CHAPTER 15- ECONOMICS AND THE AMERICAN ECONOMY
15.1- AMERICAN ECONOMIC SYSTEM
Introduction to Economics:
Most Americans believe that, if you work hard, you can get ahead. Many successful business people have had to overcome obstacles in their lives. Dave Thomas, the founder of Wendy’s restaurant chain, was an adopted child who never knew his birth parents. His adoptive mother died when he was very young, and Dave spent most of his childhood moving from place to place so his adoptive father could find work. Thomas got his first job when he was 12. As a young man, he worked for a company helping restaurants that were having trouble making money. He was so good at this that he became a millionaire by the age of 35. In 1969, he opened his first Wendy’s Old-Fashioned hamburgers restaurant, naming it after his daughter. By 2001, there were more than 6,000 Wendy’s restaurants.
Dave never forgot his roots. He created the Dave Thomas Foundation for Adoption to find homes for children in foster care. He died in 2002, but his restaurants, his foundation, and his example live on.
The American Economic System:
Freedom is something we hold very dear in the United States. As our national anthem says, we live in “the land of the free.” We enjoy basic rights that guarantee our freedoms, including the freedom of our economy. The economy includes anything involving money, such as businesses, jobs, taxes, investments, and prices. Although it comes from an ancient Greek word meaning “home management,” economy now means the system of material needs, expenses, and resources of a society.
Basic Economic Freedoms
Unlike in some other nations, our government does not try to control how citizens get the goods and services they need and want. Lawmakers set rules for how some economic activities in the United States take place, but even those laws are designed to protect the basic freedoms of citizens.
The U.S. economy is based on capitalism--a system that allows individuals and businesses to own and control their own property and create wealth with minimal government interference. Individuals and businesses are free to succeed—or fail.
Other economic systems include:
Communism: A system directly opposed to capitalism, in which the government tries to protect individuals by controlling property and by sharing profits across the community as a whole.
Socialism: A system that allows—but limits—private ownership and control of production and profits, in order to protect the well-being of the community.
Capitalism
Capitalism is an economic system in which private parties own the means of production which are operated to produce a profit for the owners and investors. Decisions regarding distribution and price are made by the owners rather than by any central agency of the government. These private enterprises employ workers for wages to produce their products or services. Some define capitalism more loosely, in that many of the means of production are privately owned, but all are operated to produce a profit. Capitalism was widely adopted in the Western world and contributed to industrialization worldwide. Laissez-faire capitalism refers to capitalist activities free from any government regulation, taxes, or tariffs.
Socialism
Socialism is a system in which the means of production is held in common and management is cooperative in nature. Under socialism, workers carry out production and are compensated on merit and the amount of labor contributed to the society. Socialists believe that this system prevents the accumulation of wealth among a few private owners at the expense of the majority and gives workers more opportunity than capitalism to maximize their potential. In practice, a wide range of attitudes exist in socialist countries regarding civil liberties and democratic selection of leaders, ranging from democratic socialism to more totalitarian political systems.
Communism
Communism is a sociopolitical system in which ownership of the means of production is communal and private property and wage labor is eliminated. Different varieties of communism are practiced, but most are derived from the theories of Karl Marx. Pure communism refers to a society without classes in which decisions regarding policies and production are made with the best interests of the collective society in mind. Communist theory usually states that since the working class is exploited by the ruling class in capitalist societies, the working class must replace the ruling class
U.S Economic Freedoms- A Closer Look
In the United States, you enjoy several basic economic freedoms, including:
A market is created when buyers and sellers exchange goods and services.
Our economic system is based on an idea called the free market--people buying and selling products and services according to their own wants and needs, without the government or some other authority planning and controlling what they do. In a free market, sellers and buyers decide whether or not to engage in a transaction. In this type of economy, nobody is forced to buy or sell anything, or to do so at a price set by the government.
