AOF Business Economics

AOF Business Economics

Lesson 12The American Economy

Lesson 12

The American Economy

Student Resources

Resource / Description
Student Resource 12.1 / Reading: The Ben & Jerry’s Salary Rule
Student Resource 12.2 / Partner Practice: Characteristics of the US Economy
Student Resource 12.3 / Group Practice: The Circular Flow Model Applied
*Student Resource 12.4 / Reading: The Circular Flow Model
Student Resource 12.5 / Partner Practice: Objectives for the US Economy
Student Resource 12.6 / Anticipation Guide: Economic Tools of the Trade
Student Resource 12.7 / Reading: Economic Tools of the Trade
Student Resource 12.8 / Chart: Pros and Cons of the US Economy
Student Resource 12.9 / Writing Assignment: What Would You Change about the US Economy?
Student Resource 12.10 / Note-Taking Guide: Essay Ideas

Student Resource 12.1

Reading: The Ben & Jerry’s Salary Rule

Directions: As you read the following, consider the benefits and drawbacks of such a compensation system within a free-market economy.

Ben Cohen and Jerry Greenfield, two self-described lifelong ex-hippie friends, launched Ben & Jerry’s Ice Cream in a renovated gas station in Vermont in 1978. Ben & Jerry’s quickly became a local hit, began franchising operations in 1981, and went on to become one of the most recognized ice cream brands in the United States. The company, renowned for its innovative flavors and liberal use of “goodies” such as fudge brownies, Oreo cookies, and Heath bars, set the standard for wacky and creative ways of marketing its product. However, its most enduring legacy may come out of its strong social and economic activism, which focused on putting company resources to work for good causes such as rainforest preservation and the Children’s Defense Fund.

True to its roots as a socially conscious company, Ben & Jerry’s set a standard for executive pay that other progressive companies have tried to follow. Cohen and Greenfield implemented the policy that no employee could make more than seven times what the lowest-paid employee was paid. The idea for this policy was rooted in the founders’ belief that their company should treat all employees as fairly and as equitably as possible.

The decision turned out to be a good one for the young company. It made for loyal and dedicated employees, deeply committed consumers, a passionately supportive local community, and great marketing and brand building. Indeed, the company got nearly as much marketing mileage out of its progressive compensation policy as it did out of its penchant for crazy (but delicious) flavor concoctions.

As the company grew, Cohen and Greenfield recognized that they needed skilled and experienced management to take the company to the next level. But as they began their search, they discovered that although millions of people loved the company and its products, talented and experienced managers with the right skills to run a big company effectively were reluctant to work for one with a hard ceiling on compensation. The company struggled to fill key corporate positions and struggled even more to keep the people it did hire. Ben & Jerry’s finally faced harsh reality when Ben Cohen retired from his position as CEO. Unable to recruit a capable replacement with the compensation package it offered, the company dropped its policy of tying management’s salary to that of the rest of the employees.

Student Resource 12.2

Partner Practice: Characteristics of the US Economy

Student Names:______Date:______

Directions: Review the model below and then read the descriptions of the different characteristics of the US economy. Use this information to respond to the questions below.

Private property means that most resources are owned by a person or a business that has the right to use those resources as that person or business sees fit (provided they obey the law). Almost anything that you regularly consume, with the exception of the air you breathe, is private property and subject to ownership.

What are some examples of private property that you own?

Contracts come into play because the owners of private property want to buy, sell, and trade their property in order to conduct business. In order to encourage such economic transactions, the US legal system (like its counterparts in almost all other countries) enforces legally binding agreements among parties (businesses, nonprofit organizations, governments, and individuals) so that both sides of a transaction feel secure that they will receive (or pay) what they had agreed upon. A contract can be as simple as the exchange of a dollar for a can of soda or as complex as one company buying another company.

What are some of the contracts that you enter into on a regular basis?

Choice is another characteristic of the US economy. Because everyone is free to choose with whom they conduct business (subject to obeying the law), economic transactions reflect demand for a particular product or service, to which supply can respond to demand. Consumers buy what they want from whom they want. Workers accept or reject work based on the salary offered and the work to be done. Private property owners choose to use their resources for productive uses or simply not to use them at all. In every case, choice drives the process.

