Economics Unit 4A: Supply and Demand

• Unit 4A Economics: Supply and Demand

Supply and Demand Graph

• The graph illustrates the relationship between the price and quantity of a product.
• Demand is the quantity of a product that consumers are willing to buy at different prices.
• Supply is the quantity of a product that producers are willing to sell at different prices.
• Equilibrium is the point where supply and demand meet.
• Surplus exists above the equilibrium point.
• Shortage exists below the equilibrium point.

Law of Demand

• Consumers buy more of a good or service at lower prices but less at higher prices.
• Higher prices for a good or service provide less incentive for buyers.
• Lower prices for a good or service provide more incentive for buyers.

Law of Supply

• Producers will produce more of a good or service at higher prices and less at lower prices.
• Higher prices for a good or service provide more incentive for producers.
• Lower prices for a good or service provide less incentive for producers.

Equilibrium

• The point where supply and demand meet is what everyone wants to sell at that price, and everyone who wants to buy at that price, can buy.

• Unit 4A Economics: Economic Systems

Three Basic Economic Questions

• What will be produced?
• How will it be produced?
• For whom will it be produced?

Traditional Economy

• People perform the same work as their parents and grandparents.
• Economic decisions are based on custom and historical precedent.
• Example: Pre-industrial revolution societies, such as the American Colonies.

Free Market Economy

• Characterized by private ownership of property/resources.
• Emphasizes consumer sovereignty and individual choice.
• Minimal government involvement in the economy.
• Driven by profit motive and competition.
• Example: No modern economy is completely free market, but New Zealand is closest.

Command Economy

• Central ownership of property/resources, usually by the government.
• Centrally-planned economy.
• Lacks consumer choice.
• Example: No modern economy has been completely command, but North Korea, Cuba, and the former USSR are closest.

Mixed Economy

• Individuals and businesses are owners and decision-makers for property/resources in the private sector.
• The government is an owner and decision-maker for property/resources in the public sector.
• Government's role is greater than a free market economy but less than in a command economy.
• Most economies today, including the United States, are mixed economies.

Continuum of Economic Systems

• Free Market: Less government and more individual choice.

• Mixed: A balance between government and individual control.

• Command: More government and less individual choice.

• Unit 4A Economics: U.S. Economy

Characteristics of the U.S. Economy

• Free enterprise: Businesses operate with minimal government interference.
• Prices are determined by supply and demand.
• Private property is protected by law.
• Profit motive drives businesses.
• Competition among businesses.
• Consumer sovereignty: Consumers have the power to decide what is produced.

Basic Types of Business

• Proprietorship: Owned by one person, who receives all profits and takes on all risks.
  • Examples: artist, hair salon, owner of a small used clothing store, babysitting, mowing lawns and shoveling snow.
• Partnership: Owned by two or more people, who share risks and profits.
  • Examples: larger law firms and larger accounting firms.
• Corporation: Authorized by law as a separate legal entity with limited liability and is owned by shareholders.
  • Examples: Walmart and McDonald's, any company listed on a public stock exchange, including Macy's and Pfizer.

Entrepreneur

• A person who takes risks to produce and sell goods and services in search of profit.

• May establish a business according to any of three types of organizational structures.

• Unit 4A Economics: Circular Flow

Circular Flow Model

• Illustrates how money and resources flow through an economy.
• Individuals and businesses provide financial savings and investments that can be borrowed for business expansion and consumption.
• Individuals (households) own the resources used in production and sell their human resources to businesses in exchange for income.
• Businesses (producers) buy resources from individuals and other businesses to make products, then use the profits to buy more
• Governments use tax revenue from individuals and businesses to provide public goods and services.
• Key components:
  • C: capital
  • E: entrepreneurship
  • L: land
  • L: labor