In the United States, we value the democratic idea of free enterprise—allowing private industry to operate with as little control by the government as possible. But the free market is not a “free for all.” Few Americans like the idea of laissez-faire—allowing the economy and free enterprise to be shaped only by the market, unrestricted by any government rules so businesses and citizens can operate as they wish. Most Americans want their government to protect its citizens from economic conditions that would limit or destroy their other freedoms.
As a result, our free enterprise system balances freedoms with the need to protect citizens by imposing some controls on what businesses can do. Just as we balance our rights and responsibilities as citizens, or use a balance of powers in our government, free enterprise is really a compromise. Businesses and individuals in the free market can buy and sell as they wish, but they must obey certain laws.
Example: Workplace safety for employees, accurate product labeling, and using agreed-upon weights and measurements for products.
The freedom to compete helps both sellers and buyers. As a seller, or someone who supplies a product or service, you can sell to anyone who wants to buy. And you can try to sell to the same customers as every other supplier.
Example: you can try to sell your services to babysit kids in your neighborhood, but other babysitters may compete for the same business.
Competition also provides an important benefit for the buyer, or consumer. With competition, consumers have the freedom of choice. They are not forced to buy from only one seller or supplier. They can choose the best or the cheapest product or service, however they decide.
Example: Thanks to competition, you can decide to buy electronics, clothes, or shoes from many stores based on factors as price, convenience, quality, and service.
The freedom to work to earn a living is an important part of our economic system. Many laws protect your freedom to work.
Example: the Equal Opportunity Employment Act makes it illegal for employers to discriminate against job candidates because of race or gender.
Example: If you sell oatmeal cookies at a school bake sale, you might charge 25 cents each. If you sell 50 cookies, you make $12.50. But that is not your profit. You must subtract the money you paid for the oatmeal, butter, flour, and other ingredients. If you spend $5.00 to make the cookies, then you profit $7.50.
In a free-market economy, the government is not permitted to interfere with your business if you obey business laws—except for collecting taxes. Individuals and companies must pay taxes on the profits they earn to help support government services.
Supply and Demand:
Scarcity of Resources:
Have you ever tried to buy something and found that stores and online sellers have run out? Scarcity occurs when there is not enough of something available to all of the people who want to buy or use it. A resource is a supply of something or a support that is used to create economic activity, including capital (money), natural resources (such as water, timber, and oil), and human resources, such as labor.
When a resource becomes scarce, the free economy reacts to that imbalance of supply and demand.
Example: Your favorite band is playing in town next month. When you try to buy tickets, you find the concert is sold out. Tickets to that concert are scarce because there are more people who want to buy them than there are tickets for sale. Demand for tickets is greater than supply. Demand for tickets is greater than supply. To get a ticket for the sold-out concert, you might even be willing to pay more. Heavy demand makes prices increase. On the other hand, if tickets to the concert had not sold very well, the promoters might lower the price to encourage more people to buy.
Most Americans believe that, if you work hard, you can get ahead. Many successful business people have had to overcome obstacles in their lives. Dave Thomas, the founder of Wendy’s restaurant chain, was an adopted child who never knew his birth parents. His adoptive mother died when he was very young, and Dave spent most of his childhood moving from place to place so his adoptive father could find work. Thomas got his first job when he was 12. As a young man, he worked for a company helping restaurants that were having trouble making money. He was so good at this that he became a millionaire by the age of 35. In 1969, he opened his first Wendy’s Old-Fashioned hamburgers restaurant, naming it after his daughter. By 2001, there were more than 6,000 Wendy’s restaurants.
Dave never forgot his roots. He created the Dave Thomas Foundation for Adoption to find homes for children in foster care. He died in 2002, but his restaurants, his foundation, and his example live on.
The American Economic System:
Freedom is something we hold very dear in the United States. As our national anthem says, we live in “the land of the free.” We enjoy basic rights that guarantee our freedoms, including the freedom of our economy. The economy includes anything involving money, such as businesses, jobs, taxes, investments, and prices. Although it comes from an ancient Greek word meaning “home management,” economy now means the system of material needs, expenses, and resources of a society.
