CONSUMER ECONOMICS

UNIT 2

Economics & The Consumer

Economics Defined

Economics is the study of choices about using resources – Economist

Macroeconomics – global impacts (government decisions)

Microeconomics – Decisions by individuals and businesses

Scarcity & Opportunity Costs

The Basic Economic Problem is Scarcity

Limited resources with unlimited wants & needs

Opportunity Cost The value of the next best alternative foregone

as the result of making a decision Each decision made has an opportunity cost &

opportunity benefit Is the reward worth the cost? Analyze the costs & benefits of getting a job

right out of high school vs. attending college

Chapter 1 Slide 3

ECONOMIC SYSTEMS

WHAT DETERMINES A COUNTRY’S ECONOMIC SYSTEM?

A society’s economic system is the combination of social and individual decision making it uses to answer the three basic economic questions

1. What to Produce? Country’s priorities / needs / resources /

etc.2. How to Produce?

Resources of the country – labor / capital / information / etc.

3. For Whom to Produce? Consumers have choices or is there equality

TYPES OF ECONOMIC SYSTEMS

Traditional Economy – production decisions passed to generations (Tribes in remote areas)

Command Economy - the government owns resources and makes most economic decisions in the “BEST INTERESTS” of society (North Korea)

Market Economy - people own the resources and run the businesses – Entrepreneurship & risk (Competition and Profit drive this system)

Mixed Economy – Combination of Market and Command economies (United States)

Comparing Economic Systems

Chapter 1 Slide 7

MarketEconomic

System

CommandEconomic System

MixedEconomic System

TraditionalEconomic System

What to produce?

Consumers & Producers

based on self-

interests

Government decides – What is

“best” for society

Combination of consumer

and government

decision making

Based on customs How things have always been

done

How to produce?

Consumers & Producers

based on self-

interests

Government decides – What is

“best” for society

Combination of consumer

and government

decision making

Based on customs How things have always been

done

What needs & wants to satisfy?

Consumers & Producers

based on self-

interests

Government decides – What is

“best” for society

Combination of consumer and government

decision making

Based on customs How things have always been

done

MARKET ECONOMY

Individuals in the marketplace based on their own best interests – selfish motivations

Consumers “vote” with their dollars – price & quality is directly affected by these “votes”

Competition forces businesses to provide high quality & low prices to attain market share & maintain profitability

Profit drives how they answer the 3 basic economic questions

Prices in a Market Economy

In a market economic system, the choices individuals make determine how society’s scarce resources will be used

Prices are determined by the natural forces of supply and demand

Adam Smith – THE INVISIBLE HAND Competition and “selfishness” are crucial to

its effectiveness

Adam Smith – The Invisible Hand

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”

Adam Smith – The Invisible Hand

The invisible hand is a metaphor coined by the economist Adam Smith. Once in The Wealth of Nations and other writings, Smith demonstrated that, in a free market, an individual pursuing his own self-interest tends to also promote the good of his community as a whole through a principle that he called “the invisible hand”. He argued that each individual maximizing revenue for himself maximizes the total revenue of society as a whole, as this is identical with the sum total of individual revenues.

Group Activity Create a poem / story / song / etc.

representing your understanding of Adam Smith’s Invisible Hand Theory.

Groups will present their “creation” – The best group will receive extra credit

The United States Market Economic System

Private Property - Individuals in the marketplace based on their own best interests – selfish motivations

Freedom of Choice - Consumers “vote” with their dollars – price & quality is directly affected by these “votes”

Competition - Businesses provide high quality & low prices to attain market share & maintain profitability

Profit - Ultimately drives how the the 3 basic economic questions are answered

Chapter 1 Slide 13

Factors of Production(Resources to Produce Goods & Services)

Land Any “Natural” resource – raw materials

Labor Human factors - workers

Capital Previously produced goods used in production

(machinery / tools / factories / etc.) Entrepreneurship

Ownership – organization Small Business Administration

Technology Recently added “factor”

Productivity

The production output in relation to a unit of input (a worker) - efficiency

Wages vs. Productivity As wages ↑, productivity must improve

Productivity can be improved through: Improvements in technology Better equipment Training / management techniques

Chapter 2 Slide 15

Business Organization

Individual (Sole) Proprietorship (1 owner) Negative = Unlimited Liability Positive = Tax advantages

Partnership (2 or more owners) Negative = Unlimited Liability Positive = Tax advantages

Corporation Owned by 1 or multiple individuals – considered a

separate entity from owners (Limited Liability) Private vs. Public Corporation (Stock – shareholders) Negative = Double Taxation

SUPPLY AND DEMAND

DEMAND – SCHEDULES & CURVES

• Quantities of a good consumers are willing and able to purchase at various prices during a given time period

