{"id":181,"date":"2017-08-22T16:05:01","date_gmt":"2017-08-22T16:05:01","guid":{"rendered":"http:\/\/americanboard.org\/Subjects\/elementary-education\/?page_id=181"},"modified":"2017-09-22T14:10:21","modified_gmt":"2017-09-22T14:10:21","slug":"economics-the-basics","status":"publish","type":"page","link":"https:\/\/americanboard.org\/Subjects\/elementary-education\/economics-the-basics\/","title":{"rendered":"Economics: The Basics"},"content":{"rendered":"<div class=\"twelve columns\" style=\"margin-top: 10%;\">\n<div class=\"advance\"><a class=\"button\" href=\"http:\/\/americanboard.org\/Subjects\/elementary-education\/economics-geography-and-reasoning\">Workshop Index<\/a>\u00a0<a class=\"button button-primary\" href=\"http:\/\/americanboard.org\/Subjects\/elementary-education\/geography\">Next Lesson \u27a1<\/a><\/div>\n<p><!-- CONTENT BEGINS HERE --><\/p>\n<h1 id=\"title\">Economics: The Basics<\/h1>\n<h4>Objective<\/h4>\n<p>This section will examine some basic ideas about economics, including the concepts of exchange, supply and demand, overhead, and other key points.<\/p>\n<section>\n<h3>Numbers, Numbers Everywhere<\/h3>\n<p>The principle of exchange\u2014of give and take\u2014is central to the development and maintenance of any economic system. <abbr title=\"In economics, the people or companies that make goods or provide services.\">Producers<\/abbr> cannot exist without <abbr title=\"In economics, the people or companies that purchase goods or services.\">consumers<\/abbr>. If every entity within an economy were a producer, no exchange would exist. If every entity in an economy were a consumer, a dearth of supply would drive the system into the ground. A functional economic system requires some to produce and others to consume. Equilibrium of give and take allows economies to flourish.<\/p>\n<p>The original economic model worked on a system of <abbr title=\"To trade goods or services (money is not involved).\">barter<\/abbr>. The barter system allowed for each individual entity in the system to be both producer and consumer, since most people consumed what others produced and produced what others consumed. The invention of currency as a universal standard of value led to the dominance of price-based economies, where a certain amount of currency\u2014affected by supply of commodities, demand for commodities, and other factors\u2014could be exchanged for any available good or service. One of the factors outside of <a class=\"inline cboxElement\" href=\"#supply-and-demand\">supply and demand<\/a> that affects the price of goods and services is <abbr title=\"The expenses associated with keeping a business operating.\">overhead<\/abbr>. In order for the producer to have a comfortable seat in any economic system, the producer must cover his or her overhead and reap at least a little <abbr title=\"What a business or individual earns after meeting all operating expenses.\">profit<\/abbr> in the process.<\/p>\n<div style=\"display: none;\">\n<div id=\"supply-and-demand\" style=\"padding: 10px; background: #fff;\">\n<h4>Supply and Demand<\/h4>\n<p><center><img decoding=\"async\" src=\"http:\/\/americanboard.org\/Subjects\/elementary-education\/wp-content\/uploads\/sites\/4\/2017\/08\/supplyanddemand.jpg\" alt=\"Supply and demand chart\" \/><\/center><\/div>\n<\/div>\n<p>Economic systems that include great numbers of people can be scaled up in three different tiers.<\/p>\n<ul>\n<li>The small tier, the lowest one to the ground, is the individual. In large economies, the tier of the individual is chiefly one of consumption. The decisions made by any individual consumer in an economic system cannot have too cataclysmic an effect on the system as a whole.<\/li>\n<li>The middle tier of an economic system is business, a conglomeration of individuals devoted to producing, transporting, and marketing goods for the individual to consume. Businesses themselves also consume, usually different products and on a greater scale than individuals. Entire businesses exist to supply other businesses, with no connection to the individual consumer. Businesses vary in scope, from one or just a few individuals to hundreds of thousands of individuals all working to further the same cause.<\/li>\n<li>A third tier, the interventionist government, rises to a greater level of necessity as businesses grow larger within a single economic system. Without a regulatory body to place sanctions on a <abbr title=\"An economic system with no regulation on supply and demand.\">free market<\/abbr> business, a business could grow so powerful that economic competition would no longer be possible, and the equilibrium in the economic system would break down.