Section Outline 1 of 9 Basics of Our Economic System Section 1: The Principles of Our Market Economy I.The Circular Flow of Economic Activity II.Supply and Demand Color Transparency: The Circular Flow of Economic Activity Section Reading Support Transparency

2 of 9 Basics of Our Economic System Section 1: The Principles of Our Market Economy Main Idea A market economy is based on an exchange of labor, wages, capital, goods, and services — all regulated by the laws of supply and demand. Key Terms Interest Demand Supply Market price

The Circular Flow of Economic Activity Real Life Business —People exchange their labor to buy goods and services from many businesses. —The entire American economy is based on a circular flow. 3 of 9 Basics of Our Economic System Section 1: The Principles of Our Market Economy Interest —Payment for the use of capital Go Online: The Circular Flow of a Market Economy

4 of 9 Basics of Our Economic System Section 1: The Principles of Our Market Economy Supply and Demand In free-enterprise economies, markets determine: —Prices and how much will be produced The Law of Demand —Demand: The amount of a product or service that buyers are willing and able to buy at different prices —The demand curve illustrates the relationship between price and demand. As demand increases the price decreases

5 of 9 Basics of Our Economic System Section 1: The Principles of Our Market Economy Supply and Demand (continued) The Law of Supply —Supply: the amount of a product that producers are willing and able to offer at different prices. —The supply curve illustrates the relationship between supply and price. As price increases, supply increases. Supply and Demand —Market price is the point at which the supply and demand curves intersect. —Market price is the price at which buyers and sellers agree to trade.

Basics of Our Economic System: Section 1 Analyze Graphs: Supply and Demand for Strawberries 6 of 9

Basics of Our Economic System: Section 1 7 of 9 Color Transparency: The Circular Flow of Economic Activity

Basics of Our Economic System: Section 1 8 of 9 Color Transparency: The Circular Flow of Economic Activity 1. What does this diagram represent? It shows the circular flow of economic activity in a market economy. 2. Identify the three things businesses, or producers, need to create goods. Businesses need labor, land, and capital.

Basics of Our Economic System: Section 1 Section Reading Support Transparency 9 of 9