The Economic System

Goal 8

The Economic System of the United States

The learner will analyze features of the economic system of the United States. Objectives 8.01 Compare characteristics of command, market, traditional, and mixed economies. 8.02 Describe how the free enterprise system encourages private ownership of property and promote individual initiative. 8.03 Explain the circular flow of economic activities and how interactions determine the prices of goods and services. 8.04 Illustrate how supply and demand affects prices. 8.05 Predict how prices change when there is either a shortage or surplus. 8.06 Explain how changes in the level of competition can affect price and output levels. 8.07 Identify and describe the roles and functions of various economic institutions and business organizations. 8.08 Evaluate the investment decisions made by individuals, businesses, and the government. 8.09 Describe the role of money in trading, borrowing, and investing

Economic Systems

There are many types of economies in the world. Let’s take a look:

Remember, in a true market economy, people, not the government, own the means of production. Here are some basic traits of a market economy:  Individual freedom and choice  Healthy competition  NO Government control A true market exists only in theory. Why?

In the command economy, the government makes all economic decisions. The government decides WHAT to produce, HOW to produce, and FOR WHOM to produce. Cuba and North Korea have this type of system. Some of its traits are:  No competition  No choice in products and the products are poorly made  Prices are low because the government sets the prices

In a mixed market economy, people are welcome to own the means of production, but the government may intervene and regulate certain businesses for the support and protection of the consumer. The United States and many other countries have this type of system.

The traditional economy is a system in which decisions such as WHO, WHAT, and FOR WHOM are all made on the basis of customs, beliefs, religion, habits, etc. Many developing countries use this type of system. The word “traditional” means, in this case, “not modern.” If your family made money by fishing, then, that is what you would do for a living. Some traits are:  Initiative and creativity are not used  Lack of advanced products  Little, if any, technology  No growth Developing countries in parts of South America, Asia, and Africa are still using the traditional economy and it keeps the people from advancing economically. LET’S Review: TYPES OF ECONOMIES MARKET MIXED MARKET

TRADITIONAL COMMAND

2 Free Enterprise

Free enterprise free'-en'ter·prise' (frē'ĕn'tər-prīz') adj. An economic system where few restrictions are placed on business activities and ownership . . . In this system, governments generally have minimal ownership of enterprises in the market place. This system aims for limited restrictions on trade and minimal government intervention.

How can the free enterprise system encourage private property ownership and promote individual initiative? That’s a great question! Remember Adam Smith’s (Wealth of Nations) belief is that people always look after their own self-interests! Sellers want to get the most money for the good/service they provide and buyers want to buy at the lowest possible price for the best quality. This is the “stuff” of economics!

One of the biggest incentives of the free enterprise system is private property ownership. Ownership motivates us to work, save, and invest. We can keep any profits from the sale of that property and that’s a big deal!

For most of us capitalists, the free enterprise system provides **Freedom to choose: choose our profession, the “stuff” we buy, and the services we use. In the business world, PROFIT is the motivator!

Think about all of the products out there in the world! Now write down two products that you can’t live without: ______Most likely, the inventor of the product registered their idea with the U.S. Patent Office. A U.S. government patent gives the creator of an invention the sole right to make, use, and sell that invention for a set period of time, usually 20 years. What is the purpose behind patents?

If there is a special name or symbol or slogan, it must be registered in the U.S. Trademark Office. In the box to the left, sketch a well known trademark:

If the product contains “written artistic expression,” it better have a copyright! This is a form of protection provided by authors of “original works” including literary works, dramatic, musical, artistic, and other intellectual materials.

Tell me, what would be the motivator if there were no way to protect your ideas and creativity? NONE! Remember! Ideas can be protected and will increase possible economic gain to the creator. It’s the American way! If you wrote a song, but your friend took and copied it and it became a hit and sold over a million copies, which person should get the profit? Does it make sense now?

3 Business Motivations In the world of free enterprise, businesses and individuals are motivated by profit. Businesses often use the assembly line and mass production to keep costs down and profits up. Many workers on the line have specialized jobs so that the line moves faster! Specialization increases productivity and often quality of the good or service. Would you want an orthopedic surgeon to perform brain surgery on you? Would you want a school bus mechanic work on a Boeing 757? What do these companies specialize in? a. Goodyear______b. Starbucks ______c. MJ Soffe ______d. Smithfield Foods ______

What are the 3 things that improve efficiency and productivity? 1. Capital goods! The right tool for the right job gets the work done faster! 2. Education!! Workers need strong skills to understand today’s machinery, computers, and electronics. 3. Technology!!! Technology allows us to produce new/better products which make our standard of living rise.

