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What is Economics? Economics is the study of how people produce, distribute, and use goods and services. An economic system is a country’s way of using limited resources to provide goods and services. Scarcity means that there is never enough of everything to satisfy everyone completely. Opportunity cost is the next best choice that you give up in order to do something else. Economics classifies resources as land, labor, and capital. Producers are the companies or individuals who make or provide goods and services. The people who purchase and use goods and services are consumers. Chapter 2 Basic Economics 1 Measuring the Economy Economists use many mathematical tools and equations, or indicators, to measure the health of the economy. The total value of all goods and services produced in a country is called the gross domestic product (GDP). The consumer price index (CPI) is used to measure changes in the prices of goods and services. When the average price of goods goes up sharply, it’s called inflation. When the unemployment rate is high, people cut back their spending, which can lead to a slower economy. When statistics show unemployment to be rising, investments falling, and GDP decreasing over a long period of time, it often indicates an economic downturn, or recession. Chapter 2 Basic Economics 2 Analyzing Supply and Demand Supply is the quantity of goods and services a business is willing to sell at a specific price and a specific time. Demand is the quantity of goods and services consumers are willing to buy at a specific price and a specific time. Supply and demand have a direct impact on the price of goods and services. When the supply is greater than the demand, the price goes down. When the demand is greater than the supply, the price goes up. In a market economy, the price of a particular good or service is determined by supply and demand. A surplus exists when the quantity supplied is greater than the demand. A shortage exists when the quantity supplied can’t meet demand. Chapter 2 Basic Economics 3 Visualizing Supply and Demand A supply curve shows the quantity of a product or service a supplier is willing to sell across a range of prices. Here the supplier is willing to provide more product as the price increases. Chapter 2 Basic Economics A demand curve shows the quantity that consumers are willing to buy across a range of prices. Here the consumer is willing to buy more as the price decreases. 4 Supply and Demand Curve A supply and demand curve shows the relationship between price and quantity. The equilibrium point is where the supply curve and the demand curve meet and supply and demand are balanced. It also represents the quantity that a business should produce of a given item (the equilibrium quantity) and how much the business should charge for it (the equilibrium price). Chapter 2 Basic Economics Equilibrium Price 5 Analyzing Economic Systems In a command economy, the government owns or manages the nation’s resources and businesses. In a market economy, suppliers produce whatever goods and services they wish and set prices based on what consumers are willing to pay. In a free enterprise system, individuals or businesses operate with little government interference. Free enterprise systems share the same five characteristics. Private property Freedom of choice Voluntary exchange Chapter 2 Basic Economics Economic incentive Competition 6 The Free Enterprise System In a free enterprise economy, competition is a driving force. Competition has many benefits. Competition between businesses results in bigger and better selection, lower prices, and better service. Competition between businesses encourages innovation. Competition between individuals can lead to higher earnings as businesses compete for talented workers. If a business has no competition, then it controls all of the supply and demand for the product or service it sells it is called a monopoly. A business makes a profit when the amount of money coming in from sales is greater than the business’s expenses. Chapter 2 Basic Economics 7 Taking Part in a Global Economy Globalization refers to the growing integration of the world’s economies. Some of the benefits of globalization include: Increased trade Increased prosperity Increased cultural exchange Globalization presents the following problems: Exports are goods or services that are sent from one country and sold to foreign consumers. Imports are goods and services that are brought into a country from foreign suppliers. Increased interdependence Loss of jobs Chapter 2 Basic Economics 8 International Trade A trade barrier is a governmental restriction on international trade. A tariff is a fee, similar to a tax, that importers must pay on goods they import. A quota is a limit on the quantity of a product that can be imported into a country. Advances in technology provide much of the driving force behind globalization Culture includes a people’s language, beliefs, attitudes, customs, manners, and habits. Businesspeople in most societies follow particular social rules and customs called etiquette. Chapter 2 Basic Economics 9 Chapter Review Economics is the study of how people produce, distribute, and use goods and services. Supply is the quantity of goods and services a business is willing to sell at a specific price and a specific time. Demand is the quantity of goods and services consumers are willing to buy at a specific price and a specific time. A supply curve shows the quantity of a product or service a supplier is willing to sell across a range of prices. A demand curve shows the quantity that consumers are willing to buy across a range of prices. Chapter 2 Basic Economics 10 Chapter Review (continued) In a command economy, the government owns or manages the nation’s resources and businesses. In a market economy, suppliers produce whatever goods and services they wish and set prices based on what consumers are willing to pay. In a free enterprise system, individuals or businesses operate with little government interference. Globalization refers to the growing integration of the world’s economies. Culture includes a people’s language, beliefs, attitudes, customs, manners, and habits. Chapter 2 Basic Economics 11