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Chapter 6 ECONOMICS
Economics – is the study of how societies decide what to produce, how to produce it, and
how to distribute what they produce.
Scarcity – refers to the fact that too few resources are available for everyone in the world
to consume as much as he or she would like.
Opportunity cost – of taking an action refers to the loss associated with the best
opportunity that is passed up.
What factors might make the opportunity cost of going back to school for an M.B.A.
worth the expense?
TYPES OF ECONOMIC SYSTEMS
Command Economy – the government decides what goods and services are produced.
Government planners decide how many tons of steel factories produce. Decisions are
made by command, not in response to consumer tastes.
Market Economy – private companies and individuals decide what to produce and what
to consume. Government plays a minor role, regulating businesses to make sure that they
compete fairly. Most countries in the world today, including the U.S., have market
economies.
 Based on competition, to attract customers in hope of earning profits from a
successful product or service
 Each company makes its own decisions
THE LAW OF SUPPLY AND DEMAND
1. How do producers in an economy know what to produce?
2. How do they know how much to produce?
3. How do they know how much to charge for their products?
The Law of Demand
Demand – the quantity of a good or service individuals are willing to purchase at various
prices. Depends on individuals needs or wants, also depends on their incomes.

As the price of a good increases, the quantity of the good demanded falls.
The Law of Supply
- describes how price affects the amount of a good producers produce.

As the price of a good rises, producers are willing to supply more of the good.
Determining Price
- the law of supply and demand determines prices in a market economy.
- This law states that the price of a good or service adjusts until the amount
producers are willing to produce equals the amount consumers are wiling
to consume
Equilibrium price – The price at which supply equals demand.
DETERMINING PROFITS
Estimating Revenue
 Test Markets
Estimating Costs
 Fixed Costs – Costs that a business absorbs regardless of the number of
units it produces
 Variable Costs – Costs that rise or fall depending on how much of a
good or service is produced. Includes labor and materials.
Breakeven Analysis – reveals how many units of a good or service a business needs to
sell before it begins earning a profit.
Breakeven Point – the point at which revenue is sufficient to cover all costs.
6.2 THE BUSINESS CYCLE
Business cycle – expansion and contraction by many industries at once. Called the cycle
because it consists of several phases, which occur every few years.
Expansionary Phase – occurs when consumer spending is strong and companies invest in
new factories and equipment. Unemployment declines, wages, prices and interest rates
usually rise because people generally have more money to spend.
When companies stop expanding the next phase of the business cycle begins
Contractionary Phase – consumers reduce their purchases and business investment
slows. Unemployment rises, consumer spending falls, both businesses and consumers are
pessimistic about their future. Economic growth declines..
Recession – when growth falls for two three-month periods in a row
Depression – when business activity remains far below normal for years.
Economic indicators – data that show how the economy is performing.. Ex. Housing
loans and bankruptcy.