Basic Economic Freedoms
Unlike in some other nations, our government does not try to control how citizens get the goods and services they need and want. Lawmakers set rules for how some economic activities in the United States take place, but even those laws are designed to protect the basic freedoms of citizens.
The U.S. economy is based on capitalism--a system that allows individuals and businesses to own and control their own property and create wealth with minimal government interference. Individuals and businesses are free to succeed—or fail.
Other economic systems include:
Communism: A system directly opposed to capitalism, in which the government tries to protect individuals by controlling property and by sharing profits across the community as a whole.
Socialism: A system that allows—but limits—private ownership and control of production and profits, in order to protect the well-being of the community.
Capitalism
Capitalism is an economic system in which private parties own the means of production which are operated to produce a profit for the owners and investors. Decisions regarding distribution and price are made by the owners rather than by any central agency of the government. These private enterprises employ workers for wages to produce their products or services. Some define capitalism more loosely, in that many of the means of production are privately owned, but all are operated to produce a profit. Capitalism was widely adopted in the Western world and contributed to industrialization worldwide. Laissez-faire capitalism refers to capitalist activities free from any government regulation, taxes, or tariffs.
Socialism
Socialism is a system in which the means of production is held in common and management is cooperative in nature. Under socialism, workers carry out production and are compensated on merit and the amount of labor contributed to the society. Socialists believe that this system prevents the accumulation of wealth among a few private owners at the expense of the majority and gives workers more opportunity than capitalism to maximize their potential. In practice, a wide range of attitudes exist in socialist countries regarding civil liberties and democratic selection of leaders, ranging from democratic socialism to more totalitarian political systems.
Communism
Communism is a sociopolitical system in which ownership of the means of production is communal and private property and wage labor is eliminated. Different varieties of communism are practiced, but most are derived from the theories of Karl Marx. Pure communism refers to a society without classes in which decisions regarding policies and production are made with the best interests of the collective society in mind. Communist theory usually states that since the working class is exploited by the ruling class in capitalist societies, the working class must replace the ruling class
U.S Economic Freedoms- A Closer Look
In the United States, you enjoy several basic economic freedoms, including:
- Freedom to buy and sell products and services.
A market is created when buyers and sellers exchange goods and services.
Our economic system is based on an idea called the free market--people buying and selling products and services according to their own wants and needs, without the government or some other authority planning and controlling what they do. In a free market, sellers and buyers decide whether or not to engage in a transaction. In this type of economy, nobody is forced to buy or sell anything, or to do so at a price set by the government.
In the United States, we value the democratic idea of free enterprise—allowing private industry to operate with as little control by the government as possible. But the free market is not a “free for all.” Few Americans like the idea of laissez-faire—allowing the economy and free enterprise to be shaped only by the market, unrestricted by any government rules so businesses and citizens can operate as they wish. Most Americans want their government to protect its citizens from economic conditions that would limit or destroy their other freedoms.
As a result, our free enterprise system balances freedoms with the need to protect citizens by imposing some controls on what businesses can do. Just as we balance our rights and responsibilities as citizens, or use a balance of powers in our government, free enterprise is really a compromise. Businesses and individuals in the free market can buy and sell as they wish, but they must obey certain laws.
Example: Workplace safety for employees, accurate product labeling, and using agreed-upon weights and measurements for products.
- Freedom to compete.
The freedom to compete helps both sellers and buyers. As a seller, or someone who supplies a product or service, you can sell to anyone who wants to buy. And you can try to sell to the same customers as every other supplier.
Example: you can try to sell your services to babysit kids in your neighborhood, but other babysitters may compete for the same business.
Competition also provides an important benefit for the buyer, or consumer. With competition, consumers have the freedom of choice. They are not forced to buy from only one seller or supplier. They can choose the best or the cheapest product or service, however they decide.
Example: Thanks to competition, you can decide to buy electronics, clothes, or shoes from many stores based on factors as price, convenience, quality, and service.
- Freedom to work.
The freedom to work to earn a living is an important part of our economic system. Many laws protect your freedom to work.
Example: the Equal Opportunity Employment Act makes it illegal for employers to discriminate against job candidates because of race or gender.
