Fascinating economy

The Internet does more than increase communication. It affects how people live their lives. Information is necessary for making decisions, so the Internet impacts how people make choices.

Easier, faster communication gives both producers and consumers access to a greater amount of information. People can learn more to help them make better decisions, and they can make these decisions more quickly. Producers can communicate almost instantly with their employees, their suppliers, and everyone else involved in making allocation decisions. Meanwhile, consumers have the latest information about prices, availability, and quality, enabling them to make the wisest buying decisions.

The amount and speed of information sharing can help improve the way people play the game of economics.

It is easy to communicate these days, even on the go.

E-Commerce

Access to information is not the only way the Internet has affected the economy. The Internet has created an entirely new type of economic activity called e-commerce. It refers to online buying and selling of goods and services. E-commerce is the electronic form of retail sales.

E-commerce has changed the way many companies do business. Almost every store has a website that sells items people previously had to buy in their stores. Many companies do not have actual stores at all; they only sell online.

One of the earliest pioneers of e-commerce was Amazon.com, and the company remains one of the largest online retailers. Amazon began by selling books on the Internet. After achieving rapid success, the company branched out into other retail areas. Amazon now sells products ranging from electronics and toys to clothing, jewelry, tools, and more. Amazon is a leader in e-commerce, and its business practices have influenced the entire retail industry.

E-commerce allows just about anyone to become a global seller of goods, services, and information online. Online business gives producers access to the largest market available, with over 1.5 billion people who go online on a daily basis.

The Internet is getting more popular among shoppers.

The Growth of E-Commerce

E-commerce started taking off in the late 1990s. Since 1999, buying and selling online has been the fastest-growing activity in the U.S. economy.

Both consumers and producers have gone online to buy and sell, and this trend does not seem to be stopping. The amount of money spent online has been growing very quickly. In 1999, there was $15 billion worth of online sales. The next year, that total had almost doubled to $29 billion. Ten years later, U.S. retail e-commerce sales had reached $169 billion in 2010. In fact, from 2002 to 2010 retail e-sales increased at an average annual growth rate of almost 18 percent, compared with 2.6 percent for total retail sales. In 2014, e-sales were about 5.9% of total retail sales.

The growth in e-commerce has been remarkably fast, but even with the fast growth of e-commerce, online sales represent less than 6 percent of all retail sales in the United States. This means that 94 percent of all goods sold are still purchased the old-fashioned way: in a store.

The Advantages of E-Commerce

Why is e-commerce becoming more and more popular? Using the Internet to buy and sell has advantages for both consumers and producers. That is why online shopping is growing so quickly.

The Internet makes it easy to compare prices. With traditional shopping, it takes multiple trips to different stores to compare their prices. There are Web pages that allow you to see how much dozens of different stores charge for a particular product. Or you can just click from one company’s website to another without having to go anywhere.

Online shopping saves time and money. You do not have to go anywhere to buy online. You do not have to spend time looking for parking, walking into and out of the store, or buying the gas to get you there.

Online shopping lets you get things not normally available nearby. With the Internet, the entire world is your store. Wherever something is made or sold, it can be shipped directly to you or anyone else.

You can ship gifts without an extra trip to the post office. You can do your gift shopping at the last minute and have the box sent right to the recipient. Most online stores give you the option of including a card and gift wrap.

Consumers like online shopping because of the convenience and availability. E-commerce has advantages for producers too. The Internet makes selling goods and services more efficient for many businesses by eliminating unnecessary costs.

Online businesses do not need as many employees. Instead of a bunch of salespeople and managers, online businesses only need to hire people to load goods onto trucks for shipping to their customers.

With e-commerce, there are fewer stores to run. Some businesses do not even have real stores at all, just warehouses. This saves on rent and labor.

The Internet is an easy form of direct advertising. Instead of putting ads in newspapers and magazines, and on television and the radio, a company’s website is an ad that consumers can look at any time. Advertising on other websites is also less expensive and reaches millions of viewers.

What Sells on the Internet?

E-commerce has done a lot for the computer industry. The sale of computers has grown a lot since the Internet began taking off. In 1990, few people had computers in their homes. By the year 2011, over 75% of all-American households had at least one computer.

People with computers are naturally drawn to e-commerce for computer products. It is easy to buy printers, scanners, wireless routers, and more from online sellers.

