Economic Scarcity and Supply & Demand

Economic Scarcity

• Scarcity is the fundamental economic problem of having unlimited wants but limited resources to satisfy them.
• Scarcity impacts production, consumption, and exchange by forcing choices about what to produce, how much to consume, and how to exchange goods and services. This necessitates trade-offs.
• Scarcity necessitates choices for individuals, governments, and societies because resources are not sufficient to meet all demands.
• Scarcity leads to economic policy and allocation by creating a framework for managing the distribution of limited resources.
• Scarcity requires choices and prioritization of resource utilization.
• Economic decisions facing scarcity require a thorough evaluation of opportunity cost—the value of the next best alternative forgone.

Supply and Demand

• The law of supply states that as prices rise, the quantity supplied of a good or service increases, and vice-versa.
• The law of demand states that as prices rise, the quantity demanded of a good or service decreases, and vice-versa.
• Economic equilibrium occurs when the quantity supplied equals the quantity demanded at a particular price.
• Supply and demand curves depict the relationship between price and quantity supplied/demanded, showing changes in supply and demand. Changes in quantity supplied and quantity demanded on the curve are shown.
• Consumer demand is affected by factors like consumer preferences, income, prices of related goods, and expectations. Government, environmental, and technological factors also impact demand.
• The relationship between prices and consumer purchases is characterized by the law of demand.
• Economic elasticity measures the responsiveness of quantity demanded or supplied to changes in price.
• Government price ceilings and floors can lead to either shortages or surpluses in the market.

Economic Systems

• Capitalism is an economic system characterized by private ownership of the means of production, profit motive, and competitive markets.
• Individuals in a free enterprise system seek to maximize profits based on their economic role within the system.
• Characteristics of a market economy include profit motive, competitive markets, and private property rights.
• Various economic systems exist, including traditional, market, and command economies. These economies can be compared and contrasted.
• Economic systems, resources, and culture are interconnected and influence each other.
• Decisions in a command economy are centralized and directed by the government.
• Decisions in a traditional economy are derived from customs and traditions.
• Capitalism, socialism, and communism represent distinct economic ideologies.
• A mixed economy combines elements of different economic systems (e.g., market and command).

Gross Domestic Product (GDP)

• GDP is the total market value of all final goods and services produced within a country's borders in a specific time period.
• GDP can be calculated using the expenditure approach, income approach, or output approach.
• GDP is a crucial economic indicator reflecting the health of a country's economy.
• Economic growth is directly correlated with GDP growth.
• GDP reflects the overall economic activity and well-being of a nation.
• Nominal GDP measures GDP in current prices, while real GDP measures GDP adjusted for inflation.
• GDP influences the stock market through its impact on overall economic health.

International Trade

• International trade significantly impacts the U.S. free enterprise system.
• International trade is characterized by absolute and comparative advantage, trade barriers, exchange rates, and balance of trade.
• Trade barriers and exchange rate fluctuations affect international commerce.
• International trade promotes specialization and interdependence and increases world output. Credit is also involved in a market economy.
• Tariffs, quotas, and embargoes, while potentially beneficial in specific cases, also carry disadvantages and distributional effects.
• International issues, such as political instability, have significant economic impacts.
• Exchange rates impact international trade by influencing the relative costs of imported and exported goods. Understanding the advantages and disadvantages of various credit forms is relevant to international trade. Determining determinants of credit history is also relevant.

Business Cycles

• The circular flow model represents the flow of resources, goods, and services within the economy.
• Interdependence exists between individuals, businesses, and the government in the economy.
• The product market involves the buying and selling of goods and services, and the factors of production consist of land, labor, capital, and entrepreneurship.
• The six business cycles include expansion, peak, recession, depression, trough, and recovery.
• Individuals and businesses play key roles in the circular flow process.
• Changes in components of the circular flow impact all other components.
• The government interacts with the circular flow via taxation, services, and national debt.

Inflation

• Inflation is a persistent increase in the general price level of goods and services in an economy.
• Demand-pull inflation arises from excess aggregate demand.
• Cost-push inflation is triggered by rising production costs.
• Built-in inflation occurs when inflation continuously feeds on itself, reinforced by expectations and wage-price spirals.
• The Consumer Price Index (CPI) and Wholesale Price Index (WPI) are used to measure inflation.
• Inflation can sometimes positively impact certain assets, like real estate and commodities.
• Product Price Indices measure inflation for specific categories of products.
• Inflation's causes and effects include factors like demand increase, supply shortages, and increased production cost.
• Inflation's pros and cons must be weighed carefully.
• Monetary policy is a tool frequently used to control inflation.
• The effects of inflation can lead to price instability, reduced purchasing power, and economic uncertainty.
• Hyperinflation represents a severe, uncontrolled inflation scenario.