<\/li>\n<\/ul>\n<section class=\"question\">\n<h4>Question<\/h4>\n<p>Chuck leases a 300-square foot shop to Benny for $678 per month. In this case, $678 is considered<\/p>\n<ol>\n<li>a sanction.<\/li>\n<li>a part of Chuck\u2019s overhead.<\/li>\n<li>a portion of Benny\u2019s profit.<\/li>\n<li>a part of Benny\u2019s overhead.<\/li>\n<\/ol>\n<p><a class=\"q-answer button button-primary\">Reveal Answer<\/a><\/p>\n<p class=\"q-reveal\">Answer D is correct. Recall that overhead is the amount of money it takes just to keep a business operational. While there are nonmonetary examples of overhead (time, for example), its value is mostly measured in cash.<\/p>\n<\/section>\n<h3>Some Key Concepts<\/h3>\n<p>Other important economic terms to remember are <em>scarcity<\/em> and <em>opportunity cost<\/em>.<\/p>\n<p><em>Scarcity<\/em> means not having enough resources to fulfill demand. Scarcity of product is usually beneficial to the producers of goods, such as businesses. In times of extreme scarcity, the government must often step in and see that no one business holds dramatic dominance of the supply and therefore the market. <em>Opportunity cost<\/em> is another important economic concept; it is less concrete than the concept of scarcity. Whenever a decision is made, there are two costs involved: the direct value of making the decision and the opportunity cost of not being able to make a different decision.<\/p>\n<p>For instance, the opportunity cost to a city building a hospital on a certain plot of land would be the potential profit from building a factory, or the various other benefits that the citizens would reap if the structure were to become a repair shop or an employment agency. If a decision strongly benefits too few entities within a system or takes too much away from too many, the opportunity cost of that decision is too high. Regulators must step in to ensure a less extreme decision.<\/p>\n<p>Economics is a field filled with theorists and their ideas. <a class=\"inline cboxElement\" href=\"#bastiat\">Click here to learn more about one of them, the \u201cparable of the broken window.\u201d<\/a><\/p>\n<div style=\"display: none;\">\n<div id=\"bastiat\" style=\"padding: 10px; background: #fff;\">\n<p>French economist Fr\u00e9d\u00e9ric Bastiat composed the parable of the broken window in his 1950 essay That Which is Seen and That Which is Not Seen. In consoling a shopkeeper whose son has just broken the shop\u2019s window, the onlookers say, &#8220;It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?&#8221; They theorize that the broken window is actually beneficial to the whole town, as the glazier earns money and then spends it on bread. The baker benefits and spends his earnings at the cobbler\u2019s and so on. However, as Bastiat points out, the townspeople aren\u2019t considering the hidden costs, that is, what the shopkeeper can no longer purchase due to window repair fee.<\/p>\n<\/div>\n<\/div>\n<p>Another economic concept that has great effect on decisions in any economic system is the concept of <em>trade-off<\/em>. In order to increase one aspect of an economic system, another must often be decreased or neglected. Trade-offs such as efficiency for labor cost, quantity for quality, and energy supply for environmental solidity are common. The concept of trade-offs is related to opportunity cost. Whenever the trade-off is too heavily weighted on one side against the equilibrium of the system, amendments to the decision must be made to see that equilibrium is maintained.<\/p>\n<p>Spending, saving, and investing are important components of an economy. Spending means the acquisition of commodities, but it also means the consumer has less currency. Saving means the consumer keeps his or her currency, but whatever the consumer could have bought remains on the shelf. Investing is a less cut-and-dry proposition; investing means that the consumer has less money and no <abbr title=\"Something useful that can be turned to commercial advantage.\">commodity<\/abbr> to show for his or her money, but that in the future, the consumer hopes to have more money for having invested the money that he or she did. It would not be a stretch to say that the commodity purchased in an investment is the commodity of earning potential.<\/p>\n<p>Modern economies, more often than not, feature the possibility of <abbr title=\"The ability to borrow or to purchase goods and services with payment delayed beyond delivery.\">credit<\/abbr>. It is important for the consumer to be careful when spending money that he or she does not have. If he or she has a good record of handling credit, the consumer is more likely to be extended credit in the future, but his or her privilege of credit may be revoked altogether if his or her record is bad.