1. Economics 101
The Basics

2. Economics: The study of how a society allocates its scarce resources to satisfy its unlimited wants and needs

3. Scarcity – the fundamental economic problem we have unlimited wants, but a limited amount resources to satisfy those wants

4. As a result, Scarcity forces us to make choices, not only individually, but for a society as well

5. (1) Society must decide what to produce with its limited resources Which goods and services will be produced?

6. (2) Society must decide how to produce those goods and services
(2) Society must decide how to produce those goods and services. What methods should we use?

7. (3) Society must decide for whom to produce
(3) Society must decide for whom to produce. Who will receive the goods and services?

9. The way a society answers the three basic economic questions of what, how, and for whom to produce… determines its economic system

10. We will study the way we (the U. S
We will study the way we (the U. S.) answer those questions a little bit later in this unit

11. But scarcity forces us (as individuals) to make choices, too We have to decide which wants we are going to try and satisfy and which wants we will allow to go unsatisfied

13. When we have to make a choice, we face a trade-off

14. a trade-off: To satisfy more of one thing need means satisfying less of another

15. For example, when people save their money by putting it into a savings account, they are trading off spending that money today in order to have more to spend in the future

16. Choosing to spend an hour playing video games, means having less time to spend on homework

17. When a good is scarce, choosing to use the good in one way means giving up some other use

18. What we give up (in order to chose what we do) is called the opportunity cost of that choice

19. Opportunity Cost – the value of the next best alternative that you had to give up for the choice you made

20. Opportunity cost includes more than just money includes the discomforts and inconveniences linked to the choice made …such things as money, time, or resources given up when one choice is made rather than another

21. Opportunity cost emphasizes that had people not made the choice they made, they would have chosen the next best alternative

22. Please understand that all choices have costs. Nothing is free
Please understand that all choices have costs. Nothing is free. We have to give up things in order to do other things. (Again, this is the concept of the trade-off).

23. Remember this acronym: T.I.N.S.T.A.A.F.L.
There Is No
Such
Thing As A
Free
Lunch

24. Let’s review what we have so far…
Scarcity: society does not have enough resources to produce all the things people want to have
Scarcity has to do with lack of resources
The fact that a good is limited in quantity does not make it scarce. It has to be desired (wanted)!
Scarcity is the mother of all choice

25. We make choices to satisfy wants and needs
Choosing to use a scarce good in one way means giving up some other use (trade-off)
What we give up is the opportunity cost of that choice
Nothing is free (TINSTAAFL). Someone, somewhere, somehow paid for it

26. Now, the next thing we have to do is distinguish between a want and a need

27. Need – a basic requirement for survival

28. Examples: food, shelter, clothing

29. In addition to physical needs, we also have emotional needs

30. Love, Acceptance, Hope, Accomplishment, Communication, Knowledge, Companionship, etc.

31. Want – a means of expressing a need what we would like to have to make our lives more comfortable and enjoyable

32. Examples: Pizza, Hamburger, Taco to satisfy the need of food

33. Marriage, All-conference team, 4. 0 grade point average, Friends, etc…
Marriage, All-conference team, 4.0 grade point average, Friends, etc…. to satisfy emotional needs

34. The difference between a want & a need is not always clear

35. Do you really “need” that new entertainment system?

36. Be careful: advertisers present wants as needs

37. So we now know the basics. Let’s now study our economic system!

38. There are three types of economic systems – Market, Command, & Traditional economies

39. In the United States, we have a market economy

40. Market Economy – the three basic economic questions are made by individual citizens based on the market forces of supply and demand

41. Let’s take a close look at how the laws of Supply & Demand work

42. Let’s begin with demand…

43. “Demand is the willingness and ability to buy a good or service”

44. Demand is one of the two forces that help to determine prices

45. LAW OF DEMAND As price increases, the quantity demanded decreases.
As price decreases,
the quantity demanded increases.