What else do you think sells well online? Popular online purchases, with the percentage of total online sales, include

• Computer products: 40%

• Books: 20%

• Travel: 16%

• Clothing: 10%

• Music: 6%

• Gifts: 4%

• Stocks: 4%

• The Internet and Economics

Developments in technology have always influenced the overall economy. Through the Internet, people have access to more information, which affects their decision-making process. And e-commerce is a fast-growing type of economic activity.

Whatever other technological changes are coming, it is likely that the Internet will continue to have a growing effect on the game of economics.

CHAPTER 1 SUMMARY

The Game of Economics

– Economics is a game played by everyone, in which every player has roles and goals.

– Like other games, the game of economics has rules, properties, and outcomes.

– Unlike other games, economics has no winner. This is mostly because there is no rule that says when the game has to end; in fact, the game of economics never ends.

– Economics is all about the allocation of resources for the production and distribution of goods and services.

– Efficiency, equity, freedom, growth, and security are all goals different players have in the game of economics.

– Although goals are sometimes incompatible with one another, they still must be set in order to play the game of economics.

– Scarcity occurs because resources are limited. This is one reason why allocation decisions are so important.

– The fundamental questions faced by all economic systems are: What will be produced? How should production be organized? How will goods and services be distributed? What is the most effective allocation of resources?

Chapter 2

You live in a world where goods and services are essential. Can you imagine what the world would be like if you could not buy food, use public transportation, or attend classes? The goods and services you use every day are important. Your life would not be the same without them.

In the game of economics, different players produce and consume these goods and services. Consumers and producers make the decisions that drive the game of economics. They gather information and weigh options before making a choice. They ask themselves certain questions: How much am I willing to spend? Or how much should I produce?

The way people answer these and other important questions determines how they allocate resources. And this in turn affects the production, distribution and consumption of goods and services. Economics is powered by the many decisions made by players. Examine how the various players go about making these important decisions.

Economics is like a game. It has rules, properties, outcomes, and players. We all play the game of economics, and of course players are an important part of any game. They make the decisions that drive the action. Economic players make decisions about what to produce, sell, and buy.

Any time you buy something, you are playing the game of economics. You are participating in the economic system. To understand the importance of your role as a player in the economy, as well as the roles that other people play, examine what the many different players do.

People also have wants – that is, things they desire but could live without, such as concert tickets or the latest basketball shoes. Everyone has needs and wants, and everyone tries to fulfill both, if possible.

Everyone plays the game of economics all the time. Even the simplest actions are economic actions. For instance, if you download a ringtone to your phone, you are playing the role of a consumer. Your cell phone is a good.

Consumers make purchases depending on what they need and want. But of course, they must also consider how much money they have to spend, and the prices of the things they want. The decisions made by consumers send messages. The ring tone is a service. Your cell phone provider plays the role of producer.

In every type of economic system, there are exchanges between consumers and producers. The decisions that consumers make influence the decisions of producers. Producers decide what and how much to produce, depending on the desires of consumers.

Consumers

to the other group of players, the producers. Consumers let the producers know what they want to buy and the price they are willing to pay. Every time a consumer decides, it sends this kind of message.

Price has a major effect on a consumer’s decision to buy. If the price of a movie ticket is too high, you might stay home and watch a DVD instead. On the other hand, if the movie theater slashes prices, there will be long lines at ticket office of consumers waiting to see the latest release.

The important role that consumers play includes deciding

– What products and services to use and buy.

– How much to buy.

– What price they are willing to pay.

Producers

Consumers make purchasing decisions, but there would not be anything to purchase without producers. Producers try to satisfy the needs and wants of consumers. They provide consumers with such goods and services as clothing, food, entertainment, and healthcare.

To be successful, producers have to determine what consumers want and how much they are willing to pay. Producers make all their decisions based upon the decisions made by consumers. So, producers are always trying to predict what consumers will want next, and how much they will pay for it.

Have you ever been to a water park? How many services do you buy for the price of admission? You can go down a variety of slides, swim in a wave pool, or maybe even watch a live show. At a water park, producers offer many goods and services in one place. To make a profit, they must be able to anticipate how many consumers will want to buy their many goods and services, and what they will be willing to pay.

Producers play an important economic role. They decide what to produce, how to produce it, and for whom it will be produced. If they make the right decisions, they will satisfy consumers’ needs and wants.

Workers as Economic Players

Producers produce the things that consumers buy. These things have to be made. The people who make the goods and provide the services sold by producers play an important role in the game of economics. We call these players workers.

