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1
What Is Economics?
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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.
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Chapter Objectives
• Evaluate how competition among producers
influences the price of goods in a market
economy.
• Interpret the relationship between supply
and demand.
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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
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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
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Types of Economic Systems
• Four types of economic systems:
– Traditional
– Market or free enterprise
– Command
– Mixed
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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
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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
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Market Economy
• A marketplace brings consumers and
producers together to exchange goods,
services, and money
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Market Economy
• Examples:
– Market for all goods
and services in an
economy
– Market for cars
– Market for a certain
brand of sneakers
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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
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In Your Opinion
• Why might some
people choose to
live under a
command
economy?
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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
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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
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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
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Trade-Offs and Opportunity
Cost
• Scarcity forces everyone to make
choices, which involve
– trade-offs
– opportunity costs
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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
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How the U.S. Economy Works
• Flows of goods, services, and resources
between producers/sellers and
consumers/workers
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How the U.S. Economy Works
• Flows of payments for goods, services,
and resources between
consumers/workers and producers/sellers
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Four Qualities of a Market
Economy
• Private ownership and control of
productive resources
• Profit motive
• Free economic choice
• Competition
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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
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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
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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
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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
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Competition
• Competition among businesses and
individuals affects
– prices
– wages
– quality of goods and services
– features of goods and services
– quality of customer service
– innovation
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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
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Competition
• Market economies can provide the best
products and services at the lowest
prices
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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
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Laws of Supply and Demand
• Price and supply move in same direction
in the supply curve
Supply Curve
Price per pair
$80
$60
$40
$20
$0
1,000
2,000
3,000
4,000
Number of pairs produced
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Laws of Supply and Demand
• 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
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Laws of Supply and Demand
• Price and demand move in same
direction, opposite the supply curve
Price per pair
Demand Curve
$80
$60
$40
$20
$0
1,000
2,000
3,000
Number of pairs sold
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4,000
Equilibrium
• Laws of supply and demand work
together
• When demand and supply are
relatively balanced, the market is in
equilibrium
• Equilibrium is an ideal
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Equilibrium
• Equilibrium price is when quantity
supplied equals quantity demanded
Price per pair
$80
$60
$40
$20
$0
1,000
2,000
3,000
Number of pairs
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4,000
Supply
Demand
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
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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
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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
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In Your Opinion
• Is understanding the free enterprise
system important to the study of
personal finance?
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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.
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