46. Slopes downward to the right
Demand Curve
A graph that shows the amount of a product that would be bought at all possible prices in the market
Slopes downward to the right
                                                

47. Demand is simple to understand… as price goes up, the amount demanded goes down as price goes down, the amount demanded goes up Price and the amount demanded move in opposite directions they have an inverse relationship to each other

48. Supply is the other force that determines prices of goods and services

49. “supply is the willingness and ability to sell a good or service”

50. Law of supply When price increases, quantity supplied will increase
When price decreases,
quantity supplied will decrease

51. Price and quantity supplied move in the same direction

52. Supply is the opposite from demand

53. Law of Supply Price Quantity $50 100 $40 90 $30 70 $20 30 $10 1
Supply Schedule:
Suppliers will normally offer more for sale at higher prices and less at lower prices
Price
Quantity
$50
100
$40 90
$30 70
$20 30
$10 1

54. Slopes upward to the right
Supply Curve
                                                
a graph showing the amount of a product that would be supplied at all possible prices in the market
Slopes upward to the right

55. Market Equilibrium

56. This occurs at the price at which the quantity demanded equals the quantity supplied

57. Supply and Demand at Work

58. Surpluses & Shortages SURPLUS SHORTAGE
Quantity supplied exceeds quantity demanded
The price is above the market (clearing) price
Prices will fall
SHORTAGE
Quantity demanded exceeds quantity supplied
The price is below the market (clearing) price
Prices will rise

59. Market Surplus

60. Market Shortage

61. Supply and Demand at Work
When operating without restriction, a market economy eliminates shortages and surpluses
Over time a surplus forces the price down and a shortage forces the price up until supply and demand reach an equilibrium price
This self-regulating feature of a market economy is sometimes called the “invisible hand”

62. Supply and Demand at Work
Sometimes the government sets the price of a product because it believes the forces of supply and demand are unfair
Price Ceiling – government-set maximum price that can be charged for a good or service
Price Floor – government-set minimum price that can be charged for a good or service

63. When government over-regulates, surpluses and shortages are created That’s why limited government interference is wanted in a market economy we call this “Free Enterprise”

64. Changes in supply & demand

65. Demand Changes Demand is always changing
                                                
Demand is always changing
Changing demand affects the demand curve graph

66. An increase in demand shifts the demand curve out to the right a decrease in demand shifts the demand curve inward to the left

67. Factors Affecting Changes in Demand

68. Changes in the Number of Consumers- also referred to as the population of buyers

69. Changes in Consumers’ Income – refers to pay raises and pay cuts of consumers

70. Changes in Consumers’ Tastes- Consumer attitudes & tastes change all the time What was popular years ago may not be popular today and vice versa. Fads come and fads go.

71. Changes in Consumers’ Expectations- the degree to which consumers think prices will rise or fall.

72. Changes in Substitutions - Demand can be influenced by changes in the price or quality of related products.

73. Changes in Complements - Demand can be influenced by changes in the price or quality of complementary products.

74. Changes in Supply Supply can increase or decrease
When supply goes down, the curve moves to the left
                                               

75. Effects of Supply Changes on the Market
An event that increases supply causes the supply curve to shift outward and to the right

76. An event that decreases supply causes the supply curve to shift inward and to the left

77. Factors Affecting Supply

78. Changes in the Cost of Resources – Also referred to as the price of inputs What it costs to make the product

79. Productivity - Relates to efficiency and economic growth

80. Technology – New and better ways of manufacturing products

81. Number of Firms – Businesses open up and shut down

82. The Effect that Demand & Supply changes have on the market
When demand increases (& supply remains constant), price will increase and the amount bought and sold will increase.
When demand decreases (& supply remains constant), price will decrease and the amount bought and sold will decrease.
When supply increases (& demand remains constant), price will decrease and the amount bought and sold will increase.
When supply decreases (& demand remains constant), price will increase and the amount bought and sold will decrease.