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Chapter 16 Introduction to Economics 16-1 Pages 438 - 445 NEEDS WANTS Our Wants and Resources Wants – are desires that people have that can be met by getting a product or a service Unlimited Wants 2 groups of wants Goods –things that we can touch or hold Examples: Services- includes work that is done for us Examples: the health care provided by a doctor, the haircut by a hairstylist, or advice about money provided by a banker Limited Resources If resources are limited, and if wants are unlimited, then we have to make economic choices. Economics is the study of how people choose to use their limited resources to satisfy their unlimited wants. Resources are all the things that can be used in making products or services that people want 3 Types of Resources NATURAL RESOURCES- a nation’s land and all of the materials nature provides that can be used to make goods or services. Examples: Good soil, trees, iron LABOR- workers and their abilities CAPITAL- buildings and tools Examples: factories, Equipment such as computers, Trucks or trains Your Turn… What resources would the owner of a pizza shop need? Name an example for each kind. Natural Resource: Labor: Capital: The Basic Economic Problem Faced by individuals, cities, states, and countries every day SCARCITY is whenever we do not have enough resources to produce all of the things we would like No country has all of the resources that it needs Societies and Economic Choices Scarcity forces societies to make economic choices that answer three questions: 1. What to produce 2. How will they be produced? 3. Who will consume, or use, them? What goods and services to produce to meet its people’s needs and wants? •Must consider: 1. Natural resources 2. Human resources 3. Capital resources •How to produce it? •Large scale factories •Small businesses •Artisans and craftsmen •Who gets the goods and services? •Different ways to distribute/deliver goods and services •Resources are not the only consideration of nations •Also must consider societal values ECONOMIC SYSTEMS Each country has its own economic system or way of life Traditional economy Economic questions are answered on the basis of habits or customs – the way things have always been done Generally, not very productive Don’t change much over time – don’t adapt to new ways Example: it you were born into a farming family, you would become a farmers and farm the same way your parents and grandparents did ECONOMIC SYSTEMS Market economy Individuals and businesses own the resources used to produce goods and services Answer the economic questions based on profit and price Prices play an important role Command economy Planners who work for the government make the economic decisions Individuals and businesses have very little say THE AMERICAN ECONOMY Based on a market economy Businesses are free to compete for profit with little interference from the government Businesses can choose how to use their resources Prices are used to determine who will receive the goods/services BUT, it does not have a pure market economy Government does play a role Make sure the business practices are fair Make rules for the treatment of employees Also, has elements of a traditional economy It is known as a MIXED MARKET ECONOMY 16-2 TRADE-OFFS When you make a choice between two things you want to buy, you are making an economic decision. To make a good decision, you must think about the benefits and costs of each choice Once you make a decision you give up one option or choice. This is called a trade off. (P. 446) Trade-offs occur with more than just money. Examples: Your time– a friends party vs. studying for a test Businesses– invest in research vs. spend on advertising Government–spend $ on schools v. spend money on roads or national defense Managers– a big bonus for a few employees vs. a small bonus for all OPPORTUNITY COSTS OPPORTUNITY COST is the cost of the next-best use of your time or money when you choose to do one thing rather than another Economists use the term very specifically Reserved only for the next-most attractive alternative Example: A city has to decide whether to repair sidewalks or build a park. If the city builds the park then the opportunity cost would be the unrepaired sidewalks. MEASURING COSTS AND REVENUES FIXED COSTS – expenses that do not change no matter how much a business produces. Examples: rent, insurance VARIABLE COSTS – an expense that varies depending on how much a business produces Examples: labor, supplies TOTAL COSTS- the combination of all fixed and variable costs MARGINAL COSTS- the additional or extra opportunity costs associated with each increase of one unit of sales MEASUIRNG COSTS AND REVENUES MEASURING REVENUE REVENUE – the money a business receives from selling its goods or services MARGINAL REVENUE- the additional income received from each increase of one unit of sales MARGINAL ANALYSIS MARGINAL ANALYSIS – compares the additional benefit of doing