Supply/Demand, Markets and Trade

Economic Systems Command Economy Market Economy An economy in which most economic decisions about production and distribution are made through central planning and control Market Economy A market economy is an economic system where production and prices are based on the interaction of supply and demand

Economic Systems Mixed Economy: Economy is free, but there is some influence by the government (types of regulations)

Supply and Demand Law of Demand the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded.

Supply and Demand

Supply and Demand Law of Supply the higher the price, the higher the quantity supplied. Producers supply more at a higher price because selling a higher quantity at a higher price increases revenue.

Supply and Demand

Supply and Demand

Markets and Trade: Key Terms Opportunity Cost: The alternative (or the value of that alternative) that must be given up when resources are used for one purpose instead of another. Specialization: Division of labor into specific tasks and roles intended to increase the productivity

Markets and Trade Markets allow specialization, leading to trade and growth. When people trade, both parties expect to benefit from the trade.

Markets and Trade Otherwise, why would they have traded in the first place?

Comparative and Absolute Advantage The ability to produce more units of a good or service than some other producer, using the same quantity of resources/time

Comparative and Absolute Advantage Comparative Advantage The ability to produce a good or service at a lower opportunity cost than another producer. This is the economic basis for specialization and trade (not Absolute Advantage)

Comparative and Absolute Advantage What does comparative and absolute advantage look like in a real example?

Should Lebron mow his own lawn?

Should Lebron mow his own lawn? Lets say LeBron is both a great basketball player and a great lawn mower  LeBron can mow his lawn in 2 hours. He could also film a Nike commercial in two hours and make $10,000. So, James' opportunity cost of mowing his lawn is $10,000.

Should Lebron mow his own lawn? Neighbor Scotty can mow LeBron's lawn in 4 hours. He could also work at McDonald's for those 4 hours and make $8 per hour. So, Scotty's opportunity cost of mowing LeBron's lawn is $32.

Should Lebron mow his own lawn? Who has an absolute advantage in mowing the lawn? LeBron James-- he can do it in less time. So, James is better at mowing grass than Scotty. Who has comparative advantage in mowing the lawn? Scotty-- he can do it at a lower opportunity cost (misses out on $32 versus $10,000).

Should Lebron mow his own lawn? Would LeBron or Scotty benefit from a trade? 

Should Lebron mow his own lawn? BOTH! As long as Lebron James pays Scotty more than $32 to mow his grass they both benefit from the trade

Should Lebron mow his own lawn? Specialization leads to higher production Everyone has different Opportunity costs, everyone has comparative advantage/disadvantage in something.

Does everyone always benefit from trade and pursuing comparative advantage? http://www.pbs.org/newshour/bb/business-jan-june13-surfers_03-21/

How do governments influence trade? Government Actions How do governments influence trade?

Government Actions Tariff: an additional tax or duty to be paid on a particular import or export -Example: a tariffs can be placed on foreign goods in order to help protect domestic businesses from competition abroad

Government Actions Subsidies: a sum of money granted by the government to assist an industry or business - helps keep the price of a product low or competitive

Government Actions Trade agreements and multinational trade organizations -when two (or more) countries agree to abide by the same set of trade rules in order to try and keep things fair and competitive