The Basics of Economics

Economic Activity Our economy, much like others around the world operate on a circular flow of economic activity. –Goods and Services are exchanged for labor and money. –Example: Producers exchange money in the form of wages for labor. Wages are then used to buy goods and services form producers.

The Circular Flow Individuals supply business with land, labor and capital. Businesses supplies individuals with goods and services. Businesses pay for the individuals for the use of land, labor and capital. Individuals pay businesses for goods and services to satisfy needs and wants.

In our economic system, individuals own the means of production which they exchange with producers for money. –We exchange labor, our time and skills for wages. –We exchange the land or natural resources at a price. –We exchange our capital, tools and machines and are paid interest.

Laws of Economics When there is free competition among sellers and buyers, the market works according to two natural economic laws. The Law of Demand The Law of Supply

The Law of Demand What is demand? –The amount of goods or services buyers are willing and able to purchase at different prices. The Law of Demand states that when product prices are low consumers will purchase more.

Demand Curve The Demand Curve illustrates the quantity or amount of goods consumers would be willing to purchase at given prices.

Demand Curve MCA CD 1)How many CD’s would consumers be willing to buy at $10.00 a piece?

Demand Curve MCA CD 2)If producers are in business to maximize profit, why don’t they sell their CDs for $50.00 each?

Demand Curve MCA CD 3)Consumers would be willing to purchase 400 copies of a CD if producers were willing to sell it for how much?

The Law of Supply What is supply? –Supply is the amount of a product that producers are willing and able to sell or offer at different prices. The law of supply states that when product prices are high, producers will make more.

Supply Curve The Supply Curve illustrates the quantity or amount of goods producers would be willing to offer at given prices.

1)How many games will Software House be willing to offer at the price of $40 each?

2)Software House would be willing to produce 100 games if they could sell each copy for how much?

3)How many games would Software House be willing to produce at a price of $10.00 a piece?

How does the market determine the price of a product? The law of demand and the law of supply work together to determine the price of a product and the quantity offered. Price affects the demand of a product in the same way that it affects the amount supplied.

How does the market determine the price of a product? The higher the price, the more of a given product will be offered by producers. The lower the price, the more of a given product will be demanded by consumers. Market price or the price at with buyer and seller agree to trade occurs where the supply curve intersects with the demand curve.

1)If market price is determined by the law of supply and demand, what would be the price of bag of potato chips? Market Price

2)According to this graph, at $0.75 how many bags of potato chips will producers be willing to offer?

3)Producers would rather sell their chips for $1.00 a bag, however, what problem would occur?

Supply and Demand for Video Games 1)What would occur of producers attempted to sell their video game for $40?

Supply and Demand for Video Games 2)Based on information in the graph, which would be the best price for a new video game?

Supply and Demand for Video Games 3)What would occur if the video game manufacturer produced under 192 copies of their game?