Workers create goods and services.

Workers, however, are not a third group of economic players. When they make or provide goods and services, they act as producers. But when they purchase things, they act as consumers. Workers play a dual role. They are producers and consumers.

Workers as Consumers and Producers

Workers straddle the line between consumer and producer. Sometimes these two roles can be played simultaneously. For example, when a restaurant employee is sent out to buy potatoes, that worker is both a producer (someone making food) and a consumer (someone buying food).

Open Workers as Consumers and Producers. Sort the activities into the correct column to show when a worker is playing the role of a consumer, a producer, or both.

Businesses as Economic Players

When they make goods or provide services, workers play the role of producer. But it takes more than workers to offer those goods and services to consumers. For instance, a restaurant is more than just a group of workers who decide to make and serve food to people. A successful restaurant needs someone to apply for the appropriate permits, rent the building, hire employees, buy equipment, and oversee production.

When a person or a group of partners decides to undertake these tasks, they start a business. Businesses provide the goods and services the consumers want by hiring, organizing, and supplying workers. Nothing would get made without workers. But it is the task of businesses to get those things to the consumers who want them.

Business Activity

Businesses drive most economic activity. Without businesses, workers would not have anything to produce, and they would be unable to earn money. Without money, they could not play their other economic role as consumers.

When a new business opens, jobs are created for workers. Businesses are producers. But they also provide what the economy needs for consumption. They pay workers what they need to consume the goods and services offered by producers.

For example, when Dell Inc., a computer company, opened a factory in Austin, Texas, in the 1990s, the company provided thousands of jobs for workers in the area. The new workers then had money they could spend on goods and services. This boosted local businesses and created even more jobs in the area. In turn, this led to workers earning more money to spend on things such as Dell computers. From this example, can you see how a big business might help to circulate money within a community?

Government as an Economic Player

So far, you have seen that most economic decisions in the United States are made by individual consumers or businesses. But even under the American free-market system, the government of the United States still plays an important role in the economy. The U.S. government tries to maintain steady growth, keep prices stable, and provide public goods and services. An example of government action came in 2006, when the U.S. government helped stabilize the price of oil by ensuring that oil companies could not raise the price of gasoline above a certain limit. This enabled consumers to continue to afford and use gasoline.

This decision also affected the government, because it also buys a lot of gas. The government plays the role of consumer even while it is attempting to guide and benefit the economy.

Send My Bill to the Government

In many countries, the government plays a more active role in the economy. In Canada, the government provides universal healthcare to all its citizens using taxes paid by workers and businesses. In this case, the government plays the role of producer.

How Does the Government Play?

The government can fill the role of consumer as well as producer. After all, it takes goods and services to run the government. It is helpful, therefore, to think of the government as a very large, public business.

View How Does the Government Play?, then sort the activities into the correct column to show whether the government is playing the role of consumer or producer.

Playing Roles

Consumers and producers play important roles in economics. They decide what to buy or what to produce, and how much of it to buy or to produce. Other players in this game include workers, businesses, and government.

In a free-market system, people are free to decide what to buy. But those choices can be influenced by others. Sometimes people are influenced by family, friends, or advertisements. People are also influenced by what is available, how much it costs, and how much money they have. There are many things that can influence the decisions of consumers.

Producers are also affected by many influences. What do consumers want? What will they pay for those things? What kinds of advertisements help them decide what to buy? These and other questions influence what producers make. Questions about resources influence producers, as well. They need to know what resources are available for production, how much they cost, and how far away they are.

Who Has the Power?

Deciding what to buy seems simple. You choose what you want and pay someone for it. But the buying and selling of goods and services is much more complicated than that. Part of the reason lies in the fact that producers make so many different products. For consumers it can sometimes feel overwhelming. With so much to choose from, it can be hard to decide.

Why do producers make so much stuff? Producers want to sell their goods and services, but not everybody wants to buy the same things. If they did, restaurants would have one-item menus and electronics stores would have only one kind of television.

Consumers have the power to decide what to buy. Producers are aware of this. They make products and services based on what they think consumers will buy. This means producers must pay close attention to how consumers behave. By understanding what consumers have done with their money in the past, producers try to predict what they will be willing to buy in the future. Because of this, consumers have a great influence over the actions of producers. Consumers have a great deal of power over producers.

The Power of Producers

Consumers may make the final choice about what to buy, but that does not mean producers have no power of their own. The choices made by consumers are always limited by what is available. Consumers may want to buy something, but unless a producer makes it, they are out of luck.

