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Unit 10 SS5E1-4 Economic Understandings

In this unit, students will also incorporate all they have learned about economics in this concluding unit by understanding that good citizens also make wise spending and saving choices. The connecting themes Individuals, Groups, Institutions will be realized because the student will understand that the actions of individuals, groups, and/or institutions affect the economy through intended and unintended consequences.

SS5E1 Use the basic economic concepts of trade, opportunity cost, specialization, productivity, and price incentives to illustrate historical events.

The large costs in funds and materials for wars like World War II resulted in limited resources within the United States. Thus, resources had to be rationed. During World War II, the United States government had to equip, clothe, feed, move, and support soldiers on two fronts. To get troops to Europe and the Pacific quickly, limited resources within the United States were reallocated. This meant that rather than allowing citizens to buy whatever they could afford, the government chose to ration or limit certain items. Substances like rubber, gasoline, and even basic food items were rationed. The government used rationing to provide members of the armed forces with the materials needed for war.

Citizens line up outside their local War Rationing Board office on Gravier Street in New Orleans, 1943.

a. Describe opportunity costs and their relationship to decision-making across time (e.g., decisions by individuals in response to rationing during WWII).

I can define opportunity costs and describe their relationship to decision-making across time. (Knowledge)
I can describe opportunity costs and their relationship to decisions by individuals in response to rationing during WWII. (Knowledge)

The rationing of resources during war demonstrates the economic concept of opportunity cost. To understand opportunity cost in its simplest form would be define it as what you gave up to when you made a choice. During World War II the opportunity cost was allowing everyone in the United States to buy everything they wanted and could afford, when the government made the decision or choice to ration resources. This concept is challenging to understand, because it seems that the items were the opportunity cost, and associate it negatively with giving something up. Opportunity cost is the “next best choice,” and in this case, that was allowing freedom to purchase anything they wanted if they had the money for those items. For the United States government, depriving citizens of their right to purchase was an acceptable opportunity cost so that the military could have what they needed. When demonstrating mastery of this element, students must be able to describe an opportunity cost in general, and should know that there is only one “opportunity cost” when in a decision-making situation. That cost is the single next-best alternative that is not selected.

b. Explain how price incentives affect people’s behavior and choices (e.g., decisions to participate in cattle trails because of increased beef prices).

I can define price incentives and explain how they affect people’s behavior and choices. (Knowledge)
I can explain how price incentives affected people's decisions to participate in cattle trails because of increased beef prices. (Knowledge)

Incentives have affected economic decision-making throughout history. Increased demand for beef and beef products along the Eastern coast and in the growing cities of the Midwest, made large-scale cattle ranching profitable. Despite the cost of moving large numbers of cattle, ranchers and their employees still made a profit. Their price incentive was the high price of beef in the urban areas where cattle were shipped. Students need to understand that if local beef prices had been competitive, then ranchers would have lacked the incentive to move cattle across Texas to get to railway hubs for shipping.

c. Describe how specialization can improve standards of living and productivity (e.g., how Henry Ford’s use of the assembly line reduced the price of automobiles).

I can define specialization and describe how it can improve standards of living and productivity. (Knowledge)
I can define the assembly line and describe how Henry Ford’s use of the assembly line reduced the price of automobiles. (Knowledge)

Henry Ford’s development of mass production, the assembly line, and inter-changeable parts lead to specialization in manufacturing. As a result, Ford created an automobile, the Model T, cheaper and faster. As a product, it was in high demand because Americans could purchase it at a lower cost, and it was a high-quality product.

Specialization benefited Americans and people could focus their productive energy on a smaller set of skills. This allowed them to become better at those skills, which in turn, meant that those customers who consumed those goods and services ended up with a higher quality product. Students need to realize that at the beginning of the 20th century, industrialization had already begun to deeply affect American life. Certain areas of the country had numerous large cities, where people worked in factories or other large-scale businesses. Other pockets of the country still had many people in agrarian communities. In these areas, farming was mostly for self-sufficiency. As the years passed, the agrarian traditions remained in the South longer than they did in the North. Thus, many people in Northern cities worked for monetary wages, rather than just as producers of food for their families. Also in the north, many farms existed on larger tracts of land, which provided them with the opportunity of growing crops for sale. This meant that they could use profits to purchase items they could not make or grow. In the South, farmers were often sharecroppers or tenant farmers, who had smaller farms and less access to cash. As a result, they were less able to buy consumable factory goods. People working successfully in businesses had to purchase all their food, but were also able to pay for what they wanted. Again, this economy that was reliant on cash and not bartering was more common in urban areas, and more common in the North. In fact, during the first few decades of the 20th century, many people left the rural South for urban areas in the North to take advantage of job opportunities and specialization to improve their lives.

