© Goodheart-Willcox Co., Inc.. 1 What Is Economics?


1What Is Economics?


Chapter Objectives

• Distinguish between needs and wants.

• Compare different types of economic systems.

• Define scarcity in terms of needs and wants.

• Analyze a decision in terms of trade-offs and opportunity cost.

• Explain the role of profit motive in the economic system of the U.S.

continued


Chapter Objectives

• Evaluate how competition among producers influences the price of goods in a market economy.

• Interpret the relationship between supply and demand.


Economic Systems

• In earliest times families were the basic economic unit

• Self-sufficient families

– grew their own food– provided for

members’ needs and wants

– only consumed what they produced continued


Economic Systems

• The family lost its role as the basic economic unit as– people moved away from

agricultural base – new ways of organizing production

through specialization and technology emerged

– larger quantity and wider variety of goods and services became available


Types of Economic Systems

• Four types of economic systems:– Traditional – Market or free enterprise– Command – Mixed


Traditional Economy

• Found mostly in underdeveloped countries

• Change comes slowly• People tend to stick with what they

know and do as they always did• People are governed by strong

cultural, religious, or tribal leadership


Market Economy

• Decisions and activities of consumers impact businesses

• Businesses react to consumers’ needs

• Businesses have the opportunity to grow and profit

• Individuals are given incentives to succeed

continued


Market Economy

• A marketplace brings consumers and producers together to exchange goods, services, and money

continued


Market Economy

• Examples:– Market for all

goods and services in an economy

– Market for cars– Market for a

certain brand of sneakers


Command Economy

• Commonly found in socialist and communist countries

• A central authority, usually government,– decides how resources are allocated– decides who will produce what– sets prices and decides how much to

produce


In Your Opinion

• Why might some people choose to live under a command economy?


Mixed Economy

• Combines features of command and market economies

• Exists in the U.S., China, Great Britain, Japan, and many other nations

• Most economies are mixed• Though mixed, the U.S. economy

has minimal government involvement


The Challenge of Scarcity

• Needs and wants are unlimited• Resources are limited• Economic systems attempt to

resolve the problem of scarcity• Scarcity is a problem for

individuals, families, companies, and nations

continued


The Challenge of Scarcity

• Nonhuman resource – Examples: natural resources,

capital, or physical things used to make and distribute other goods and services

• Human resource – Examples: human labor, good

health, skills, knowledge, education, entrepreneurship


Trade-Offs and Opportunity Cost

• Scarcity forces everyone to make choices, which involve– trade-offs– opportunity costs


Scarcity and Economic Systems

• Three problems for all societies:– What and how much to produce– How to allocate resources in

producing goods and services– How to divide the goods and

services produced


How the U.S. Economy Works

• Flows of goods, services, and resources between producers/sellers and consumers/workers

continued


How the U.S. Economy Works

• Flows of payments for goods, services, and resources between consumers/workers and producers/sellers


Four Qualities of a Market Economy

• Private ownership and control of productive resources

• Profit motive• Free economic choice• Competition


Private Ownership and Control of Productive

Resources• Individuals and businesses have

– the right to own property such as possessions, real estate, business enterprises

– freedom to decide how to use resources


Profit Motive

• Provides incentives for– entrepreneurs to take risks to start

new businesses– businesses to produce goods and

services– investors to buy stocks, bonds, and

other investments– people to sell their resources: labor,

land, ideas, capital


Free Economic Choice

• Consumers can choose– how they

earn income– what to do

with their money: spend, save, or invest

– what, where, and how much to buy

continued


Free Economic Choice

• Businesses can choose– what they produce– how and where to produce it– how and where to sell what they

produce– what to do with their profits


Competition

• Competition among businesses and individuals affects– prices– wages– quality of goods and services– features of goods and services– quality of customer service– innovation

continued


Competition

• Businesses must innovate to be competitive and successful by investing in research and development (R&D)

• Advances in technology drive innovation

• U.S. invests more money in research and development than any other country in the world

continued


Competition

• Market economies can provide the best products and services at the lowest prices


Laws of Supply and Demand

• Supply is closely connected to price

• Businesses produce more of something when they can sell it at higher prices

• When price rises, supply rises• When price falls, supply falls

continued



• Price and supply move in same direction in the supply curve

continued



• Demand is closely connected to price

• When price rises, demand falls• Consumers buy more of

something at a lower price than at a higher price

• When price falls, demand rises

continued



• Price and demand move in same direction, opposite the supply curve


Equilibrium

• Laws of supply and demand work together

• When demand and supply are relatively balanced, the market is in equilibrium

• Equilibrium is an ideal

continued


Equilibrium

• Equilibrium price is when quantity supplied equals quantity demanded


Changes in Demand Trigger Price Adjustments

• Price rises when– demand is greater than supply– demand rises and supply stays the

same

• Example: airline ticket prices are highest during peak travel times

continued


Changes in Supply Trigger Price Adjustments

• Price falls when– supply is greater than demand– supply rises and demand stays the

same

• Example: stores drop prices for winter coats and hats at end-of-season clearance sales


The Market’s Answer to Scarcity

• Demand in the marketplace determines what and how much to produce

• Businesses decide how to allocate resources in producing goods and services

• Forces of supply and demand in the job market determine how to divide goods and services produced


In Your Opinion

• Is understanding the free enterprise system important to the study of personal finance?


Central Ideas of the Chapter

• Economics is the study of how people use scarce resources to satisfy their unlimited needs and wants.

• In a free enterprise system, market forces allocate the resources.


Glossary of Key Terms

• command economy. A system in which a central authority, usually the government, controls economic activities.

• consumer. A buyer and user of goods and services.

• demand. The quantity of a product or service consumers are willing to buy.

• economic system. Structure in which resources are turned into goods and services to address unlimited needs and wants.

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• free enterprise system. See market economy. Also called capitalism.

• goods. Physical items such as food and clothing.

• human resource. Qualities and characteristics that people have within themselves.

• innovation. The process of creating something—new or improved products and new ways to do things and solve problems.

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• market economy. A system in which privately owned businesses operate and compete for profits with limited government regulation or interference.

• marketplace. An arena in which consumers and producers meet to exchange goods, services, and money.

• mixed economy. A combination of market and command systems.

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• needs. Items a person must have to survive.

• nonhuman resource. External resources, such as money, time, equipment, and possessions.

• opportunity cost. The value of the best option or alternative given up.

• producer. An individual or business that provides the supply of goods and services to meet consumer demands.

• profit. The total amount of money earned after expenses are subtracted from income.

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• resources. Any input used to generate other goods or services.

• scarcity. The challenge of stretching resources to cover needs and wants.

• services. Work performed.• supply. The amount of a product or

service producers are willing to provide.

• technology. The application of scientific knowledge to practical uses and product development.

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• trade-off. Part of making choices that involves evaluating two or more options and selecting just one; the item given up in order to gain something else.

• traditional economy. System in which economic decisions are based on a society’s values, culture, and customs.

• wants. Items a person would like to have that are not essential to life.

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© Goodheart-Willcox Co., Inc.. 1 What Is Economics?

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