Producers determine what is available, and this gives them economic power. For instance, when the quantity of a popular product is limited, consumers will often pay a higher price. For a variety of reasons, including the popularity or rarity of an item, consumers might buy even though the price is high, the quality is not as good, or the choices are limited.

In this way, producers have a great influence on what is bought.

Guessing Game

To sell the things, the goods they make and the services they provide, producers want to know what consumers want. What makes them happy? Producers might make an original product that becomes incredibly popular and sell millions. Or they might make an original product that nobody wants and get stuck with a full warehouse and a lot of unpaid bills. Production sometimes feels like a guessing game.

Producers want to become masters at this guessing game, and they use a variety of methods to do so. Surveys or focus groups are used to test ideas on small groups of consumers. Based on their reactions to new products producers can make better guesses about what the general public will buy.

Collecting information on what consumers like and dislike is called market research. If producers can predict what consumers will buy, what products will be popular, or even simply what people need, they can produce a lot of it. That allows them to sell what they make and grow their business.

Cultural Influences

Producers and consumers influence each other. But the choices made by consumers and producers are also affected by other factors. Culture plays a significant role in economic decisions.

In most societies, the goods and services produced help distinguish one culture from another. Things like food, art, sports, clothing, and literature differ between cultures. Consumers are influenced by their own cultural values and traditions. These traditions influence consumers to buy certain kinds of goods and services. They also have an effect on what producers make.

Producers have to be very conscious of what consumers are going to buy, and many consumer decisions are influenced by cultural values. For instance, many cultures value sports. In the U.S., sports such as baseball, football, and basketball are valued very highly. In Europe and Latin America, soccer plays an important cultural role; in some countries, people are even allowed to take time off work to watch a big game or the World Cup. Sports fans all over the world spend millions of dollars every year on tickets and merchandise, but which sports are valued – and therefore potentially valuable to producers – depends on the culture.

Holidays are another important cultural feature. Thanksgiving is a big holiday in the U.S. People travel by air, car, and train to spend time with their families and eat a special meal. In countries such as Iraq, Lebanon, and Jordan, Eid is a very important holiday. Parents buy their children new clothes, shoes, and toys during Eid, which takes place during three days at the end of Ramadan. They also prepare and share special dishes and take time to visit with family and friends.

In Asian countries such as China, Korea, and Vietnam, the Lunar New Year is the most important holiday of the year. In China, for example, the festivities begin on the first full moon of the year and can last for up to 25 days. The New Year is a time of renewal. Families spend time together eating rich foods and paying respect to ancestors and elders.

Different holidays lead to different consumption decisions, and these consumption decisions affect producers. A producer in China is not going to be very successful trying to sell turkeys in November, but a producer in the U.S. would be wise to go into the turkey business around Thanksgiving.

Peer Pressure

Consumers do not always buy goods and services because of a need or a want. Sometimes consumers make purchases because they feel pressured. Sometimes people buy products simply because others are. This is known as peer pressure.

Peer pressure influences consumer behavior, and it does not just apply to young people. People of all ages feel peer pressure. For example, an adult might feel pressure to buy a luxury car, a boat, or some other expensive item simply because that is what other successful adults do.

Because peer pressure can convince consumers to buy things they might not otherwise purchase, producers like it. Producers cannot control peer pressure, but often try to start a trend in the hopes of creating peer pressure. Producers try to anticipate what the next trend will be, especially during a holiday season like Christmas. They can make a lot of money if they produce the right product at the right time.

Scarce Resources and the Environment

The decisions made by consumers and producers are also affected by the availability of resources. Today, many resources are becoming scarce at the same time that the needs and wants of consumers are increasing. Meeting those needs and wants is a big challenge for any society.

Goods and services can become scarce as a result of limited availability of natural resources. Environmental changes can also lead to scarcity. For example, farmers who experience drought or floods might lose their crops – an important resource. Big cities can lose electricity, another kind of resource, during heat waves.

A Game of Influences

In economics, the players all make free choices, but these free choices are not completely free from influence. Consumers and producers influence each other with the decisions they make. Culture, peer pressure, price, and environmental changes also affect these decisions.

View A Game of Influences, and match each economic situation listed in the left column with the type of influence it corresponds to in the right column.

Over the years, the quantity and variety of goods and services available to consumers has greatly increased. Consumers have many more choices today than ever before.

