Introduction to Economics and Market Systems

Economics

The study of rationing systems and of how scarce resources are allocated to fulfill the infinite wants of consumers.

Needs

The basic necessities that a person must have in order to survive.

Wants

The desires that people have.

Scarcity

That society has limited resources to meet unlimited wants.

Basic Economic Problem (BEP)

The problem of how to allocate limited resources to satisfy unlimited wants.

Opportunity Cost

The real cost of the next best alternative that is forgone when a choice is made.

Economic Resources/Factors of Production

The inputs used to produce goods and services, including land, labor, capital, and enterprise.

Land

The natural resources used in production.

Labor

The human work force in production.

Capital

The non-natural resources used in production.

Enterprise

The management, organization and planning of the other three factors of production.

Consumer Goods

Products sold to the general public.

Capital/Producer Goods

Products purchased by other businesses to produce other goods and services.

Services

Intangible products provided by businesses.

Economic Systems

The function of an economic system is to decide how to address the BEP by answering the 4 questions.

Types of Economic Systems

Free market, Planned (command), Mixed (modified market).

Free Market

A system where the laws of supply and demand direct the production of goods and services.

Characteristics of Free Market Economies

Private Property, Freedom of Choice, Motive of Self-Interest, Competition, System of Markets and Prices.

Private Property

Individuals and businesses own assets, allowing them to profit from ownership.

Freedom of Choice

Owners can produce, sell, and purchase goods in a competitive market, with constraints on price and capital.

Motive of Self-Interest

Sellers aim for the highest price while buyers seek the lowest, benefiting the economy overall.

Competition

Drives innovation and efficiency, keeps prices low, and enhances resource allocation.

System of Markets and Prices

Prices reflect supply and demand, with equal access to information for buyers and sellers.

Limited Government

The government ensures open markets, prevents manipulation, and ensures equal access to information.

Planned Economy

A system where a central government makes all economic decisions.

Characteristics of a Planned Economy

The government develops a comprehensive plan to set economic and societal goals for all sectors and regions.

Resource Distribution in Planned Economy

All resources are distributed based on the central plan.

Efficiency in Planned Economy

The government aims to utilize capital, labor, and natural resources efficiently.

Employment in Planned Economy

It seeks to employ everyone's skills and abilities fully, striving to eliminate unemployment.

Mixed Economy

A system that combines characteristics of market, command and traditional economies.

Characteristics of a Mixed Economy

It protects private property.

Price Determination in Mixed Economy

It allows the free market and the laws of supply and demand to determine prices.

Motivation in Mixed Economy

It is driven by the motivation of the self-interest of individuals.

Demand

Refers to the quantity of a good or service that consumers are willing and able to purchase.

Law of Demand

When price decreases demand increases.

Substitution Effect

When a product becomes more expensive, consumers substitute toward a cheaper good.

Income Effect

When a product becomes more expensive, it takes up a larger portion of a consumer's income and so the consumer has less to spend on other goods.

Supply

The quantity of a good or service that producers are willing and able to sell.

Law of Supply

When price increases supply increases.

Supplier Willingness

At higher prices, suppliers are willing to produce more as it means that they can earn more profit.

Demand Curve

A graphical representation of the relationship between the price of a good and the quantity demanded.

Supply Curve

A graphical representation of the relationship between the price of a good and the quantity supplied.

Movements of Demand & Supply Curves

A movement along the existing supply curve occurs only due to change in price or demand/supply.

Shifting of Demand & Supply Curves

The quantity demanded of the good changes at every price, causing the entire curve to shift left or right due to non-price factors.

Non-Price Factors

Any variable other than the price of a good or service that influences the quantity demanded or supplied.

Factors Affecting Demand

Price of related goods, tastes and preferences, level of disposable income, demographic factors (age, gender, socioeconomic status), consumer expectation.

Factors Affecting Supply

Producer expectations, changes in technology, prices of other goods, production costs, government regulations.

Equilibrium

The price at which the quantity demanded equals the quantity supplied.

Surplus

When supply exceeds demand, leading to price reductions.

Shortage

When demand exceeds supply, leading to price increases.

Market Clearing

When the supply of a good or service matches the demand and equilibrium is achieved.