<\/p>\n<p>Commodity-producing businesses need employees to help keep them running. The factors of production, and, subsequently, the wages of employees, are determined in much the same way as prices on the market\u2014with the laws of supply and demand. When demand is great for a product that any certain business is pumping out, that business is required to increase production and therefore raise the amount of money spent on wages (this is an example of a trade-off\u2014quantity for labor cost). Should there be a glut of supply for the product that any certain business produces, production, wages, and sometimes the number of employees must be cut back. High demand is most often seen with low supply, and high supply is most often seen with low demand. Free market economies function mainly on supply and demand.<\/p>\n<h3>Specialization<\/h3>\n<p>Sometimes it is easier for one party to produce something than it is for another party to produce the same thing. This simple concept is the basis for <abbr title=\"In economics, the narrowing of production to a specific field or action in order to benefit financially. For example, a company who specializes in making gas caps can set up their factory for that one item and therefore increase production, lower their cost, and compete more effectively.\">specialization<\/abbr> and exchange, a system whose benefits include greater overall efficiency for all parties and the ability of all parties to be utilized within a system to their fullest potential. Take the following table as an example:<\/p>\n<table>\n<thead>\n<tr>\n<th><\/th>\n<th>1 unit of clothing<\/th>\n<th>1 unit of food<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td><strong>Country X<\/strong><\/td>\n<td>6 hours<\/td>\n<td>2 hours<\/td>\n<\/tr>\n<tr>\n<td><strong>Country Z<\/strong><\/td>\n<td>3 hours<\/td>\n<td>9 hours<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>The table shows that Country X has the advantage in ease of food production, while Country Z has the advantage in ease of production of clothing. Country X produces one unit of clothing in the same amount of time that it takes to produce three units of food. Conversely, it takes Country Z three times as long to produce a unit of food as it does to produce a unit of clothing. The simplest conclusion to draw from this table is that if X focused most of its resources on producing food and Z most of its resources on clothing, the two could trade their surpluses of their chief product. Both economies would flourish with less labor loss than would occur without specialization and exchange.<\/p>\n<section class=\"question\">\n<h4>Question<\/h4>\n<p>What is the basic concept behind the above clothing\/food graph?<\/p>\n<ol>\n<li>Supply and demand<\/li>\n<li>Specialization and exchange<\/li>\n<li>Production and usage<\/li>\n<li>Economics and labor<\/li>\n<\/ol>\n<p><a class=\"q-answer button button-primary\">Reveal Answer<\/a><\/p>\n<p class=\"q-reveal\">The correct answer is B\u2014the economically sound plan of specialization and exchange.<\/p>\n<\/section>\n<h3>U.S. Economics<\/h3>\n<p>The U.S. economy is a multifaceted system, with each aspect playing a vital role. These systems include private ownership of businesses, public and private banks, the stock market, labor unions, and government agencies. Allowing businesses to be privately owned and operated, for instance, provides choice to the consumer and competition within the market. The presence of both private and government banks allows for the safekeeping of <abbr title=\"Value adjusted for inflation (as opposed to nominal).\">real value<\/abbr> for both individual consumers and conglomerate businesses and industry. The stock market is a way to track the performance of companies as well as consumer confidence in them. The stock market also provides investment opportunities for consumers. A labor union is a collective at the employee level that keeps in mind the best interests of its workers. Labor unions see to it that businesses and governments do not allow their own interests to conflict with the interests of the people who make those institutions what they are. <a class=\"inline cboxElement\" href=\"#government\">Government agencies<\/a> are many and various, providing essential services to one feature or another of a national economy.