Circular Flow of Economic Activities

The circular flow of economic activity chart shows how our market system works. Our system is economically interdependent. There are three major parts to our economy: the business sector, the government sector and the households sector. Being interdependent means that each sector needs the other to work properly. Here’s how it works: businesses work to produce goods and services. The government provides security and structure and things which are necessary, such as roads, bridges, and our armed forces. Households, also known as consumers (me and you) supply the labor for both business and government sectors. In exchange for their labor, people earn money and the money is used to buy goods and services. The U.S. is famous for high productivity and a high rate of consumption! Both households and business pay taxes to the government and the government provides services which are meant to benefit society. Each depends on the other and if one sector is ailing, all sectors will “feel” it.

Illustrate How Supply and Demand Affects Prices 4 Demand: How much of a good or a service a buyer is willing to purchase at various price levels.

Supply: How much of a good or a service is willing to part with at various price levels

There are many things which influence supply and demand. Price is one factor. Consumer tastes are also important. Twenty years ago, VHS was the only way to see movies at home. Now, they are in the 2 for $5.00 bin at Wal-mart. Why?

Income is another factor in supply and demand. People have to have an income, pay their fixed expenses, and then, what’s left over is what often drives the retail sector. If times are tough or the worker is being paid a minimum wage, there will not be a lot of buying, which will create surpluses in the marker, driving prices down. Competition also can influence the market. The more businesses compete with each other, the more choice a consumer has and often, the best possible price for the consumer. If businesses flood the market with a good and prices go down, however, a company may not make enough profit to stay in business. The use of complimentary or substitute goods also affect supply and demand. If there is damage to the orange crop in Florida and orange juice prices go up, people may substitute apple juice for orange. Also, some items work together and one item without the other can affect the market. VHS tapes must be played in a VCR player. One item without the other is worthless. If manufacturers stop producing one, the other is in trouble!

Let’s look at Supply and Demand together:

This chart represents both the supply and demand curves. Where the two lines intersect is called the equilibrium price. This occurs when both supply and demand are in balance.

What is the equilibrium price? $ ______(approx) How many demanded at that price? QTY ______(approx)

What happens if the price is higher than the equilibrium price? Then there is a surplus of goods. What happens if the unit price is $3.00? What is the QTY supplied at $3.00? ______. What is the QTY demanded? ______. Do you know how to figure out how many units are surplus? EASY!! QTY supplied subtract QTY demanded = surplus! ______subtract ______= ______units. When there is a surplus of goods, what should the seller do to the price? Why? 5 What happens if the price is lower than the equilibrium price? Then, there is a shortage of goods. What happens if the unit price is $2.00? What is the QTY supplied at $2.00? ______. What is the QTY demanded? ______. Do you know how to figure out how many units are short? EASY!! QTY demanded subtract QTY supplied = shortage! ______subtract ______= ______units.

When there is a shortage of goods, what should the seller do to the price? Why?

What happens when there is a positive shift in demand? Let’s look:

When demand increases, the curve shifts to the right. What happens to price? Does it rise or fall? ______What happens to QTY supplied, does it rise or fall? ______.

What is the new equilibrium price?

$ ______(approx)

Inflation

Inflation means that the average person will pay more for goods/services than before. The opposite of inflation is deflation. Inflation is measured by the Consumer Price Index (CPI). This index is compiled monthly and it compares today’s prices with prices of goods and services used earlier. The most obvious effect of inflation is that your money doesn’t buy as much. Causes: 1. Consumers spending is greater than the amount of goods available and/OR 2. Rising costs of resources like oil and labor costs. People on fixed incomes are hurt the most by inflation. What happens if your income stays the same and prices go up? $1,000.00 in 1980 has the same buying power as ______in 2009. $1000.00 in 1960 has the same buying power as ______in 2009.

Competition . . . it’s the American Way! 6 In a free market, there are buyers and sellers. Each seller competes for the consumers business; this tends to drive a product’s price down which is always good, right? Well, yes and no . . . YES! Lower prices help the consumer. If Lucky Brand jeans are sold for $90.00 at Macys, for example, but you can buy the same style at Stein Mart for $50.00, where are you going to buy the jeans? ______NO! If the sellers engage in competition to the point they can no longer earn a profit on their product, competition may end up forcing a business to close. It almost happened in the 1970s between Coke and Pepsi products. If there are fewer sellers in the market, what will happen to the price of a product? ______.

