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Lesson 3.1 WHAT IS AN ECONOMY? GOALS • Describe market and command economies. • Define the concept of supply and demand. • Explain the effects of market structure on price. • Describe the functions of business in a market economy. SCARCITY • Scarcity occurs when people’s needs and wants are unlimited and the resources to produce the goods and services to meet those needs and wants are limited. • Scarcity occurs in every economy. COMMAND ECONOMY • In a command economy, the government determines what, how, and for whom products and services are produced. MARKET ECONOMY • In a market economy, individuals decide what, how, and for whom goods and services are produced. PRODUCTIVITY • The level of output that an industry or company gets from each worker or each unit of input into its products and services is called productivity. SUPPLY Price $40 $30 $20 $15 Supply Curve $50 Price • Supply is how much of a good or service a producer is willing to produce at different prices. • Suppliers are willing to supply more of a product or service at a higher price. Quantity 40 30 20 10 40 30 20 10 10 20 30 40 50 Quantity DEMAND Price $20 $30 $40 $50 Demand Curve $50 Price • Demand is an individual’s need or desire for a product or service at a given price. • Individuals are willing to consume more of a product or service at a lower price. Quantity 40 30 20 10 40 30 20 10 10 20 30 40 50 Quantity WHEN SUPPLY AND DEMAND MEETSupply and Equilibrium Price $50 Price • The point at which the supply and demand curves meet is what is known as the equilibrium price and quantity. • This is the price at which supply equals demand. Demand Curves 40 30 20 10 10 20 30 40 50 Quantity MARKET STRUCTURE AND PRICES • When a company controls all of a market, it has a monopoly. BUSINESS ACTIVITIES IN A MARKET ECONOMY • Production • Marketing – Product – Distribution – Price – Promotion • Management • Finance Lesson 3.2 THE CONCEPT OF COST GOALS • Identify various types of costs. • Discover how different types of costs affect the prices entrepreneurs charge. FIXED AND VARIABLE COSTS • Fixed costs are costs that must be paid regardless of how much of a good or service is produced. • Fixed costs are also called sunk costs. • Variable costs are costs that go up and down depending on the quantity of the good or service produced. MARGINAL BENEFIT AND MARGINAL COST • Marginal benefit measures the advantages of producing one additional unit of a good or service. • Marginal cost measures the disadvantages of producing one additional unit of a good or service. OPPORTUNITY COST • Opportunity cost is the cost of choosing one opportunity or investment over another. Lesson 3.3 GOVERNMENT IN A MARKET ECONOMY GOALS • Explain the government’s effect on what is produced. • Recognize the different roles the government plays in a market economy. GOVERNMENT’S EFFECT ON WHAT IS PRODUCED • Purchases • Taxes • Subsidies ROLES OF THE GOVERNMENT • Regulator – Inspection – Licenses • Provider of public good • Provider of social programs • Redistributors of income