On one hand, this makes consumers’ choices easier because they can usually find something that they want to buy. However, at the same time it also makes consumer decisions harder. With so many choices, consumers have to sift through many options to find the one that suits them. This takes time and energy.

Consumers use different decision-making methods based on personal values and outside influences. To understand how consumers, participate in economics, we need to understand how they make decisions and what factors influence these decisions.

Over the years, the quantity and variety of goods and services available to consumers has greatly increased. Consumers have many more choices today than ever before.

On one hand, this makes consumers’ choices easier because they can usually find something that they want to buy. However, at the same time it also makes consumer decisions harder. With so many choices, consumers have to sift through many options to find the one that suits them. This takes time and energy.

Consumers use different decision-making methods based on personal values and outside influences. To understand how consumers, participate in economics, we need to understand how they make decisions and what factors influence these decisions.

Like everyone else, you make decisions every day. But do your decisions always make sense? You certainly hope so. When it comes to buying, we all try to use rational choice before we make a decision.

When consumers make a purchase, they try to make rational, or wise, decisions. Often, economic decisions are made after thinking about price, quantity, need, and sacrifice. But sometimes economic decisions are irrational, or unwise. Irrational economic decisions can lead to trouble.

Like everyone else, you make decisions every day. But do your decisions always make sense? You certainly hope so. When it comes to buying, we all try to use rational choice before we make a decision.

When consumers make a purchase, they try to make rational, or wise, decisions. Often, economic decisions are made after thinking about price, quantity, need, and sacrifice. But sometimes economic decisions are irrational, or unwise. Irrational economic decisions can lead to trouble.

Cost-Benefit Analysis

To make rational choices, we need lots of information. In fact, making wise decisions usually involves cost-benefit analysis. A rational choice will seek to maximize benefits while minimizing costs. Costs and benefits differ from one consumer to the next, so each person’s rational choice will be different as well.

It is Your Call

Think, for example, of trying to make a wise decision about which cell provider to use. One company offers 5,000 minutes for $50. Another gives 2,000 minutes for $45. The extra benefit is 3,000 more minutes for a cost of only $5. It seems like a good deal, right? If you regularly use 3,000 minutes per month, it is a good deal. But what if you never use more than 1,500 minutes per month? There is no need to pay for extra minutes if you will never use them.

By using information about the two plans and your own needs, you would be able to make a cost-benefit analysis and come up with a rational decision.

Financial Planning

Cost-benefit analysis is helpful when it comes to making decisions, but it is not the only tool used by consumers. Consuming usually involves money, and most of us need to plan ahead and keep track of our money to make sure there is enough when we need it. This involves financial planning, which is the creation of a strategy to pay for necessities and save for future goals.

Give Me a Break

Imagine that you have saved some money and now you are ready to choose how to spend it. Some of your friends are planning to go to the beach on the weekend. You would like to join them, but if you spend your money on a day at the beach, you will not have any left. Do you need or want that money for something else? A financial plan can help you answer the second question.

As with rational choice, financial planning requires information and an understanding of your financial goals. Financial planning is another form of rational choice. You decide whether the benefits of a purchase now are worth the cost of not having the money for a different purchase later.

The Benefits of a Budget

One tool that some consumers use to help with financial planning is a budget. A budget allows a person to control how much money is coming in and how much is going out.

The main idea behind a budget is to have enough money to pay for the thing you want and need. A consumer with a budget knows whether he or she can afford to go on a beach vacation without spending money needed for rent or bills. A budget can also help consumers reach their financial goals. A budget can help you save for the future by keeping your expenses below your income. This leads to savings now for spending later.

Top Five Benefits of a Personal Budget

Know how much money you are making.

Know how much money you are spending.

Know how much money you are saving.

Plan for future expenses.

Plan for future savings.

Fixed and Flexible Expenses

Expenses are part of life. A budget helps monitor and control them.

There are two main types of expenses: fixed expenses and flexible expenses. Fixed expenses, such as rent, a car payment, or tuition, are necessary and generally do not change from month to month. Flexible expenses, such as buying video games, paying for car repairs, or purchasing new clothes, are non-necessary or unplanned spending. Sometimes, flexible expenses can be adjusted or eliminated. At other times, however, they cannot be avoided.

Fixed expenses must be taken into account in a budget, because they rarely change and usually cannot be eliminated. Once the fixed expenses are paid for, there may or may not be much left for flexible expenses.