MONOPOLIES A monopoly exists when there is one producer of a good or a service in the market. Usually, there are no easy substitutes for the product and it is very hard for another company to enter the market to compete with the monopoly. Most monopolies or monopolistic practices are illegal in the U.S.

If there is just one producer of a good, what may happen to prices?

In the U.S. there are municipal monopolies, like sewer, garbage, water, electric service and they are controlled by the city. There are practical reasons for these types of monopolies, wires on a pole or sewer lines under ground would be hard to manage if there were a lot of competitors.

OLIGOPOLIES An oligopoly consists of a few large producers and there is limited competition. They tend to avoid price competition, focusing on the differences between products and advertising BRAND NAMES. Prices tend to be higher. Examples are the “Big Three” automobile manufacturers or the soft drink companies.

CONGLOMERATES A conglomerate usually has many different businesses under its ownership. Phillip Morris, a tobacco company, also owns Kraft Foods (Kraft Macaroni and Cheese and Nabisco crackers.) It seems strange that these companies are connected in any way. A MERGER occurs when two similar businesses combine to form one. A real world example is XM and Sirius satellite radio merging to create XM Sirius. The companies merged because the claim that there wasn’t enough business to keep both companies afloat and together, they can turn a profit. Time will tell if it was a good economic move for consumers.

Vertical mergers: A company buys another company which supplies a part of their product. Example: a car manufacturer also owns a windshield company.

Horizontal merger: A company buys a similar company which adds to their product base. Example: Fiat (an Italian car company) will buy Chrysler.

7 As we look at the different types of business organizations, think of different examples within our town. Types of Business Organizations Type Facts Examples *1 owner business *3/4ths of all business in Sole Proprietorship the U.S. *Easy to start *All the risk, but all the reward $ $$$$ *Unlimited liability

*2 or more owners of a business *Easier to raise money Partnership *Each partner may contribute a special talent *Shared liability

* Owned by many investors in the company *Ran by a board of directors Corporation *Money is raised through the sale of stock (shares) *Stockholders have no risk except losing share value/Limited liability *Hard to set up *Most shareholders do not have “power” in decisions company makes. *Profits can be taxed twice

8 Organized Labor

Labor unions were created to protect workers. The owners of the company and the workers negotiate a contract called collective bargaining. For the most part there are two types of unions: craft and industrial. Craft unions are groups of workers which specialize in a particular trade such as plumbers or electricians. Industrial union workers are in the same industry, but may have different jobs. What are the pros and cons of belonging to a union? Usually union workers wages and benefits packages are better than non- union workers. It is harder to fire union workers, too. Cons are that because of the higher labor costs, businesses can’t compete and may go out of business. Unions charge dues to their members which can offset any real wage increases. Sometimes, owners and workers can’t agree on a contract, or one side believes the other is treating them unfairly. A union can call for a strike, or a refusal to work until the union’s demands are met. Or owners can shut down the business, called a lockout, refusing to let workers work. But it is in the best interest of both groups to work out a deal so that the owners can make a profit and the workers can make a wage. Mediation is when a third party tries to make compromises for both sides, but neither party has to agree. Arbitration is when a third party makes compromises and both parties must follow what the arbitrator says.

Before 1900, the U.S. government usually sided with business owners, but after that time, the U.S. government mostly supported the worker. There are four labor laws which you may find on the EOC:

1935 National Labor Relations Act: workers have right to join unions 1935: Social Security Act: provided an income to retirees 1938 Fair Labor Standards Act: created a minimum wage, guidelines for workplace safety, and outlawed child labor.

The most extreme form of union control is the "closed shop," in which only members of a union can be hired. In 1947, however, the U.S. government passed the 1947 Taft-Hartley Act in which closed shops were declared illegal.

For good or bad, unions are here to stay. Most agree that workers in the U.S. have a much higher standard of living than most workers in the world and unions may have contributed to that fact.

Of the four Acts, which is most important for workers? Why?

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What is Money?

As we go through the Power point, answer the following:

1. What is money?

2. What are the three functions of money?

a. b. c.

