What is an Economy MKTMP2 Integrate socialstudies skills

What is an Economy? MKT-MP-2 Integrate social-studies skills into marketing, sales and service, to obtain an understanding of customers and the economic environment in which they function.

Economic Systems �Economy: the organized way a nation provides for the needs and wants of its people �Resources: the things used in producing goods and services �Resources = Factors of Production �Land �Everything contained in the earth or found in the sea �Labor �All the people who work �Capital �Money to start and operate a business �Includes infrastructure: the physical development of a country �Entrepreneurship �The skills of people who are willing to invest their time and

Scarcity: the difference between wants and needs and the available resources Examples: USA: educated labor force, great deal of capital, abundance of entrepreneurs, and many natural resources Even the US cannot meet all the needs and wants of its people Some live in poverty Underdeveloped Nations: not that fortunate

How Does an Economy Work? v Nations must answer 3 basic questions: 1. Which goods and services should be produced? 2. How should the goods and services be produced? 3. For whom should the goods and services be produced? v How these 3 basic questions are answered determines the type of economy of the nation. 1. Traditional Economy 2. Market Economy 3. Command Economy

Traditional Economies Traditions and rituals answer the questions Often based on cultural and religious practices and ideals that have been passed down What? There is little choice as to what to produce If you belong to a community of farmers, you farm How? There is little choice If you belong to a family of potters, then you will continue to follow traditions of pot making from ancestors For Whom? Tradition regulates who buys and sells and where and how the exchange will take place.

Market Economies Pure Market Economy: there is no government involvement in economic decisions Gov’t lets the market answer the questions What? Consumer decide what to produce based on their purchases How? Businesses decide what to produce Must be competitive and produce quality products For Whom? The people who have money are able to buy more goods and services

Command Economies Government makes all the decisions Government controls all the factors of production What? Dictator or group of gov’t officials decide what to produce based on what they believe is important How? Government owns all means of production, it runs all the businesses, it controls all employment opportunities For Whom? Government decides who gets what is produced

Mixed Economies No economy is purely traditional, market, or command US is a mixed economy with leanings toward a market economy Regulations to protect food, air, and water supply Labor laws Social programs Welfare, Medicaid Since all economies are mixed, how much gov’t involvement Capitalism Communism Socialism

Capitalism Political and economic philosophy characterized by Marketplace competition Private ownership of businesses aka: Free Enterprise Typically democracies Political power in the hands of the people Usually more than one political party Examples: USA and Japan

Communism Social, political, and economic philosophy in which the government controls the factors of production Usually authoritarian No private ownership of property or capital Society is classless Citizens are assigned jobs Examples: Cuba and North Korea

Socialism Most have democratic political institutions Increased amount of government involvement in the economy than capitalism Typically have more social programs for citizens Examples: Canada and Germany

Economies in Transition Breakup of the former Soviet Union provides the best example of societies making the difficult change from command to market economies Examples: Estonia and Latvia

Understanding the Economy When is an economy successful? 1. When it increases production 2. When it decreases unemployment 3. When it maintains stable prices Economic Measurements Labor Productivity Gross Domestic Product Gross National Product Standard of Living Inflation Rate Unemployment Rate

1. Labor Productivity Output per worker hour that is measured over a defined period of time Week Month Year Ways to increase productivity Invest in new equipment Provide additional training or financial incentives Reduce work force and increase responsibilities Higher productivity increases profit

2. Gross Domestic Product The output of goods and services produced by labor and property located within a country GDP is made up of: Private investment Government spending Personal spending Net exports of goods and services 2009 GDP = $14. 12 Trillion 2010 GDP = $14. 87 Trillion

3. Gross National Product The total dollar value of goods and services produced by a nation, including goods and services produced abroad by U. S. citizens and companies. This measure was used by the U. S. prior to 1991 The main difference between GDP and GNP With GNP, it is not where the production takes place but who is responsible for it

4. Standard of Living A measurement of the amount and quality of goods and services that a nation’s people have Reflects quality of life Std of Living = GDP/population

5. Inflation Rate Refers to rising prices Low inflation rate (1% - 5%) shows a stable economy High inflation rate (10% +) can devastate an economy Money doesn’t have the same value as it did with lower inflation Money doesn’t go as far as it used to Controlling inflation is performed by the Federal Reserve When inflation increases, the FED raises interest rates to discourage borrowing and slow spending

5. Inflation cont’d Consumer Price Index (CPI) Change in price over a period of time of some 400 specific retail goods and services used by the average urban household Producer Price Index (PPI) Measures wholesale price levels in the economy Changes in PPI are usually passed along to consumers

6. Unemployment Rate Higher unemployment rate = economic slowdown Lower unemployment rate = economic expansion Dec. 2010 U. S. Rate = 9. 1% Dec. 2010 GA Rate = 10. 2%

The Business Cycle The recurring changes in economic activity Expansion Time when the economy is flourishing Low unemployment Increase in output Recession Period of economic slowdown that last at least 2 quarters (6 months) Unemployment rises Decrease in output Depression A period of prolonged recession Nearly impossible to find a job Consumer spending very low Recovery A period of renewed economic growth following a recession or

Factors Affecting Demand Strength of want or need Availability of supply Availability of alternative products that consumers believe will satisfy their need/want

The Demand Curve: relationship between the price and the quantity demanded The Law of Demand: as the price of a product is increased, the demand will decrease and vice versa Economic Market: all the consumers who are willing to purchase a particular product or service

The Demand Curve

Factors Affecting Supply Possibility of profit Amount of competition Capability of developing and marketing the products and services

The Supply Curve: a graph that shows the relationship between price and quantity Law of Supply: with the price of a product is increased, the more will be produced and vice versa

The Supply Curve

Market Price: the point where supply and demand for a product is equal

What is a Surplus? A surplus occurs when supply exceeds demand Prices usually drop on the item

What is a Shortage? A shortage occurs when demand exceeds supply Prices usually go up

What is Equilibrium? Equilibrium occurs when supply and demand are basically equal Prices tend to remain stable during equilibrium