unit 6 free market and role of government. the existence of competition in a free market economy...
DESCRIPTION
Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice. . The government can protect a free market economy by maintaining a stable currency, tax breaks to proprietorships, law and order…. - PowerPoint PPT PresentationTRANSCRIPT
![Page 1: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/1.jpg)
Unit 6 Free Market and Role of Government. The existence of competition in a free market
economy ensures individual choice.
![Page 2: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/2.jpg)
Scarcity – The basic economic problem that arises because people have unlimited wants but resources are limited
The government can protect a free market economy by maintaining a stable currency, tax breaks to proprietorships, law and order…
![Page 3: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/3.jpg)
51. How do individuals and governments utilize scarce resources?
Trade Off/Opportunity Costs – A benefit, profit, or value of something that must be given up to acquire or achieve something else.
Factors of Production – Resources required for the production process.Ex. Land, Labor, Capital, Enterprise
![Page 4: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/4.jpg)
Economic Questions:1. What is to be produced? 2. How are the goods to be produced? 3. For whom are the goods produced.
![Page 5: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/5.jpg)
Traditional Economic Systems• The economy is based on custom, the way things have always been done.• low technology development• the “village” takes care of each other• Often a leader and elders make decisions.
![Page 6: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/6.jpg)
Command Economy
• The government controls the economy.• technology use varies according to the
economic system and the country• The government provides the goods and
services it chooses.
![Page 7: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/7.jpg)
Market economy (free market, capitalism, free enterprise)
• The economy is based on supply (producers) and demand (consumers).
• medium to high technology use• Each individual takes care of him/herself• Government stays out of the economy (“laissez-faire)
![Page 8: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/8.jpg)
Characteristics of a market economy• Laissez-faire – government leave business/free enterprise alone, “hands off”
• Invisible hand – the economy will be balanced by competition, profit motive and self interest
• Consumer sovereignty - the consumers and their demand are the driving forces in a market economy
• What consumers purchase is their private property, the goods/services belong to the consumers
![Page 9: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/9.jpg)
Sole Proprietorship
• Sole Proprietorship– a business owned and operated by a single
individual
![Page 10: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/10.jpg)
Advantages of a Sole Proprietorship
• Most popular type of business in the US (75% of businesses)
• Easy to start-up• Least-regulated form of business• Owner gets to keep all profits • Owner has full control of management of the
business
![Page 11: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/11.jpg)
Disadvantages of Sole Proprietorships
• Unlimited Liability (unlimited losses)– Owners are fully and personally responsible for all
of firm’s debts• Limited Life– “dies” when the owner retires or closes the
business
![Page 12: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/12.jpg)
Partnerships
• Partnership– A business owned and managed by two or more
people
![Page 13: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/13.jpg)
Partnerships• Advantages– Able to raise more
money than a sole proprietor
– Owners are able to specialize
• Disadvantages– Require articles of
partnership– Unlimited liability– (unlimited losses)– Potential for conflict
![Page 14: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/14.jpg)
Corporations
• Corporation– A legal entity, owned by individual stockholders
who face limited liability for firm’s debts
![Page 15: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/15.jpg)
“A legal entity…”
• To start a corporation, must create a legal charter to describe business
• Corporations have legal identities separate from that of their owners
• Corporations function in many ways like individuals– Pay taxes– Sign contracts– Can sue others and be sued
![Page 16: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/16.jpg)
“…owned by individual stockholders…”
• Stock – certificate of ownership• Stockholder(s) are the owner(s)• Stockholder(s) elect leaders of the company• Money from stock is used to start-up and run
the corporation
![Page 17: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/17.jpg)
“…who face limited liability for the firm’s debts.”
• Limited liability (limited losses/debts, can only lose what you put in, NOT personal assets, personal items)– Only the corporation, not the owners, is
responsible for any debt of the corporation• Stockholders can only lose the amount of
money they have invested in the business
![Page 18: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/18.jpg)
Advantages of Corporations
• Limited liability for owners• Unlimited Life• Ability to raise financial capital through stock• Can grow very large
![Page 19: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/19.jpg)
Disadvantages of Corporations
• Difficult to start-up• Owners/stockholders may have very little say
in management• More government regulation• Higher tax rates
![Page 20: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/20.jpg)
Law of Demand
• When prices goes up the quantity demanded goes down.
• When the price goes down the quantity demanded goes up.
![Page 21: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/21.jpg)
Demand Curve
• ..
![Page 22: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/22.jpg)
Demand Shift Factors
1. Population – more people = more demand2. Income – more money = more demand3. Substitutes – higher price for butter decreases demand for butter
and increases the demand for margarine4. Complements – higher price for peanut butter usually reduces
demand for peanut butter and for jelly5. Tastes and Preferences – more popular = more demand
![Page 23: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/23.jpg)
Demand Shifts• rise in demand = rise in
demand curve to the right. (high demand for turkeys before Thanksgiving)
• drop in demand – lower in demand curve to the left (little demand for turkeys after Thanksgiving).
![Page 24: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/24.jpg)
![Page 25: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/25.jpg)
Law of Supply
• Suppliers will offer more (higher quantity) of a good at a high price
• As price increases, quantity the supplier is willing to supply increases
• Price and quantity supplied go in same direction
![Page 26: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/26.jpg)
Economics choices for the supplier (the producer)
• 1. fixed costs – a cost that will remain fairly constant; the price of rent,
• 2. variable costs – costs that will change, a producer will not pay the same every month; the electricity
• 3. total costs – the fixed costs + the variable costs• 4. marginal costs – the cost of adding one more unit
of production (what is the cost of producing just one more item, one more “baconator” if new employees/machinery must be included in the pricing?)
![Page 27: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/27.jpg)
Supply shifts too!• Cost of Resources (input)• (also called factors of production)– If the price of resources used in production increase,
the supply will decrease– Price of resources decreases, supply increases
• Government Influence (taxation + regulation)– If government limits supply, the supply decreases– If government supports more supply, the supply
increases (ex/ farm subsidies)– If government regulations increase production costs
(environmental regulations EPA, or safety regulations OSHA), supply may decrease
![Page 28: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/28.jpg)
![Page 29: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/29.jpg)
![Page 30: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/30.jpg)
When the supply and demand curves intersect, the market is in equilibrium
![Page 31: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/31.jpg)
Surplus is when there is an excess supply of a product.
Shortage is when the quantity demanded is higher than the available supply
![Page 32: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/32.jpg)
MonopolyHow does competition affect price and output?
1. Only one seller in the market2. Extremely difficult to enter the market3. Produces 1 product4. Doesn’t need to compete5. Full control over price• Examples– Duke Power– Pizza at Wake Forest
![Page 33: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/33.jpg)
Monopolies
• Sometimes called a “market failure”• Full price control• Total market power• Should the government regulate monopolies?
![Page 34: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/34.jpg)
OligopolyHow does competition affect price and output?
1. A few (2-4) sellers in the market2. Difficult to enter the market3. Similar products4. Compete with few other sellers5. Some control over price• Examples– Forsyth and Baptist Hospital– American Car Companies
![Page 35: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/35.jpg)
Competitive MarketHow does competition affect price and output?
1. Large number of sellers2. Easy entry into the market3. Very similar products4. Highly competitive5. Very little price control• Examples– Pizza– Groceries
![Page 36: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/36.jpg)
Monetary policy$$$$$$$$$$$$$$$$$$$$$$$$$$$
• Controlled by the Federal Reserve System• Discount rate– The rate the Federal Reserve Bank (a bank for the
banks) charges a member bank for a loan.• Open market operations– Buying and selling of government bonds
![Page 37: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/37.jpg)
Monetary policy$$$$$$$$$$$$$$$$$$$$$$$
• Loose monetary policy (to help the business cycle expand)– Decrease the discount rate, decreases interest rates– Buy bonds – gives $ to bond holders
• Tight monetary policy (to help the business cycle contract)– Increase the discount rate – increases interest rates, fewer
customers/businesses will borrow $– Sell bonds – takes money from bond holders
![Page 38: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/38.jpg)
Monetary policy$$$$$$$$$$$$$$$$$$$$$$$$$$$
• Loose monetary policy– Creates more money – Long term could cause inflation
• Tight monetary policy– Reduces the money available– Long term could cause unemployment if
consumers stop spending and businesses begin to lay off employees
![Page 39: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/39.jpg)
Fiscal(freaking, federal, fiscal tax me and spend it on you policy)
• Government spending– Spending money on infrastructure (roads, bridges,
dams, flood gates…)– Military, education, Medicare, Social Security– Unemployment, health care
• Government taxes– Progressive income taxes– Excise taxes (gas, alcohol, cigarettes, tanning)
![Page 40: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/40.jpg)
Fiscal(freaking, federal, fiscal tax me and spend it on you policy)
• Loose fiscal policy– Increase government spending– Decrease taxes
• Tight fiscal policy– Decrease government spending– Increase taxes
![Page 41: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/41.jpg)
Fiscal(freaking, federal, fiscal tax me and spend it on you policy)
• Loose fiscal policy effects– More $ for consumers and businesses– Business cycle will expand
• Tight fiscal policy effects– Less $ for consumers and businesses– Business cycle will contract
![Page 42: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/42.jpg)
the business cycle
• ...
trough
expansion
peak
contraction
trough
![Page 43: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/43.jpg)
the business cycle• ...
peak
trough
recession, 6 months of declining GDP
depression, high unemployment, low GDP, low CPI
peak
peak
![Page 44: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/44.jpg)
business cycles, examples
• ...
![Page 45: Unit 6 Free Market and Role of Government. The existence of competition in a free market economy ensures individual choice](https://reader036.vdocuments.net/reader036/viewer/2022062501/56816882550346895ddefd3f/html5/thumbnails/45.jpg)
Two major indicators...
GDP = Gross domestic product= total dollar value of all final goods and services produced in a countryCPI = Consumer Price Index= measure of change in price over time of specific goods/services