- Freedom to make a profit.
Example: If you sell oatmeal cookies at a school bake sale, you might charge 25 cents each. If you sell 50 cookies, you make $12.50. But that is not your profit. You must subtract the money you paid for the oatmeal, butter, flour, and other ingredients. If you spend $5.00 to make the cookies, then you profit $7.50.
In a free-market economy, the government is not permitted to interfere with your business if you obey business laws—except for collecting taxes. Individuals and companies must pay taxes on the profits they earn to help support government services.
- Freedom to own property.
Supply and Demand:
Scarcity of Resources:
Have you ever tried to buy something and found that stores and online sellers have run out? Scarcity occurs when there is not enough of something available to all of the people who want to buy or use it. A resource is a supply of something or a support that is used to create economic activity, including capital (money), natural resources (such as water, timber, and oil), and human resources, such as labor.
When a resource becomes scarce, the free economy reacts to that imbalance of supply and demand.
- Supply is the amount of a particular good or service that producers are willing (and able) to provide at a given price.
- Demand is the amount of a particular good or service that people are willing (and able) to buy at various prices.
- When supply is greater than demand, prices tend to go down, or decrease.
- When demand is greater than supply, prices tend to go up, or increase.
Example: Your favorite band is playing in town next month. When you try to buy tickets, you find the concert is sold out. Tickets to that concert are scarce because there are more people who want to buy them than there are tickets for sale. Demand for tickets is greater than supply. Demand for tickets is greater than supply. To get a ticket for the sold-out concert, you might even be willing to pay more. Heavy demand makes prices increase. On the other hand, if tickets to the concert had not sold very well, the promoters might lower the price to encourage more people to buy.
15.2- ECONOMIC SYSTEMS
Command Economy:
In a command economy, the central government makes most of the country’s economic decisions. Command economists believe that all the resources of a country should be managed by the government so they can be used by the government to serve its citizens. Critics say command economies do not work.
Example: In the 20th Century, the former Soviet Union and other Eastern European socialist countries used a government-managed command economy system to try to share resources and profits more equally among their citizens. Their economies did not grow naturally under government control, and ordinary citizens did not thrive. Most of those countries have now shifted to a less centralized economy.
Market Economy:
In a market economy, the government or any other authority does not try to manage the economy. Markets grow, shrink, and change only according to supply and demand, or what some economists call market-driven, or natural market forces. Buyers and the costs of goods and services determine what prices can be charged.
Example: The price of laptop is set by computer companies and stores, not by any government or organization. The owners of the computer companies set prices based on:
Mixed Economy:
As you might guess, mixed economies follow a combination of two factors:
Individuals, businesses, and the government all make economic decisions. Most countries today, including the United States, use a mixed economy. The U.S. Government has passed antitrust laws to restrict any company from having a Monopoly—that’s when one company has exclusive control of sales of a product or service in a market. Monopolies have no competition. They usually result in poorer service than would exist in a competitive market.
Example: AT&T was once the only phone company operating in America. But as other companies developed the technology to deliver telephone service, the government broke up AT&T’s monopoly to allow competition.
In a command economy, the central government makes most of the country’s economic decisions. Command economists believe that all the resources of a country should be managed by the government so they can be used by the government to serve its citizens. Critics say command economies do not work.
Example: In the 20th Century, the former Soviet Union and other Eastern European socialist countries used a government-managed command economy system to try to share resources and profits more equally among their citizens. Their economies did not grow naturally under government control, and ordinary citizens did not thrive. Most of those countries have now shifted to a less centralized economy.
Market Economy:
In a market economy, the government or any other authority does not try to manage the economy. Markets grow, shrink, and change only according to supply and demand, or what some economists call market-driven, or natural market forces. Buyers and the costs of goods and services determine what prices can be charged.
Example: The price of laptop is set by computer companies and stores, not by any government or organization. The owners of the computer companies set prices based on:
- Their costs—such as programmer fees, manufacturing expenses, advertizing, shipping, store rents, and so on.
