What are economics?

  • study of how individuals, businesses, and governments use their scarce resources to fulfill their needs and wants
  • factors of production (FOP): land labor production
  • scarcity – when an item is limited and people want or need it
  • good and service (G+S)
  • trade-off – exchanging one good/service for another (voluntary service)
  • needs: food, shelter, clothing
  • wants: everything else
  • goods – items that are made
  • service – goods for a fee
  • opportunity cost – what one gives up in order to get something else

Factors of Production:

  • land – natural resources (i.e. iron ore, coal, petroleum, fertile soil, water, fruit, vegetables)
  • labor – work force (i.e. teacher, engineer, file clerk, auto mechanic, accountant, physician, security guard)
  • capital – machinery or items used to make other things (i.e. tractor, factory, crane, hammer, power saw, jackhammer, wrecking ball)
  • entrepreneurship – owners of business

Supply and Demand

Law of Demand – as the price of a good/service goes up, consumers will buy less; as the price of a good/service goes down, consumers will buy more

P    ↑ ↓   ] inverse relationship between price and quantity demanded
Qd ↓ ↑   ]

Factors that affect demand:

  • substitutes
  • name recognition
  • law of diminishing marginal utility (LDMU)

Law of Supply – as the price of a good/service goes up, producers will produce more; as the price of a good/service goes down, producers will produce less

P    ↓   ] direct relationship between price and quantity supply
Qs  ↓   ]

Factors that affect supply:

  • cost of production
  • new competition
  • technology

Types of Market Structure

Market Structure No. of Firms Type of Product Conditions of Entry Type of Price-setting Behavior Existence of Nonprice Competition Examples
Pure (perfect) competition Many Homogeneous Free or very easy Determined by market None wheat, corn, agricultural products
Monopolistic competition Many Diffferentiated Relatively easy Determined by market plus small amount of discretion Some, especially by advertising fast food, gasoline, name brands
Pure oligopoly Few Homogeneous Substantial barriers Determined by market plus considerable discretion, possible price leadership Some, such as ontime delivery steel industry, aluminum industry
Differentiated oligopoly Few Differentiated Substantial barriers Determined by markt plus considerable discretion, possible price leadership Extensive breakfast cereal, soft drinks, beer, soup, toothpaste
Monopoly One Only product of its kinid Entry can be blocked Establishes price at most profitable level possible Advertising of firm’s “image” electric utility company, local phone company

Monetary and Fiscal Policy

Main goals of the United States:

  • full employment
  • price stability
  • economic growth

inflation – prolonged rise in goods and services

gross domestic product (GDP) – total dollar value of a nation’s good/services in a year

fiscal policy – use of taxes and government spending to reach economic goals

monetary policy – manipulation of money supply through federal reserve system to reach economic goals

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