What are some examples of choice from the purchases that you have made?

Most of these actions are motivated by self-interest. In the case of businesses, self-interest generally takes the form of the profit motive. Individuals enter into business arrangements based on what they believe will serve them best and companies generally enter into business arrangements based on what will be most profitable. Economists refer to this as voluntary exchange—a transaction in which both parties choose to do and from which both parties expect to benefit.

While economics focuses on self-interest and the profit motive to explain most exchanges, it also recognizes that some transactions stem from motivations beyond the range of immediate self-interest. Volunteer activities,acts of charity, work by nonprofit organizations, and simple acts of giving and kindnessthat occur every day fall outside of this explanation, but they still have a profound effect on the US economy.

Can you think of an economic decision that you have made that was not driven by self-interest?

The concept of limited government plays a distinct role in the US economy as well. A limited government approach, widely favored in the US, seeks to keep government intervention as limited as possible, based on a belief that that will encourage free enterprise transactions to blossom between individuals and businesses and maximize economic efficiency. However, this doesn’t mean that the government has no part in the smooth and fair operation of the economy. The government provides key public services such as education, law enforcement (to ensure contracts are followed and bad actors are punished), various types of safety regulations (like ensuring food companies sell safe food and coal mining companies pump the explosive gases out of their mines), and direct help to businesses and individuals through programs that encourage economic growth and employment.

How does the government affect your life? Are there things that you can and cannot buy? Is there a type or an amount of work that you can or cannot do? Give examples.

All of these characteristics operate within a competitive environment in which companies and individuals compete with one another when pursuing their self-interest, thus benefiting all participants in the economy with products and services efficiently produced at competitive prices.

Directions: Javier’s Market serves the community by offering groceries, deli sandwiches, drinks, and other consumer goods. Using the examples provided in the model below for Javier’s Market, describe additional examples of each of the four characteristics and how these characteristics play out in the business transactions and choices of Javier’s business.

Student Resource 12.3

Group Practice: The Circular Flow Model Applied

Student Names:______Date:______

Directions: Working with your group, read the scenario below, consider how each of the bolded terms would fit into the circular flow model on the next page. Next, write each of these terms next to the part of the circular flow model (the different markets, actors, or relational arrows) that best represents it. Use the examples already provided to get started. Note that some of these terms can be associated with more than one arrow or box.

SCENARIO: You recently started a job bagging groceries at the local market with the goal in mind to save money for a car. Your parents are proud of your initiative, but they are concerned about the impact this job may have on your grades. So they offer you a deal. As long as you keep your grades up, they will match your savings dollar for dollar, and when you leave for college in two years, you’ll have a car to take with you. You live up to your end of the bargain and two years later when you graduate high school, you’ve saved $6,000 ($3,000 of your own earnings plus $3,000 from your parents’ help).

Luckily, your aunt owns a used car lot, so you are certain to find the car you want at a fair price. You find a Honda with low miles for only $5,500, which is a very good price. And even better, you’ll have $500 left over to upgrade the stereo. That is, you thought you would—until you learn that with the tax and registration fees you have to pay, you end up having to borrow $200 from your parents just to make the transaction happen. You start to complain to your parents about the cost of tax and registration. But they remind you that some of that money goes to pay firefighters’ salaries—the same firefighters who put out the fire that your neighbor accidentally started in his garage last year.

Nonetheless, you are ecstatic about the new car, especially its great mileage with gas prices so high. Still, you complain to your friend who works at the local gas station about the price while filling up one day. He says it’s not the station’s fault. Federal gas taxes are high and international oil prices are through the roof. His boss isn’t making any extra money, but the countries producing oil sure are. Your friend, whose dad works for an environmental engineering firm, points out that gas prices wouldn’t matter if the government would just put more money into alternative energy research and development.

