Chapter 2 Economics Notes



Chapter 2 Economics Notes

1. An economic system is a method used by a society to produce and distribute goods and services.

2. What goods and services should be produced? This is simple, what kinds of things should this or any economy produce? Should this economy make more trucks or cars? Should this economy make more Big Macs or Taco Bell tacos? These questions are answered by you every time you go out and purchase something. If the public buys more Taco Bell tacos, then our economy will make more Taco Bell tacos than Big Macs. At one time on the internet you could buy pet food over a web site? Was buying pet food over a web site a good idea? Our economy (that includes you) decided that buying pet food over the internet was a bad idea. We decide, by using your money, what goods and services to produce.

How should these goods and services be produced? If I have a factory that makes shoes should I make them by hand or by machine? If we are going to make electricity should we make it with oil, water, solar power or natural gas?

Who consumes goods and services? Our society decides who gets the Lexus car and who gets to ride the bus. Our society decides who gets to go to see Shrek 2 and who gets to stay at home. This means our society must determine how to distribute income or money. If you work for a firm that pays well you receive income and can buy a nice car and go to the movies. If you don’t work or have a low paying job then you may have to ride the bus and wait for the movie to come out on DVD.

To keep this simple we call these three economic questions what, how and who.

3. Factor payments are the income people receive for supplying a factor of production. Most of us receive income from labor and receive a factor payment for that labor. If Krispy Kreme Donuts wants to open a shop in Shepherd they will have to have land, labor and capital. They will have to pay for the land to build it on, the labor to build it and the labor to operate/run the business and the capital (remember capital is the machines and knowledge needed to operate the business).

4. Standard of living is the level of economic prosperity. How well is a country doing economically? The standard of living will tell you. The United States has a high standard of living. Countries like Peru have a lower standard of living. If a country has lots of cars, computers, food and the people are paid well then you have a high standard of living. If the opposite is true, then the country has a low standard of living.

5. Traditional economy – goods and services are produced by a family for their personal consumption. Many Native American tribes practice this type of economic system. Tradition has passed down how to survive in a harsh environment, fish, hunt or make tools. These skills were passed down from generation to generation. If you kill a deer and your family eats it, then you have operated under a traditional economy. Everything revolves around the family. Remember the three economic questions, what , how and who? In a traditional economy the family decides what to produce, how to produce it and who will consume the goods.

Market economy – economic decisions are made by individuals. This would mean the people determine what goods to make, how to make them and who will consume the goods. Notice there is no government regulation of the economy here.

Command economy – the government regulates economic activity making the decision of what, how and for whom to produce. North Korea, China and Cuba have this type of system. The government decides what will be produced, how to produce it and who will consume the goods. In North Korea of example, the government will decide how many cars will be made per year.

Mixed economy – people and in a limited way the government controls the economic system. The people and government determine what will be made, how it will be made and who will consume the goods. The United States has this kind of economic system. You and I determine how many cars will be made but the government makes sure they are safe by requiring such things as seat belts and air bags. Government plays a small role in regulating our economy.

6. A market is an arrangement that allows buyers and sellers to exchange things. Wal-Mart, Best Buy and TD’s are all markets.

7. A household is a person or group of people living in the same residence. A firm is an organization that uses resources to produce a product which it then sells. Kathy’s Kolache’s is a firm because it produces a product and then sells it.

8. A factor market is a market in which firms purchase the factors of production from households. A firm exchanges a factor payment (money paid) in exchange for land, labor or capital. Profit is the financial gain made in a transaction.

9. A product market is a market in which households purchase the goods and services a firm produces. Wal-Mart is mostly a product market because it really doesn’t make many of the things it produces. Wal-Mart sells DVD players and Dr. Pepper, but it doesn’t make them. Firms like Sony and Dr. Pepper make them and send them to the product market. Kathy’s Kolache’s is a firm and a product market because it does both makes and sells their product.

Look on page 10 for an explanation of the circular flow model of a market economy. Notice there is no government regulation in this economy.

10. Socialism is an economic system that is based on the belief that democratic means should be used to distribute wealth evenly throughout a society. Most socialist countries are democratic and political power rests with the people. They have freedoms of speech, press and religion. The government controls major industries like banks, airlines, and utilities. But most other businesses like restaurants, grocery stores and such are left alone. Denmark, Norway and France are examples.

Communism is an economic system with all economic and political power rests in the hands of the government. The government controls all. There are few freedoms. North Korea and Cuba are examples.

11. Laissez faire is the idea that states that government generally should not intervene in the marketplace. This means that the government should not tell Dodge what color trucks to make or Best Buy what kind of TV’s to sell. The United States is laissez faire, the government does not involve itself in things other than making sure the product is safe.

12. Remember that fun circular flow model we did? Look at page 42 and you will see that the government can now interact in that flow. How?

The government makes us all pay taxes such as income taxes.

The government can buy things such as pens, bombs, government owned cars or computers.

The government can purchase land, labor or capital. They can buy land to build a highway, labor to build it and machines to help in the construction.

The government can also send money to people through Social Security.

13. In a free enterprise economy a person or corporation owns the business. The United States is a free enterprise economy because the government does not own or control businesses. The government does not own or control TD’s or McClains or Sonic. A person or corporation owns them.

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