<\/p>\n<div style=\"display: none;\">\n<div id=\"government\" style=\"padding: 10px; background: #fff;\">\n<table>\n<thead>\n<tr>\n<th>Government Agency<\/th>\n<th>Economic Effect<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Environmental Protection Agency<\/td>\n<td>Keeps ecological interests in mind; prevents economic expansion at too great an expense to natural environments<\/td>\n<\/tr>\n<tr>\n<td>Economic Research Service<\/td>\n<td>Performs research that addresses the need for a safe food supply, a well-nourished American population, and good quality of life for rural Americans<\/td>\n<\/tr>\n<tr>\n<td>Economic Development Administration<\/td>\n<td>Tends to the productivity of the American economy and ensures that all regions share in economic opportunity<\/td>\n<\/tr>\n<tr>\n<td>Office of Economic Adjustment<\/td>\n<td>Provides assistance to communities adversely affected by military decisions such as closure of bases and cancellation of contracts<\/td>\n<\/tr>\n<tr>\n<td>Economics and Statistics Administration<\/td>\n<td>Keeps accurate public data and provides analysis of U.S. economic accounts<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<\/div>\n<h3>Economics On A Large Scale<\/h3>\n<p>Government policy also puts a great deal of pressure on economic movements within any given country. Inflation, the swelling of the <abbr title=\"Any single number calculated from an array of prices and quantities. A list of prices for all goods and services is not possible, so a sample (price index) is used.\">price index<\/abbr>, can negatively affect an economy when it rises beyond nominal levels. Governments can institute policies that tax held currency such as savings, making it just as expensive to hang on to your money as to spend it. This policy can energize a stagnant economy and slow down inflation when it threatens to become rampant. An unfavorable consequence of anti-inflation policies is that they can either create or exacerbate unemployment. In order to reconcile the contradictory aims of anti-unemployment and anti-inflation policy, the government often focuses its energies on economic growth, which is conventionally measured as an increase in the real <abbr title=\"The value of all the goods and services produced within the borders of a nation.\">gross domestic product<\/abbr>.<\/p>\n<p>These quantities are examples of <abbr title=\"The study of the workings of a national or international economy, including factors such as income, earnings, and trade deficits.\">macroeconomic<\/abbr> quantities. Due to the grand nature of what they describe, macroeconomic quantities are difficult to measure. Unemployment is measured by counting all the nonworking people actively seeking employment and dividing that number by the number of total citizens eligible for the work force. The price index is calculated by dividing the sum of the price in one period and the quantity in a second by the sum of price and quantity in the second period. The gross domestic product is calculated by subtracting the sum of national consumption, government expenditures, aggregate investments, and exports from all products imported into the national economy.<\/p>\n<h3>Market Economies<\/h3>\n<p>Most national economies in the world today are <abbr title=\"Economies that operate by voluntary exchange in a free market. Supply and demand are not controlled by a central authority or government.\">market economies<\/abbr>, where goods and services are traded freely among citizens according to their <abbr title=\"The price for which a good will trade in a given market.\">exchange values<\/abbr>. Eighteenth-century economist and philosopher Adam Smith, credited with instituting economics as an academic and political discipline, considered the free market to be a self-regulating system due to the natural influence of the laws of supply and demand. Smith believed that if each citizen in a free market acted in his or her own best interest, the free market would flourish.<\/p>\n<p>Smith also argued that the only regulatory measures necessary in a free market were the naturally occurring factors of competition and the desire to advance the human species. Buyers would be prudent in acquiring proper things, and sellers would be prudent in regulating prices in order to, if for no other reason, continue their own advancement. Buyers would compete with one another in their acquisition, and sellers would compete with one another in the quality and availability of their products and facility to provide them, all in order to see themselves and their successors at the head of the next generation.<\/p>\n<p>The driving force in capitalist systems is currency, and in a global economy, multiple currencies are traded. If a citizen of one country with one currency chooses to trade with a citizen of another country with another currency, the currency of one must be translated, like a language, into the currency of the other before any transaction can be made. This principle necessitates <abbr title=\"The price of one currency translated into the price of another. For example, the British pound may be worth two US dollars.