This reminds you that you are off that fall to the state university to study economics in its new, state-of-the-art economics building that was paid for partially by sales tax revenue and partially by a donation from one of the university’s most successful graduates, a famous entrepreneur in the oil refining business. Given how much money he made, you think about the possibility of focusing your studies on the oil industry.People make a lot of money in that business and it would be nice to be able to buy your next car without worrying about how much tax you would have to pay. As you drive away from the gas station, daydreaming about becoming a big-time oil executive, you don’t even notice the smooth, newly repaved road that takes you all the way to your job.

AOF Business Economics

Lesson 12The American Economy

Student Resource 12.4

Reading: The Circular Flow Model

The US economy is a mixed-market economy in which the free enterprise system plays a dominant role. Businesses and individuals interact with one another in two primary marketplaces called the factor markets and the product markets. Money flows from consumer to producer through the product markets in the form of purchases made by consumers for goods and services. Money flows from producer to consumer through the factor markets in the form of purchases of resources and capital, and in salaries paid. The interaction of supply and demand in the market sets the volume and price for these transactions.

Even though the free enterprise system is a powerful force in the US economy, the US government nevertheless plays a significant role through its power to create money and credit (through the Federal Reserve), collect taxes, spend money, and regulate certain economic activities. It purchases goods and services in the product markets just like businesses and individuals do (but on a very large scale). It pays salaries, buys resources, and borrows capital in the factor markets (by selling Treasury bonds and Treasury bills) much as businesses do.

Economists have created a useful model that illustrates how these three key forces in the US economy—businesses, individuals, and government agencies—interact. The model is called the circular flow model and that is what this presentation describes.

The American economy is a modified free enterprise system consisting of three separate entities:

• Firms (for-profit businesses and nonprofit organizations)

• Households and individuals

• Government

The term modified free enterprise means that our economy is primarily based on the free market and the interaction of supply and demand. However, the government, an entity generally driven by objectives other than profit, and not intended to serve the self-interest of particular individuals or groups, also plays a significant role.

The circular flow diagram demonstrates how these entities interact to push goods and services in one direction, and money in another.

Households and individuals:

•Provide labor in the factor markets

•Buy products in the product markets

For example:

•When you work, you’re selling your labor in the factor markets: labor is exchanged for money.

•When you buy food at the grocery store, you’re participating in the product markets: goods are exchanged for money.

Businesses:

•Buy resources such as land, labor, and capital in the factor markets

•Sell finished goods and services in the product markets

For example:

•When a business buys some land and builds a warehouse, hires people, and borrows money to make this possible, it is purchasing these inputs to the production process in the factor markets: land, labor, and capital are exchanged for money. When you sell your labor in the factor markets, businesses buy it.

•When a business sells merchandise or services to others, it does so in the product markets: goods and services are exchanged for money.

These ideas are represented in the diagram by the arrows flowing through the factor markets, and also through the product markets, between individuals and firms.

Government:

•Collects taxes from individuals and businesses almost every time goods or services move between businesses, and between individuals and businesses

•Provides services such as police, fire, education, national defense, and welfare programs

•Regulates aspects of certain economic activities, like licensing of doctors and dentists, aviation safety, or banning dangerous food additives

•Insures certain risks that private business can’t or won’t insure, notably insuring the bank deposits of consumers and small business against loss

•Pays income to certain people who are not government employees (or retirees); e.g., social security payments to older people

•Employs many citizens, including teachers, fire fighters, and police officers

•Purchases a considerable amount of products for various governmental uses (e.g., cars for police officers, supplies for public schools, and so forth)

This significant role of government in our nation’s economy is why the economic system is a called a “mixed-market” economy, or a “modified” free enterprise system. If it were a “pure” free-enterprise system, government would have only three primary economic responsibilities:

•Print money so that firms can easily transact business.

•Maintain the legal system: laws, courts, and enforcement.

•Protect property rights.

Product markets are where finished products are provided (usually by businesses) to consumers, or to the government, in exchange for money. That includes:

•Goods

•Services

Sometimes the government sells goods or (more often) services in the product markets, like making a bridge available for use in exchange for tolls. However, that’s a relatively small part of the economy, and it’s left out of the diagram to avoid making it too complicated.

Individuals go to product markets—a department store, the salon, or even the Internet—to make purchases. For example: