Economics Chapter 3 - Lecture notes 3 PDF

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Chapter 3 Section 1 Aim: What are the basic principles of American Free Enterprise system? -

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what role the gov should play in the free market and how the principles make it possible for people to participate anyone in america who wishes to produce a good or service, create a new business, change one, has the possibility of doing that as of 2012, there were 22 million unincorporated businesses (small business/ mom and pop shop) 3.5 million of those incorporated business are owned by minorities women are considered minorities in business factors of production are open to everyone to use and create a business natural resources, talented labor force there’s a critical element ot america that gives us a regenerative labor force: immigration immigrants provide the talented labor force over and over again there's flexibility and freedom built into the economic system the freedom allows people to try new ideas

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5 different reasons that allow for freedom/flexibility:

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1. profit motive = incentive -

opening business isn't easy but the profit motive encourages ppl to take rational risk (well thought through) fulfill own self interest and once it's well thought thru, u can take the risk by weighing opportunity costs rewards innovate growth in american free enterprise system the desire, the incentive to make profit encourages person to be far more productive and efficient w the resources b the person knows that the more efficient they are, the greater their profit 2. open opportunity

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anyone can compete in the american marketplace anyone can experience economic mobility (working themselves up on economic class) they have potential of gaining wealth but they can also lose it 3. legal equality

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everyone has the same legal rights guaranteed under the constitution private property is protected 4. private property is protected

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cornerstone of american enterprise what everything is built on people can use their resources any way they want to can make own decisions bc it’s yours gov cant take it away from you people care more about their business bc it’s theirs when u own it, u use it wisely and conservatively so u don't squander ur resources most ppl who own business work much longer business who work longer hours constant input of work bc the geater work, the more u can earn greater incentive to make it the best 5. freedom to buy and sell/ enter into contract

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gov can't interfere w those contracts 6. voluntary exchange

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individuals choose that freedom creates consumer sovereignty and competition can enter and exit marketplace wherever they want action sends important signal to producers Section 2

Aim: why are interest groups important in a free-market and to the American Free Enterprise system? It can influence the gov/ public officials to instill changes that consumers want, which will lead to more sales. Interest groups voice the opinions and needs of people. Provides a way for consumers and business to compromise. This empowers the individual whetehr they be a producer or consumer. -

interest groups are part of free market that is to the benefit of the consumer it is the average citizen who will become the consumer advocate they are private organizations, gov not involved main purpose is to persuade public officials to act in ways that benefit consumers

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ex: the Consumer Union

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purpose: to make sure there's enough consumer protection laws such as u have to put nutrition facts on the back of food, side effects on medicine bottles, food handling guidelines, dramatization notices on commercials, smoking kills messages on cigs, warning labels on cleaning products, expiration date

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there's also business protection groups businessinetersst groups ex: The National Retail Federation they address issue of taxation, land use, zoning, aid to farmers

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American free enterprise system provide for economic freedom guaranteed in the constitution all freedoms of free enterprise is based on america’s basic value and belief in liberty an economic system is created and based upon that nation’s values (what they believe in and value) in america, it's liberty

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these are all of the guaranteed rights in the american free enterprise system, and they are guaranteed by the constitution ●

right to property is most important bc it’s the cornerstone - in constitution (search and seizure, 4th, 5th, 14th amendment) - the only way the gov can take private property is under eminent domain - if the gov is building a highway or anything else that's a public good (benefit outweighs cost), the gov can take private property but they must pay for that property at fair market value (what they home would be getting in the market today)

economic development vs public good: ●

economic development: - efforts that seek to improve the economic well-being and quality of life for a community by creating jobs and supporting the growing incomes and tax base - only benefits people w the skill set to work at the establishment being built

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public good: a commodity or service that is provided without profit to all members of a society, either by the government or a private individual or organization. -

without profit paid for through taxes

the diff is that economic development is focused on improving the monetary aspects of a community and public good is focused on providing for a community’s needs. Public good doesn’t create profit most of the time.

if a toll is collected, it's more of a maintenance agent. it’s pair for through taxes ● -

taxation: the cost allows for fed, state, a municipal gov (city gov) can tax us income tax instituted during civil war ad became amentment constitnutionally theres the right to taxation

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right to enter into contracts gov cant pass law thatll change the term of an exisitng contractof void it

role of gv in free enterprise system ● ● ● ●

carry out its constitutional responsibility protect individual’s property rights protect individual’s rights to enter into contract promote public interest: the concerns of the society as a whole - ex: it in the public interest to pass laws to keep air and water clean, control pollution - in public interest to make sure food and drug stream is clean - manufacturing and processing rules for food - standards that drug manufacturing companies must follow to make sure that medications we take are pure and contain the content they're supposed to contain