\">exchange rates<\/abbr>, standardized conversions of one currency to another. Exchange rates are prices of individual currencies in the world market and are determined much in the same way as production prices within an individual economy; great demand increases price, surplus or lack of demand reduces it.<\/p>\n<p>The United States dollar (USD) is a very important <em>unit currency<\/em> in the world economy. Its movements affect financial matters across the globe, but fluctuations in the price of the dollar on the world market are most significant to the U.S. economy. As the value of the dollar drops, the United States loses influence in the global economy and some of its avenues for international business. Imported goods become more expensive while exports drop in price. A rising dollar has exactly the opposite effect: more international influence and cheaper imports, with exports going at a higher rate. The quality of life in any capitalist country participating in a world economy is very closely related to the perceived quality of its currency in that economy.<\/p>\n<section class=\"question\">\n<h4>Question<\/h4>\n<p>A consumer is willing to buy four compact discs for $15 but will buy six if the discs are priced at $12 per piece. Which economic force is being described in this scenario?<\/p>\n<ol>\n<li>Demand<\/li>\n<li>Price indexing<\/li>\n<li>Supply<\/li>\n<li>Scarcity<\/li>\n<\/ol>\n<p><a class=\"q-answer button button-primary\">Reveal Answer<\/a><\/p>\n<p class=\"q-reveal\">The correct answer is A. Demand affects the price of something that a consumer is not only willing to buy but also has the capacity to buy (depending on the price).<\/p>\n<\/section>\n<h3>Review<\/h3>\n<ul>\n<li>An economy is characterized by production, consumption, and exchange.<\/li>\n<li>Forces such as supply and demand have dramatic effects on production, costs, wages, and other economic factors.<\/li>\n<li>Gross domestic product (GDP) is the measure of the value of economic production of a country.<\/li>\n<li>Market economies exist where goods and services are traded freely among citizens according to their exchange values.<\/li>\n<li>Adam Smith was an economic philosopher who is credited with many of the ideas underlying capitalism.<\/li>\n<\/ul>\n<\/section>\n<p><!-- CONTENT ENDS HERE --><\/p>\n<div class=\"advance\"><a class=\"button\" href=\"http:\/\/americanboard.org\/Subjects\/elementary-education\/economics-geography-and-reasoning\">Workshop Index<\/a>\u00a0<a class=\"button button-primary\" href=\"http:\/\/americanboard.org\/Subjects\/elementary-education\/geography\">Next Lesson \u27a1<\/a><\/div>\n<p><a class=\"backtotop\" href=\"#title\">Back to Top<\/a><\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Workshop Index\u00a0Next Lesson \u27a1 Economics: The Basics Objective This section will examine some basic ideas about economics, including the concepts of exchange, supply and demand, overhead, and other key points. Numbers, Numbers Everywhere The principle of exchange\u2014of give and take\u2014is central to the development and maintenance of any economic system. Producers cannot exist without consumers. [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"parent":0,"menu_order":0,"comment_status":"closed","ping_status":"closed","template":"","meta":{"footnotes":""},"class_list":["post-181","page","type-page","status-publish","hentry"],"_links":{"self":[{"href":"https:\/\/americanboard.org\/Subjects\/elementary-education\/wp-json\/wp\/v2\/pages\/181","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/americanboard.org\/Subjects\/elementary-education\/wp-json\/wp\/v2\/pages"}],"about":[{"href":"https:\/\/americanboard.org\/Subjects\/elementary-education\/wp-json\/wp\/v2\/types\/page"}],"author":[{"embeddable":true,"href":"https:\/\/americanboard.org\/Subjects\/elementary-education\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/americanboard.org\/Subjects\/elementary-education\/wp-json\/wp\/v2\/comments?post=181"}],"version-history":[{"count":11,"href":"https:\/\/americanboard.org\/Subjects\/elementary-education\/wp-json\/wp\/v2\/pages\/181\/revisions"}],"predecessor-version":[{"id":1256,"href":"https:\/\/americanboard.org\/Subjects\/elementary-education\/wp-json\/wp\/v2\/pages\/181\/revisions\/1256"}],"wp:attachment":[{"href":"https:\/\/americanboard.org\/Subjects\/elementary-education\/wp-json\/wp\/v2\/media?parent=181"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}