Since consumers are free to buy what they want, their purchases reveal to producers what goods and services are in demand. This helps sellers because demand tells then what they should produce if they want to make a profit. It also helps consumers by making sure producers are only producing things consumers want or need.

d. Describe how trade and voluntary exchange promotes economic activity (e.g., how the Panama Canal increases trade among countries).

I can define trade and voluntary exchange and describe how they promote economic activity. (Knowledge)
I can describe how the Panama Canal increases trade among countries. (Knowledge)

When trade occurs in a truly voluntary exchange, both parties benefit. The buyer and the seller of the service or good both gain something from the exchange. Specifically, in a voluntary exchange, buyers receive a good or service that they want, while the seller receives a payment for that good or service. Once this exchange is replicated on a larger scale, you have a working economy. Thus, if both parties are acting in mutual self-interest, continued trade promotes additional economic activity.

Panama Canal - Voluntary Exchange

One example in historical context that illustrates this concept is the Panama Canal. This canal made trade between countries easier, as ships no longer had to make the treacherous journey around the southernmost tip of South America. It increased the speed in which goods could travel, and made shipping goods more lucrative. While the Canal itself took almost 40 years to turn a profit, demand for passing through the Canal continues to increase, so much so that shipping companies now pay an additional fee to move through it more quickly.

Steam shovels load rocks blasted away onto twin tracks that remove the earth from the Panama Canal bed circa 1908. It took the United States 10 years to build the canal at a cost of $375 million (which equals about $8.6 billion today).

SS5E2 Describe the functions of four major sectors in the U. S. economy.

The sectors of households, businesses, banks, and government interact in a modern economy. The United States, as a capitalist, free-enterprise economy, relies on the interactions of the four sectors. This circular flow, spurs on the production of goods and services. Banks facilitate this flow through the various services they provide.

a. Describe the household function in providing resources and consuming goods and services.

I can define and describe the household function in providing resources and consuming goods and services. (Knowledge)

Households or individuals are the final consumers of goods and services produced by the businesses or companies. Households create demand in the market with their personal tastes and preferences. The company or business produces goods and services that the consumer demands. Therefore, households determine the production of producers or businesses.

b. Describe the private business function in producing goods and services.

I can define and describe the private business function in producing goods and services. (Knowledge)

Producers create the goods and services that households or consumers, want and need. This is done through innovation and production by small businesses and large corporations. In turn, these companies provide opportunities for wealth to be distributed through employment and through profits, which are obtained by shareholders. Businesses do not produce typewriters anymore because there is not a large market for them.

c. Describe the bank function in providing checking accounts, savings accounts, and loans.

I can define checking accounts and describe the bank function in providing them. (Knowledge) I can define savings accounts and describe the bank function in providing them. (Knowledge)
I can define loans and describe the bank function in providing them. (Knowledge)
I can define bank functions in providing checking accounts, savings accounts, and loans. (Knowledge)

Banks are critical to our economy. The primary function of banks is to put their account holders' money to use by lending it out to others who can then use it to buy homes, businesses, and other financial demands. Specifically, students should understand that banks provide services that aid our economy. Banks function by safely allowing people and businesses to deposit their savings, on which they can then earn interest. Banks also control our economy’s payment system. Examples of how this is done include the use of electronic payments, direct deposits, and transfers. Students should understand that banks issue loans to both people and companies. Banks make it possible for people to buy homes or start businesses, and for companies to make investments.

What is a Bank?

d. Describe the government function in taxation and providing certain public goods and public services.