something with the additional costs of doing it If the additional benefit is greater than that of the additional cost, the rule is to do it! BENEFIT COST ANALYSIS BENEFIT-COST ANALYSIS – economic model that compares the marginal costs and marginal benefits of a decision Shows the size of the benefit with the size of the cost by dividing the two Example: Idea A: $100 revenue at a cost of $80 = Divide 100 by 80 = 1.25 Idea B: $150 revenue at a cost of $90 = Divide $150 by $90 = 1.67 Idea B is more cost effective 16-3 DEMAND AND SUPPLY IN A MARKET ECONOMY What makes prices go up and down? In a command economy, government officials set most prices. In a market economy prices are set by the interaction of supply and demand. Producers are the businesses that provide goods and services. Consumers are the people who buy them. Producers create supply and consumers create demand. DEMAND Demand is the amount of a good or service that people are willing and able to buy at a particular price. There are 4 key parts to this definition. Amount- Demand measures how much of something consumers buy. This amount changes as prices change. Willing to buy- Consumers must want to buy the good or service or there is no demand. Able to buy- Consumers must be able to buy. Wanting an item without having the money to pay for it does not count as demand. Price - Demand is tied to price. The amount of an item people are willing and able to buy is linked to its price. SUPPLY Supply is the amount of a good or service that producers are willing and able to sell at various prices during a set time period. As the price of a product goes up, producers will supply more of it. As the price goes down, they supply less. MARKETS AND COMPETITION The quantity of a particular item that is demanded or supplied at each price can be shown in a SCHEDULE, and then drawn into a line graph. 1. Each point on the demand curve shows the amount demanded at a particular price. 2. Each point on the supply curve shows the quantity supplied at a particular price. 3. The line showing demand slopes down to the right. That is because people tend to demand more when the price is low and less when the price is high. 4. The slope of the supply curve is opposite. That is because producers tend to supply more when prices are high and less when prices are low. MARKETS AND COMPETITION The demand and supply curves together show a market. A market is a place where buyers and sellers of the same good or service come together. It can be a specific location, like a farmers market or mall, or the internet, like E-Bay or Amazon. COMPETITION Competition is the struggle among sellers to attract buyers. This keeps the prices down. If the market does not have enough sellers, prices may soar too high. This is why the U.S. bans monopolies. HOW PRICES ARE SET MARKETS set prices. On the supply and demand line graph – the point where the supply and demand lines meet is the equilibrium, this is where the supply and the demand is balanced. If the price is higher than the equilibrium price, producers would be willing to produce more but consumers would not be willing to buy more. This would result in a surplus, which causes prices to fall. If the prices were lower than the equilibrium price, this would result in a shortage. Shortages cause the prices to rise. FACTORS AFFECTING DEMAND Price is not the only thing that affects demand. Other factors affecting demand include: 1. Number of Consumers- More consumers = more demand. Less consumers = less demand. 2. Consumer income- If consumers have more money, then they will buy more and demand goes up. If they have less money, them they buy less and prices decrease. 3. Change in Customer Preference- If consumers like a product then demand goes up. FACTORS AFFECTING SUPPLY 1. Price 2. Number of Suppliers- If new members join the suppliers then supply increases. If producers leave, then supply decreases and prices go up. Since consumers have fewer choices, producers can charge more. 3.Costs of Production- If the cost to make a product goes up, producers make less profit. This leads them to produce less and supply goes down. THE ECONOMIC ROLE OF PRICES Prices play a key role in a market economy. They help answer the three basic economic questions: what to produce, how to produce, and for whom to produce. FOR WHOM TO PRODUCE- Businesses produce for those who have the money and desire to buy at a given price. Businesses base price on consumer to demand. Prices determine what to produce as well. Businesses try to keep production costs down. Example: CARS – to hand build cars would be too expensive, so producers use mass production and machines. OTHER USES OF PRICES They measure value by sending signals to producers to determine if the price is set correctly. It also tells consumers how much a product is worth. Prices play the same role in a command economy because the government answers the 3 basic economic questions based on their idea of the value of a good or service.
