SocialismA. The Government controls the means of productionB. The Government controls major industries such as

health care, mass transportation and utilities (Electric)

C. Government controls how industries are rani. How much to charge for a productii. How much to pay employeesiii. Who gets what benefitsiv. Controls Qualityv. Social “safety net” for people

D. Common in Europe, Latin America, and Africa

III. Mixed Economy/SocialismA. Problems with Socialism

i. National Governments are notorious at not handling finances appropriately- Why should they, they can just print more money.

ii. Quality begins to decline1. Socialism removes competition which

results in a decline in qualityiii. Most government ran projects spend more

than they make

IV. Command EconomyA. Also known as CommunismB. A system in which the government controls everythingC. The government controls every aspect of an industry

i. The government controls who works at a career, the wages, the production and the resources

D. All wealth is shared in the economyi. The Construction worker gets paid as much as the

Bank CEOE. Government controls every aspect of lifeF. No true form of communism has been practiced on the

large scale for a long period of time

IV. Command EconomyKarl Marx19th century German economistAuthor of “Communist Manifesto” and “ Das Kapital”

Government should control economy and distribute goods and services to the people

Founder of revolutionary socialism and communism

IV. Command EconomyA. Problems with Communism

i. People are greedy and tend to be lazyii. Communism results in Economic

Stagnation- it doesn’t grow but gets worseiii. National governments waste a lot of moneyiv. There is no competition

1. One shoe brand, one colorv. Very little economic choicesvi. Government officials usually live better

lives then the general publicvii. Quality is lousyviii. IT FLAT OUT DOES NOT WORK!

RIP1991

V. Black MarketsA. An illegal market in which goods are sold

above legal price (textbook definition)B. Predominantly happens in the open in under-

developed countriesC. Drugs, guns, bootleg movies/software and

other illegal goodsD. During Prohibition, there was a black market

for alcoholi. A bottle of wine that cost $5 when legal

selling for $50

V. Black MarketsA. Black markets will always exist in as economyB. Black Markets cause many problems

i. Crime Rates increaseii. Cost of law enforcement increasesiii. Corruption Increases

VI. Important EconomistAdam Smith18th century Scottish economistPublished “The Wealth of Nations” in 1776Explained the workings of the free market within capitalist economiesInvisible hand of the market

VI. Important EconomistAdam Smith (continued)Laissez-faire - Government stays out of business practices “hands off” to let the market place determine production, consumption and distribution.

Individual freedom and choice emphasized.

VI. Important Economist John Maynard KeynesGovernment should intervene in economic emergencies through tax and spending (Fiscal Policy) and changing the money supply (Monetary Policy).This is done to smooth out the business cycle (expansion and recession) and keep inflation low.

VII. ConclusionA. What type of economy is the better choice

and why?B. Why is Capitalism successful?C. Why would Socialism appeal to some people?D. Know how the Circular Flow Model Works