Supply and Demand The law of supply and demand affects the price of a product An open market is when products are based on supply and demand

Supply S $35 $30 $25 $20 $15 $10 Number of DVDs The amount of goods that producers are willing to supply at a certain price

Demand D $35 $30 $25 $20 $15 $10 Number of DVDs The amount of goods that consumers are willing to buy at a certain price

Market Price set by Supply and Demand S D $35 $30 $25 $20 $15 $10 Number of DVDs Market Price Where the two meet is called the equilibrium price or market price

Real life is not quite like this – not so neat, either you have an oversupply or undersupply With oversupply sales or prices decreases to get rid of inventory –Oversupply – nail salons With undersupply prices increase –Red sox tickets, tickets to concert, flights to Florida

Market Price set by Supply and Demand S D 10m 20m 30m $3.00 $2.50 $2.00 $1.50 $ OPEC

Law of Demand says that as PRICE declines the demand for a product increases –Ex. DVD, Ipods, Iphone

Whether a country is industrialized (high literacy and standard of living) or a less developed country (more concerned with survival) or a developing country (changing power) countries are categorized by their level of economic development. These are influenced by Literacy level –Better education systems provide better goods & services –Knowledge is power –Product have higher quality

Technology –Automated production, distribution, and communication systems create products quickly Agricultural vs. Industrial –Higher manufacturing provides greater quantity and higher quality Also look at their infrastructure –A nation’s transportation, communication, and utility system Must be good in order to distribute your product

Economic systems are affected by decision-making When countries and nations go through a process to determine the economic questions

Opportunity costs When making choices very often have to give up something in return Examples: college for money or time homework for TV or computer develop electronics industry or develop agriculture

What Products Do we Export? Countries will export products for which they have a low opportunity cost Leads us to another principle of international trade: Absolute advantage or comparative advantage

Absolute Advantage One country is more efficient in producing a given product using the same amount of resources as another country at less cost Happens for 2 reasons –Country has raw materials necessary to produce goods –Country has low labor costs Known as specialization

Comparative Advantage The ability of a country to produce a product at a lower opportunity cost than another country Known as Law of Comparative Advantage

Example of Comparative Advantage Country A Soybeans 10 million Corn 50 million Country B 8 million 25 million

Making Good Decisions? Measures of Production Gross Domestic Product –Measures the total value of all goods and services produced with resources within a country’s borders Includes items produced with foreign resources Gross National Product –Measures the total value of all goods & services produced by resources of a country within and outside a country’s border –Measured in per capita comparison – value of goods produced divided by population

Inflation –An increase in the average price of goods and services Two basic causes –Demand pull inflation (when demand exceeds supply) causes prices to increase –Cost-push inflation (expenses of a business increase) companies spending more money to make their products so turn around and charge customer Consumer Price Index –Bureau of Labor Statistics publishes a report measuring inflation each month

Unemployment rate –Loss of income means no purchasing power

Measure of International Trade Balance of trade –Difference between a country’s exports and imports Trade surplus – exports more than it imports Trade deficit – imports more than it exports Just as businesses keep records of their cash flow nations keep records of their trade – therefore special forms and licenses filled out for trade

Balance of Payment –Flow of money going out of a country versus coming into a country Favorable balance of payment –More money coming in than going out Unfavorable balance of payment –More money going out of the country than coming in