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Basic Economic Theories
Resources
A resource - is something that you own or have control over and is used to
help you sell or create your good or service. A list of resources includes:
time, money, energy, education and employees.
Supply and Demand
The concept of Supply and Demand is considered to be the foundation of
economic theory and thought. Supply - is the number or amount of a good or
service that you have available to sell. For instance, if you have 10 bicycles
in stock, this is considered your supply. Demand – is the number of people or
companies who want to purchase your good or service.
In economic theory, a product such as a hamburger, movie or a gallon of
gasoline is sold at the price that the public is willing to pay. Price – is the
cost that a good or service is selling for. A Good – is something that you can
see, touch, smell or taste. Examples include: cars, boats, bicycles, books,
magazines and hamburger. A service - is something that you an do to help
others. Examples include: cutting hair, cleaning pools, and mowing lawns.
Changing the price of a good or service will inversely change the demand for
that same good or service. A shift in demand can change the number of
units sold or purchased and this affect how much money is made.
There is a Low of Supply that says
By raising the price of the good or service – the demand will go down
because people will think twice about paying the price asked.
There is a Law of Demand
By lowering the price of a good or service, more people will be
encouraged to purchase the good or service because they feel that
the are getting a “deal”, thus, increasing the demand for that good or
service.
The marketing equilibrium - is when the Law of Supply and the Law of
demand are equal and people are willing to pa the price the suppliers have set
o sell their good s or services.
To increase the demand for products, companies or stores run advertising or
specials to encourage you to buy their products.
Many times, by lowering the price of a product or service, people will
purchase because they can get a “deal”.
Common methods for stores or companies to increase demand of a product
or service are to: Run Sales
Issue Coupons
Decrease the Price of a Product
Give Away Free Samples
Offer Rebates
Supply and Demand Curves
The supply and demand for products is best illustrated by using a graph or
chart. To show supply and demand, three charts need to be created. A chat
for the supply curve, one for the demand curve, and one in which shows them
together, the equilibrium.
The supply curve shows – the number of units supplied at various price
points and generally slopes upward, starting from the bottom left to the top
right.
The demand curve shows – the number of units that re willing to be
purchased at various price points and generally slopes downward, starting on
the top left to the bottom right.
The equilibrium shows – where the supply and demand lines meet and the
price of a product can be set.
Another term used to describe the rise in prices or goods or services over a
period of time is inflation. Inflation – is caused when there is an excess
amount of money available in the market place and a shortage of goods and
services.
Inflation is highest when many people are employed , or when there is a low
unemployment rate. As people have more money to spend, they will purchase
more goods and services and eventually create a shortage in supply and
increase in demand for the goods or services. When there is a shortage in
supply, prices will rise, thus causing inflation.
Average inflation is around 3% each year. Employers cover the rise of good
and services caused by inflation by giving employees a cost of living
adjustment in their paycheck.
Do You Know The Real Value of Money
Inflation changes the value of money. Inflation decreases a dollar’s worth,
thus, what you can buy this year in goods or services for a dollar, will not
allow you to buy the same amount of goods or services for a dollar next year.
The fact that money losses value or purchasing power each year based upon
the average inflation rate is an economic theory called Real Value of Money.
Who Drives Up Prices of Products or Services?
A monopoly – is when a business has the ability to or attempts to control the
price of a product, and/or if a business plans to, or attempts to exclude a
competitor from doing business.
Monopolies are considered bad because they purposely drive up the price of
a product or service by reducing the supply available to the public. In
addition, they attempt to control the market place, competitors are unable
to complete thus reducing the choices available for a good or service.
Two Congressional Acts were passed to prevent the creation and running of a
monopoly. These two acts were the Sherman Act of 1890 and the Clayton
Act of 1914. These two congressional acts made it illegal to own or conspire
to create a monopoly, thus protecting our citizens from unfair business
practices.
Thanks to:
Neffe –
www.practicalmoneyskills.com – Lesson Eleven, Consumer Awareness
www.handsonbanking.org – p. 14, Week One, Basic Economic Principles
www.financialeducation.us – Week One Introduction To Economic Conepts