Demand Schedule:Price Quantity Demanded $1 1000 $2 800 $3 600 $4 400 $5 200

DEMAND CURVEPrice Quantity Demanded $1 1000 $2 800 $3 600 $4 400 $5 200

SUPPLY – SCHEDULES & CURVES

• The quantities firms are willing and able to make available for sale at various prices

Supply Schedule:

Price Quantity Supplied $1 200 $2 400 $3 600 $4 800 $5 1000

SUPPLY CURVEPrice Quantity Supplied $1 200 $2 400 $3 600 $4 800 $5 1000

Market Price - Equilibrium

• Equilibrium Price - the price at which quantity supplied equals quantity demanded

• GRAPH:

SHORTAGE IN THE MARKET• If price is set below equilibrium a SHORTAGE will occur –

Prices should rise (Forced up)• (quantity demanded > quantity supplied)• GRAPH:

SURPLUS IN THE MARKET

• If price is set above equilibrium a SURPLUS will occur – Prices should fall (Forced Down)

• (quantity demanded < quantity supplied)• GRAPH:

Public Sector in a Market Economy - Government

1. Provide Public Goods2. Redistribute Income3. Regulating Business Activity4. Ensuring Economic Stability

Providing Public Goods & Services

National Defense Police & Fire Protection Courts Parks Highways & Roads Public Education Public Transportation

Redistribute Income(Taking care of Disadvantaged) Social Security

Retirement Benefits Survivor Benefits Disability Benefits Medicare Benefits

Unemployment Insurance Public Assistance

Welfare (TANF, SSI, Food Stamps, Housing, etc.)

Regulating Business Activity

Protecting the Environment (EPA) Protecting Consumers – safety (CPSC) Protecting Workers – safety & fairness Promoting Competition (FTC)

Anti-Trust Laws to maintain fairness & competition to ensure quality & fair prices

Ensuring Economic Stability

Fiscal Policy Policies regarding Taxes and Government

Spending Stimulus Plan / Bailouts of Banks

Monetary Policy Interest Rates (Fed Fund Rate)

Basics of Taxation (Why do we pay taxes?)

Public Goods and Services Education / Law Enforcement / Roads / etc.

Redistribution of Income Wealthy individuals pay taxes at higher levels

for public assistance programs (welfare / etc.) To influence behavior

“Sin Tax” – Alcohol & Tobacco taxed at higher rates

To stabilize the economy “Fed Fund” rate is adjusted accordingly

Tax Categories

Progressive Taxes (Income Tax): The more you earn – the higher amount of

tax comes out of your pocket (Tax Brackets)

Regressive Taxes (SALES TAX): Smaller share of income is collected as

income grows – SALES TAX is regressive – straight % for sales tax

Proportional Taxes (PROPERTY TAX):

FLAT TAX – all members of a community pay the same amount regardless of earnings or value

Types of Taxes Income Tax

Wages / Interest income / etc. Social Security Tax (FICA)

Mandatory retirement savings program Sales Tax Excise Tax

Certain goods (alcohol, tobacco, firearms, air travel) Property Tax Estate & Gift Tax

Based on property values after death Business (License) Tax Customs Duties / Tariffs

Imported goods may have additional taxes

Taxes and Equity Criteria

Benefits principle Ability-to-pay principle

Benefits Principle

The benefits principle is the idea that people should pay taxes based on the benefits they receive from government services.

An example is a gasoline tax: Tax revenues from a gasoline tax are used

to finance our highway system. People who drive the most also pay the

most toward maintaining roads.

Ability-to-Pay Principle

The ability-to-pay principle is the idea that taxes should be levied according to an individual’s ability to shoulder the tax burden.

Voluntary Compliance

Federal Income Tax Rates:Schedule X – Single Person

If taxable income is  over--

But not over-- The tax is:

$0 $7,825 10% of the amount over $0

$7,825 $31,850 $782.50 plus 15% of the amount over 7,825

$31,850 $77,100 $4,386.25 plus 25% of the amount over 31,850

$77,100 $160,850 $15,698.75 plus 28% of the amount over 77,100

$160,850 $349,700 $39,148.75 plus 33% of the amount over 160,850

$349,700 no limit $101,469.25 plus 35% of the amount over 349,700

 

FRIEDMAN vs. GALBRAITH

Milton Friedman Supported a laissez-faire approach to

government involvement in economics Government attempts to protect consumers

usually creates higher prices or lower product quality

John Kenneth Galbraith Supports strong government involvement for

government in economic issues Large corporations have too much influence on

modern society inhibiting the natural forces of supply & demand (ex. advertising creates wants & needs)

Which Economist is correct?

Research issues pertaining to strong governmental involvement vs. less intrusive policies & formulate an argument in favor of the philosophy you feel is a more effective for economic stability for a country.

Stabilizing the Economy