I can define taxation, public goods and public services and describe the government function in providing those services. (Knowledge)

The government’s function in our economy is to collect taxes from households and businesses. In exchange, the government provides certain services. Some of these include schools, basic infrastructure like bridges and roads, national security, and public services. The government is also involved in the economy through the regulation and control of private enterprise. This is done to ensure that businesses do not become monopolies and that they serve the best interests of the people.

SS5E3 Describe how consumers and producers interact in the U.S. economy.

Businesses supply goods and services to meet the wants of American consumers, and that these purchases by consumers support businesses.

a. Describe how competition, markets, and prices influence consumer behavior.

I can define competition and describe how it influences consumer behavior. (Knowledge)
I can define markets and describe how they influence consumer behavior. (Knowledge)
I can define prices and describe how they influence consumer behavior. (Knowledge)

Competition

In economics, individuals and businesses are engaged in competition. Both entities compete for resources. People compete against each other for jobs, which provides them with an income that is needed to buy goods and services. People then compete in the market place to buy those limited goods and services.

People who have greater means can buy more or better goods and services than those with limited means. Businesses also compete for limited resources to produce and provide new goods and services to consumers. Businesses then use these resources to produce goods and services at better prices or faster to consumers. Competition then arises among businesses, which results in consumers having the power to determine a company’s success. If consumers find the goods or services produced by a business to be superior in price or in quality, then they are more likely to buy that company’s product. Competition in a market will typically drive prices down. Lower prices, obviously, means that more of the good can be sold. Fast food is relatively inexpensive because there are so many options. If one company tried to raise their prices substantially, they would not get as much business because of the competition.

Markets

The economic term, market, does not denote a physical location. Rather, the economic market is the physical and virtual exchange of goods and services. In a market economy, businesses attempt to sell goods and services to consumers, while consumers determine exactly what products and services they need. In their research, consumers might look for specific products, or for specific prices. In the market place, goods and services are important. This is because consumers will not participate a market if they do not want or need the product.

The amount a consumer is willing to pay for a good or service or price often determines whether the consumer purchases the product. In markets, price affects both consumers and producers. If the price is too high, producers do not have consumers because consumers wouldn’t purchase the products that they want or need. If the price is too low, consumers will purchase products, but the producer will fail to make profits. Price also relates to competition, because consumers will seek out similar products or alternatives at a lower price if necessary.

Price

b. Describe how people earn income by selling their labor to businesses.

I can define income and describe how people earn income by selling their labor to businesses. (Knowledge)

People “sell” their labor to businesses in return for monetary compensation or wages. This monetary wage allows people who were selling their labor to obtain goods and services that they need or want. While the process seems simple, additional information can be relayed to students that illustrates the relationship between education and income.

c. Describe how entrepreneurs take risks to develop new goods and services to start a business.

I can define entrepreneurs and describe how entrepreneurs take risks to develop new goods and services to start a business. (Knowledge)

Entrepreneur

Entrepreneurs, individuals who attempt to start businesses, attempt to make money by providing a good or service to consumers. To do this, entrepreneurs must take risks. These risks might include spending money they already have on supplies, equipment, or other items to start the business, or giving up a job where they currently earn an income. Entrepreneurs work long and hard hours before they even begin their business. Two examples of things entrepreneurs do include establishing a financial plan for their business, and create strategies for their business structure.

SS5E4 Identify the elements of a personal budget (income, expenditures, and saving) and explain why personal spending and saving decisions are important.

I can define and identify the elements of a personal budget (income, expenditures, and saving). (Knowledge)
I can explain why personal spending and saving decisions are important. (Knowledge)

A budget helps individuals determine in advance, where they should allocate their finances. Budgets identify expected expenses over a set period, and allow individuals to plan how their income will be used. In creating a sample budget, we should establish priorities in spending and saving by considering their wants and needs. We should also decide how to reserve some income for unforeseen expenses.

Budget

Consumers - Those who buy a good or service.
Embargo - an official ban on trade.
Goods - Things that can be touched such as clothing and food.
Labor - the work that people do
Price - the amount of money that producers are willing to sell a good or service for.
Voluntary Exchange - When producers freely choose to sell and consumers freely choose to buy, this tends to help both buyers and sellers.
Tax - Money citizens or businesses must pay the government.

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