- What buyers will pay—if buyers like you think the computer is too expensive, they won’t buy it. Eventually, the seller will drop the price to reach a level consumers are willing to pay.
Mixed Economy:
As you might guess, mixed economies follow a combination of two factors:
- Market-Driven Forces
- Centrally Planned Decisions
Individuals, businesses, and the government all make economic decisions. Most countries today, including the United States, use a mixed economy. The U.S. Government has passed antitrust laws to restrict any company from having a Monopoly—that’s when one company has exclusive control of sales of a product or service in a market. Monopolies have no competition. They usually result in poorer service than would exist in a competitive market.
Example: AT&T was once the only phone company operating in America. But as other companies developed the technology to deliver telephone service, the government broke up AT&T’s monopoly to allow competition.
15.3- U.S. BUSINESS ORGANIZATION AND MANAGEMENT
For different types of business organizations sell products and services.
Sole Proprietorship
A sole proprietorship is a business run by one person without partners, and not set up, or incorporated, as a company. Money to start and grow the business usually comes from the owner-proprietor.
Examples: Many newsstands, convenience stores, and other small shops are sole proprietorships. So are writers, editors, artists, and consultants who work for themselves, not for a company, often out of their homes.
Advantages of sole proprietorship include complete control of the business and the ability to be your own boss. Sole proprietorships are also the simplest form of business to set up.
Disadvantages include unlimited liability- the legal responsibility to pay unsettled debts or damages. Customers who have serious complaints can sue a sole proprietor for her or his home and personal possessions. Sole proprietorships are also limited by the talents, skills, energies, and resources of the sole proprietor.
Partnership
Many business activities need the talents, skills, energies, and resources of more than one person. As a result, many sole proprietors form partnerships with other people especially when their businesses grow.
A partnership is a business owned by more than one person. The partners are liable, or personally responsible for the company's debts and damages, just as if they were sole proprietors (except in limited partnerships, which limit liability for some partners.)
Advantages off partnerships are similar to those of a sole proprietorship, but partnerships also offer the added support provided by the other partners.
Disadvantages are also similar to those of sole proprietorships. Partnerships are also slightly more complicated in terms of ownership and decision-making because more owners are involved.
Corporation
Incorporation is a complicated idea that basically means that a business has been made a legal entity or corporation, with the approval of the government, for its owners' benefit.
Some towns also incorporate to gain legal status and municipal rights for their citizens. When an owner starts a corporation, or when it's owners and managers want to expand into new types of businesses or markets, they can raise money from individuals and institutions in two ways:
Advantages of corporations for their principal owners are protection from liability and right to sell shares.
Disadvantages include extra set up time and expense, and more legal and tax reporting requirements than partnerships or proprietorships have.
Not-for-Profit Organizations
Sole proprietorships, partnerships, and corporations all try to earn profit for their owners and investors. But some business like organizations, such as charities or some educational and scientific foundations, try not to keep more money than they need to operate and fulfill their missions. They do not aim to make a profit. Some examples of not-for-profit organizations are:
- Sole Proprietorships
- Partnerships
- Corporations
- Not for Profit Organizations
Sole Proprietorship
A sole proprietorship is a business run by one person without partners, and not set up, or incorporated, as a company. Money to start and grow the business usually comes from the owner-proprietor.
Examples: Many newsstands, convenience stores, and other small shops are sole proprietorships. So are writers, editors, artists, and consultants who work for themselves, not for a company, often out of their homes.
Advantages of sole proprietorship include complete control of the business and the ability to be your own boss. Sole proprietorships are also the simplest form of business to set up.
Disadvantages include unlimited liability- the legal responsibility to pay unsettled debts or damages. Customers who have serious complaints can sue a sole proprietor for her or his home and personal possessions. Sole proprietorships are also limited by the talents, skills, energies, and resources of the sole proprietor.
Partnership
Many business activities need the talents, skills, energies, and resources of more than one person. As a result, many sole proprietors form partnerships with other people especially when their businesses grow.
