Foundations of Economics

Principles, Types of Economies, Supply and Demand

Discussion Prompts

• Why do we have to work?• What is the difference between a want and a

need?• What is Economics?

Economics Definitions

• The study of the production, distribution and consumption of resources/wealth in human society.

• A social science that studies how individuals, governments, firms and nations make choices on allocating scarce resources to satisfy their unlimited wants.

• See What is Economics? Article

Scarcity

• The result (condition) of not enough resources to satisfy all wants and needs.

• Not based on the total amount of resources in a society, but on the relationship between wants and the resources available.

• http://www.investopedia.com/terms/s/scarcity.asp

Impact of Scarcity

• ration• barter• trade• buy, sell, save• work, produce, create, labor• consumption: is the act of buying or using goods

and services.• economy: a system for producing and distributing

goods and services to fulfill people’s wants.

Opportunity Cost

• Every economic decision has an opportunity cost.

• It is the benefit given up when scarce resources are used for one purpose instead of another.

• Prioritize• Analyze costs and benefits• Dinner and rent movie, or go to movie?• See Video

Factors of Production(building blocks of economy; help battle scarcity)

• Labor (human): time and energy put into production of goods and services.

• Land (nature): natural resources needed to produce goods and services. Minerals, soil, water, timber, wildlife, energy sources, etc.

• Capital (machine): Anything produced in an economy used to produce other goods and services (tools, machines, buildings, etc.).

• Entrepreneurship: an Entrepreneur is someone who starts or “undertakes” a business and makes good business decisions.

• http://www.investopedia.com/terms/f/factors-production.asp

Types of Economies• Traditional Economy: economic decisions based on long-

established traditions and practices (ex. subsistence hunting/farming, Amish).

• Command Economy: the government or central authority owns and controls the factors of production. Makes all economic decisions (ex. Soviet Union).

• Market Economy: system where private individuals own the factors of production and are free to make their own choices about production, distribution, and consumption (ex. U.S.). The U.S. is considered a Mixed Economy having a mixture of the 3 basic economic systems.

American Economy

1. Market Economy, also based on profit, investment (risk, entrepreneurship).

2. Free Enterprise: refers to a system in which individuals in a market economy are free to undertake economic activities with little to no control by the government.

3. Capitalism: a system in which people make their own decisions about how to save resources as capital, and how to use their capital to produce goods and provide services.

4. Compare economies worldwide

Supply and Demand

• Buyers and sellers come together to buy and sell goods and services in a market.

• Producers and individuals both act as buyers and sellers (or consumers and producers).

• Because of free enterprise, when there is free competition among sellers/buyers, the market will work according to supply and demand.

• Adam Smith called this the “invisible hand”• In a market economy, prices are determined by

supply and demand.

Example

• Market economies are based on supply and demand. Play game:https://americanheritage.byu.edu/Pages/GamesandActivities/Market-Economy.aspx

Law of Demand

• Demand = the amounts of a product or services buyers are willing to buy at different prices.

• People will often buy more of something when the price is low.

• There is an Inverse relationship between the price and quantity demanded of something.

• Law of demand is based on substitution effect and the income effect.

Demand Curve

Law of Supply• Supply = the amounts of a product that producers are willing

and able to offer at different prices.• This is the producer (business) side of the story.• Producers make balance costs and benefits as well as

consumers.• When a producer makes something, it costs money, the

producer wants to sell things for more than it cost to make it.• The higher the price, the higher the benefit to the producer,

the more they are willing to make. (Think Car Company)• The relationship between price and quantity supplied

is positive.

Supply Curve

Market Price

• Market Price = the price which buyers and sellers agree to trade.

• the market price is determined by the forces of supply AND demand within free market.

• Market Price occurs where supply and demand intersect

Market Price (equilibrium)

Disequilibrium

• When a market economy cannot act freely to determine a market price, shortages or surpluses can occur.

• Price Ceiling = maximum price that can be charged (sometimes set by gov.). May cause shortages.– What is an example? Rent controls.

• Price Floor = is the lowest price that can be paid. May cause surpluses.– What is an example? Milk prices.

Excess Demand: Excess demand is created when price is set below the equilibrium price. Because the price is so low, too many consumers

want the good while producers are not making enough of it.

Excess Supply: If the price is set too high, excess supply will be created

within the economy and there will be allocative inefficiency.

1970s Oil Crisis