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make sure info about products is provided to consumer - u might be allergic to something in food - so ur buying the thing that u want (information allows u to make proper choices) - gov has public disclosure laws: manufacturer must inform the consumer what the fabric is made of, what's in the food, how many calories, what's the nutrients, side effects

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federal trade commission instituted to make sure there's no deceptive practices in advertising truth in lending act: u go to a bank, get a car loan, u have to know that the terms of payment are and what happens when u don't make the payment on time and interest rate obligation to protect public health and safety - do that w consumer protection laws, creating manufacturing standards - ex: paint cant contain a certain mineral (lead) - toys cant contain lead bc children put toys in their mouth

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labelling laws

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smoking kills labels on cig surgeon general says nutrition labels proof on alcohol

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EPA: environmental protection agency OSHA: occupational safety and health administration - check to see if workplaces are safe - regulates every business there is

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creates zoning laws: community will set this up and say houses can be certain height, no alcohol stores, no porn shops, or rifle stores near schools - created so children aren't in danger

Are there negative side effects to gov regulating businesses? -

businesses could get fined for not implementing regulations slows growth it costs money to comply with regulations cost of products or services may increase bc businesses have to spend money complying w regulations costs money for gov to hire people to inspect compliance of businesses conflict of interest in government: people in gov might favor certain businesses and regulate them less

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in a capitalist economy, capitalists are there to make money ppl making the most money have the most influence

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gov promotes growth and stability in order to do this, the gov needs tools to track what's happening in the economy they look at 2 economic trends: macroeconomic trend: behavior and decision making of nation as a whole - microeconomic trends: behavior of decision making of smaller units like households and firms gov has 2 tools : - GDP: gross domestic product - business cycle

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the gov tracks the stability of the gov

indicators: ●

GDP: gross domestic product: the total # of all goods and services produced within the US in a given time period (usually a year) - it doesn't necessarily mean american companies - there are foreign manufacturers manufacturing things within the US - their products get included in our gdp numbers - however, american companies manufacturing outside the US don't get included in gdp

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business cycle: - made up of prolonged periods of expansion or contraction - the goal is to always see steady growth - a business cycle has a life of its own - it will periodically for # of reasons go into periods of contraction - wen economic forecasters see that the business cycle is moving into contraction, there’s things that the fed ov can do: - in 1929, the stock market crashed - it crashed for # of reasons - bc the gov wasn't paying too close attention to a lot of economic indicators, that threw us into prolonged period of contraction - business closed, banks out of business, stock market had no value, ppl lost their jobs, poverty - FDR made the new deal - he proposed a # of fed programs that he hoped would bring us out of period of contraction and help bs ycle move into expansion - it dd, but not completely - it wasn't until involvement in ww2 that manufacturing skyrocketed - everybody was working and men went off to war - there as general prosperity that moved us into period of expansion - we relished that period of expansion for long time - 2008 another downfall: the great recession - we came dangerously close to economic downturn - before we really got there, under pres george w bush t eh fed gov poured money into banking industry so they could help housing industry get back on its feet and it bailed out other industries so less ppl would lose their jobs - pouring $ into economy helped it come back even tho theres sections of country that have not springback, the american economy is in a v good place in 2016 - unemployment is down to like 4.6% - in free enterprise there's always gonna be unemployment but u want those #s to be between 4-6%

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fed gov worked to keep interest rates low interest rates: when u take out loan and pay it back and fed reserve controls prime rate: rate at which all lending institutions can add something if bank borrows $ from fed gov and the fed gov prime rate is 1%, the bank might charge 3% to their customer a business needs to borrow money in order to expand and buy more equipment and hire new employees borrowing $ becomes cost to the business and lowers their profit rate so fed gov thinks if we make borrowing g$ less expensive by making smaller interest rate, it’l encourage business owners to borrow $ and expand their businesses it stimulates the economy fed gov can raise interest rates when economy is strong

business cycle and gdp are indicators and measurements of health of economy some ppl say bc the bus cycle has life of its own, the gv shod stay out of it. but gov gets involved to provide tended period of contraction contraction can be recession or depression expansion is period of growth

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Aim: what does the fed gov do to promote economic strength?