A partnership is a business owned by more than one person. The partners are liable, or personally responsible for the company's debts and damages, just as if they were sole proprietors (except in limited partnerships, which limit liability for some partners.)
Advantages off partnerships are similar to those of a sole proprietorship, but partnerships also offer the added support provided by the other partners.
Disadvantages are also similar to those of sole proprietorships. Partnerships are also slightly more complicated in terms of ownership and decision-making because more owners are involved.
Corporation
Incorporation is a complicated idea that basically means that a business has been made a legal entity or corporation, with the approval of the government, for its owners' benefit.
- A corporation is considered by law to exist as something separate from its employees and owners.
- Because a corporation is a kind of "being" or "thing" owners set up corporations so "they" can become an "it."
- Some corporations sell stock to raise money, so owners can avoid using their own or borrowing the money they need.
- Corporations protect their owners from personal liability for the debts or mistakes of the business.
Some towns also incorporate to gain legal status and municipal rights for their citizens. When an owner starts a corporation, or when it's owners and managers want to expand into new types of businesses or markets, they can raise money from individuals and institutions in two ways:
- By Selling Stock: Stocks represent shares of ownership. You can think of stocks as pieces of the total corporate pie. When you buy a company's stock, you become an owner of some portion of the company. (In fact, all ownership of a corporation is in shares- even that of the original owners.) As a shareholder, you may even be able to vote on major decisions the company makes. Investing in stocks is risky: if the company does well and the stock price goes up, your investment becomes more valuable. But if stock prices plunge- you lose money.
- By Issuing Bonds: Bonds are interest bearing instruments issued by corporations or government agencies. In other words, bonds are loans that investors make to corporations and governments in exchange for a set amount of interest, which is money paid for the use of the money. the amount of interest you will get is guaranteed when you buy a bond, so bonds are a safer investment than stocks.
Advantages of corporations for their principal owners are protection from liability and right to sell shares.
Disadvantages include extra set up time and expense, and more legal and tax reporting requirements than partnerships or proprietorships have.
Not-for-Profit Organizations
Sole proprietorships, partnerships, and corporations all try to earn profit for their owners and investors. But some business like organizations, such as charities or some educational and scientific foundations, try not to keep more money than they need to operate and fulfill their missions. They do not aim to make a profit. Some examples of not-for-profit organizations are:
- Charities such as the American Red Cross, the YMCA, and the Salvation Army
- Schools, Universities, and some private educational agencies.
- Churches, mosques, and synagogues
15.4- BASIC ECONOMIC DECISIONS
You probably try to use your time to get as many things done and have as much fun as possible. Every economic system aims to use it's factors of production- the resources used in the production of goods and services- as efficiently as possible.
Factors of Production:
Factors of production can be a complicated idea. Think of them as things that can be used to create goods or services that have value. They can be broken down into three areas:
Examples: If a clothing manufacturer uses all its factories, machines, and employees to make jeans, it cannot make T-shirts. If a city uses all its land for buildings, there will not be any land for parks. If a company spends all its profits on employee holiday bonuses, it will not have enough money to invest in new computers.
Managing and balancing its factors of production are the major challenges of any business.
Production, Distribution, and Consumption:
Other areas of basic economic decision making include:
Factors of Production:
Factors of production can be a complicated idea. Think of them as things that can be used to create goods or services that have value. They can be broken down into three areas:
- Capital- Human made means of production, such as tools and machinery, a factory's buildings and property, or money.
- Land- Natural resources, such as water, minerals, or timber as well as land used for developing resources for farming. or for building on.
- Labor- human work effort and people employed in production.
Examples: If a clothing manufacturer uses all its factories, machines, and employees to make jeans, it cannot make T-shirts. If a city uses all its land for buildings, there will not be any land for parks. If a company spends all its profits on employee holiday bonuses, it will not have enough money to invest in new computers.
Managing and balancing its factors of production are the major challenges of any business.
Production, Distribution, and Consumption:
Other areas of basic economic decision making include:
- Production- What and how many goods and services to make.
- Distribution- how to move goods and services to consumers.
- Consumption- what goods and services to buy.