Making Decisions in a Market Economy

 All societies have resources. Whatever their resources, all societies try to figure out how best to use them to produce goods and services.  EX: Natural- fertile land, vast mineral deposits,  Sophisticated machinery  Educated workforces

 The study of how societies decide what to produce, how to produce it, and how to distribute what they produce.

 All goods and services are scarce, somewhere.  Scarcity refers to the fact that too few resources are available for everyone in the world to consume as much as he or she would like.

 Because goods and services are scarce, producing one good means not producing another.  The opportunity cost of taking an action refers to the loss associated with the best opportunity that is passed up.

 All societies make decisions about how to allocate resources. Different types of economies make these decision in different ways.  The Command Economy  The Market Economy

 In some countries, the govt. decides what goods and services are produced. This is Command Economy.  In a command economy, govt. planners decide how many tons of steel factories produce.  Decisions are made by command, not in response to consumer tastes.

 Until the 1990’s, many countries in Eastern Europe had command economies.  Product quality was poor, and consumers often had difficulty finding the products they wanted.  Market shelves were often empty and clothing stores carried few styles of clothes.

 Private companies and individuals decide what to produce and what to consume.  Govt. plays only a minor role, regulating business fairly.  Today, this is most countries, including the United States.

 Based on competition  No one tells companies what to produce.  Each company makes its own decisions.

 Read page 136 – 138.  Demand refers to the quantity of a good or service individuals are willing to purchase at various prices.  Demand depends on individuals’ needs and wants, also their income.  As the price of a good increases, the quantity of good demanded falls.

 Describes how price affects the amount of a good producers produce.  As the price of a good rises, producers are willing to supply more of the good.

 The law of supply and demand determines the prices in the market economy.  The price of a good or service adjusts until the amount producers are willing to produce equals the amount consumers are wiling to consume.  The price at which supply equals demand is equilibrium price.  Page 139

 Understanding supply and demand is important b/c it helps managers determine the prices they should charge.  This affects how much profit a business earns.  Profit= Revenue - Costs

 Estimate Revenue, means estimate their sales. Forecast how much they will sell and gauge consumer demand.  Estimate Costs before they launch products.  Fixed  Variable

 Reveals how many units of a good or service a business needs to sell before it begins earning a profit.  The point at which revenue is sufficient to cover all costs is called the breakeven point.