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in the american free enterprise system, markets become vulnerable to the business cycle if the business cycle begins to go into a period of contraction, less things are bought and sold in the marketplace people also lose their jobs people feel insecure -> people won't take risks economic security is important for growth the gov can and has over history done certain things to help promote the strength o the economy

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they do things to promore 3 of their goals: 1) maintain high employment - there's always unequal distribution of wealth and unemployment - but gov tried to maintain high employment -> more ppl are making products, more are buying them - without the middle class, the free market economy doesn't work - there should be jobs for everyone who wants to work

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the unemployment level should be between 4-6% for the economy to be considered healthy

2) growth - gov provides a standard of living: level of prosperity - rule of thumb is that the next generation should have a better standard of living than the previous generation - the gov sets that level - it’s hard to sustain the ogh - the gov does certain things sso the standard of living says cat certain level: - cut taxes - gov increases spending - cutting corporate taxes allows it to have more money to invest with and innovate and hire people (trickle down economics) - but the benefit of cuting taxes to corporations doesnt trickle down to everyone to benefit - it stays in pocket of CEO

3) stability & security - having confidence in economy is v important - people will invest more - ppl will take risks - pl will spend more money

indicators that the economy is stable: ●

the general level of prices: no dramatic fluctuation

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security of financial institutions: banks, trading firms - gov monitors what banks re doing - make sure heres procedures in place so there's no fraud - fed gov manages interest rates thru federal reserve - the prime interest rate is managed by fed reserve

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gov keeps prime interest rate low - low interest rate promotes borrowing - people and firms can use that $ for many things

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goc keeps an eye on monetary flow - how much $ are people investing

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make sure economic citizenship is taking place

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populist movement: put voting power in hands of people (direct election of senators) and referendum: the people decide to vote to make something a law - happens a lot on a state level

promotes innovation and invention - technology and productivity lead to growth of economy - tech makes everything more efficient esp in manufacturing -

innovation leads to obsolescence: when a product of service becomes out of date and no longer used - like noone uses flip phones anymore, smartphones are used

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Aim: Why does the Fed Gov get involved in promoting innovation and invention?

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increases the GDP efficiency innovation -> growth ->jobs, exchanges in the market people are needed to make the product and people also buy the product increases spending

when ddi the gov understand that this was a v good thing for them to be doing? - mid 1860w-1890s westward expansion - gov giving land grants away to railroads and industries to get ppl out west (homestead act) giving land to families to settle - what happened? th gov passed the Morrill acts - this was created to provide land grants to schools go out there, create a school on husbandry (raising cattle) university of wisconsin - teach them how to be engineers (MIT) - gov saying in order to move forward we need x y and z - people who can do the jobs, schools to teach them, etc - then gov realized research programs are v important - once western frontier filled, the US wanted to explore space - the gov creted NASA - gov funded it ● -

invention what does the gov provide to encourage it? PATENTS the invention will be yours in art and writing, you can get COPYRIGHTS this is to encourage creativity

American work ethic:

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we are amongst the hardest workign ppl in the world h\longest hours, least amt of vacation there are pp who work thru their vacation work ethic comes from Puritan pilgrims education , home ownership, level of prisperity fdr he came up w package of programs to bring ppl to better economci place: the new deal those programs are divided up they have seen a transformation over 1930- recent times

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1960s pres johnson fought war on poverty his philosophy said if we combat some of the causes of it, we cal eliminate it he looked at education and how wealth wsa distributed in free market, wealth isnt distributed equally poverty will always exist bco that 1980s under new federalism, redistribution program came abuot (fed gov responsibility was shifted to the states) the fed gov gave fed $ to states to run their own welfare programs thought process was that states sknow what ppl need most 1990s clinton that became to welfare to work program it limits the time htat any 1 individual can be on welfare if u tahc pp the skills to have a job, then they can become self usfficient and take care of themselves and their families that has a good track record another aspect of welfare is redistribution programs the fed gov gives $ to the states to administer programs they are divided into cash transfer programs the state pays the individual directly poor or disabled, etc cash transfer programs: - TAF program 1996 pres clinton : Welfare to work - social security 1935 fdr - paid for thru payroll tax - taxes taken out of your check in order for u to be eligible to collect social security - the distribution of SSI happens in dif ways: - retirement payout: at certain age a person can retire and collect increment of amount of money that they paid into the system - payments to the disabled (SSI): theres ppl born disabled. it costs $ for them to live. if their parents die they may need to be put into a home - the gov pays an ssi and it comes out of social security fund - widows and dependent children: - if ur dad dies in under age of 18, ur mom gets money out of social security to help take care of u - unemployment insurance: if you become unemployed bc ur employer had ar eduction in force or ur company went out of business - uremplouwe pays this to gov - if ur fired for causes, ur not eligible bc thats ur fault - ^ employment insurance - ppl hva temporary assistance if they get laid off to help u get by while ur looking for a job - worker’s compensation: if injured on the job while ur working or

on property, the company must pay for medical expenses whether they be short or long term -

in kind benefits: directly for the poor they are either free or greatly reduced in price services ex: legal aid. the 6th amendment guarantees we'll have legal representation aka lawyer if needed subsidized housing:gov subsidizes between what ur rent is and what u can pay food stamps: help ppl buy nutrients health insurance: medicare. if urr 60 or older u can have

The role of an entrepreneur is to use the factors of production to create a product or service that meets the needs of the market. They help bring about new ideas and innovation. They expand and grow the economy. r...