3. What is legal tender?

4. DO YOU KNOW?? What is the “official” legal tender of the a. United States? b. England? c. Mexico? d. Germany?

5. Why is storing wealth in livestock, for example, a bad idea?

6. What are some other stores of value?

7. Let’s say you own your home and wanted to buy a beach house at Carolina Beach. You put your first home up for collateral in order to get the loan for the beach house. You get sick and can not pay for the beach house. What may happen to your home that you already own?

8. Why should buying on credit be for those things you need rather than for what you want?

9. What are four ways to invest your “extra” money?

10 The Banking System

Back in the day, people kept money in mattresses. Today, most people keep their money in a commercial banks, savings and loans, or credit unions. Let’s compare the three types of financial Institutions:

Types of Financial Institutions Description Examples

Commercial Banks Privately owned financial institution which (1) accepts demand and time deposits, (2) makes loans to individuals and organizations. If a bank fails, the FDIC (Federal Deposit Insurance Corporation) insures people’s deposits. This creates trust in depositors.

Savings and Loans US depository institution, typically chartered and organized like a bank, that offers home mortgage loans and basic banking services such as checking (current) accounts and credit cards.

Credit Unions Credit Unions are created for and by its members who are its depositors, borrowers, and shareholders. Operated on non-profit basis, credit unions offer many banking services, such as consumer and commercial loans time deposits, and credit cards.

In financial matters, demand deposit is your money available from the bank when you need it. Examples are checking accounts and debit cards. Time deposit is when a financial institution holds your money for a certain amount of time. Credit cards, issued by financial institutions, are substitutes for cash, but money borrowed must be paid back with interest. Debit cards take money directly out of a checking account. Check Writing Basics 11 Check writing is simple! Remember! Just because you have checks doesn’t mean you have the money in the bank to cover them!

Check 102: You buy a pair of Lucky Brand jeans at Lucky Outlet Store for $51.37

Cumberland County Student 102 1 North Street Fayetteville, NC 28306 DATE______

PAY TO THE ORDER OF ______$ ______DOLLARS MoneyInstructor.com Bank Main Street Anywhere, US 10001

FOR ______

18571626 4582195012 0102

Check 103: Your tuition is due at Fayetteville Tech Community College for $1,200.52

Cumberland County Student 103 1 North Street Fayetteville, NC 28306 DATE______

PAY TO THE ORDER OF ______$ ______DOLLARS MoneyInstructor.com Bank Main Street Anywhere, US 10001

FOR ______

18571626 4582195012 0103

12 Check Writing Basics: The Register

A checkbook register is very important because it keeps a tally of what deposits you have entered, but more importantly, how much money you have spent from the account. Let’s take a look: Checkbook Register

Practice filling out your own checkbook register, use the checks above to fill-in your register:

Check Check/Deposit BALANCE Date Check Paid To Number Amount +3,560.00 101 1/14/09 -46.59 Suzy’s Florist +3513.41

Debit 1/14/09 Pierro’s Restaurant -35.97 + 3477.44

Deposit 1/15/09 Valentine’s Gift from Mom +100.00 +3577.44

How much money do you have in your account after paying your checks? $______

Insurance

Insurance is meant to compensate a person for specific unexpected losses. In exchange for payments from the insured (called premiums), the insurer agrees to pay the policy holder a sum of money upon the occurrence of a specific event. Life Insurance: Pays $$ out to the beneficiary if the insured dies Medical Insurance: Because health care is so expensive, people pay premiums to offset high costs of treatment.

13 Comprehensive Insurance: Term used for a variety of insurance policies providing broad protection. Life-Health-Home-Auto Liability Insurance: protects against claims alleging that one's negligence or inappropriate action resulted in bodily injury or property damage.

Application of Information: What type of Insurance?

1. Anne Smith, secretary, needs surgery and months of physical therapy to correct her carpal tunnel syndrome.

Type of Insurance: ______.

2. YOU leave the coffee maker on and it burns down your house.

3. While driving a friend from the airport, you hit a guardrail and injure yourself and your friend.

4. The Letter carrier slips and falls on your driveway. She is rushed to the hospital.

5. The employees of a Quickie-Stop have been complaining about feeling unsafe because the parking lot lights have been burned out for months. One night, an employee is robbed and severely beaten on the way to her car.

6. Your friend’s father has cancer and passes away at 40 years old, leaving a wife and three children behind.

7. Your car was sideswiped and the driver of the other car leaves the scene.

8. Hurricane Bill tears the roof off your house.

9. Mr. Smith goes in for his yearly physical medical exam.