The Basics of Economics
Economic Activity
• Our economy, much like others around the
world operate on a circular flow of
economic activity.
– Goods and Services are exchanged for labor
and money.
– Example: Producers exchange money in the
form of wages for labor. Wages are then used
to buy goods and services form producers.
The Circular Flow
Individuals pay businesses
for goods and services to
satisfy needs and wants.
Individuals supply
business with land,
labor and capital.
Businesses supplies
individuals with goods
and services.
Businesses pay for the
individuals for the use of
land, labor and capital.
• In our economic system, individuals own
the means of production which they
exchange with producers for money.
– We exchange labor, our time and skills for
wages.
– We exchange the land or natural resources at
a price.
– We exchange our capital, tools and machines
and are paid interest.
Laws of Economics
• When there is free competition among
sellers and buyers, the market works
according to two natural economic laws.
The Law of Supply
The Law of Demand
The Law of Demand
• What is demand?
– The amount of goods or services buyers are
willing and able to purchase at different
prices.
• The Law of Demand states that when
product prices are low consumers will
purchase more.
Demand Curve
The Demand Curve illustrates the quantity or amount of
goods consumers would be willing to purchase at given
prices.
Demand Curve MCA CD
1) How many CD’s would consumers be
willing to buy at $10.00 a piece?
Demand Curve MCA CD
2) If producers are in business to maximize
profit, why don’t they sell their CDs for
$50.00 each?
Demand Curve MCA CD
3) Consumers would be willing to purchase
400 copies of a CD if producers were
willing to sell it for how much?
The Law of Supply
• What is supply?
– Supply is the amount of a product that
producers are willing and able to sell or offer
at different prices.
• The law of supply states that when product
prices are high, producers will make more.
Supply Curve
The Supply Curve illustrates the quantity or amount of
goods producers would be willing to offer at given
prices.
1) How many games will Software House be
willing to offer at the price of $40 each?
2) Software House would be willing to
produce 100 games if they could sell
each copy for how much?
3) How many games would Software House
be willing to produce at a price of $10.00
a piece?
How does the market determine
the price of a product?
• The law of demand and the law of supply
work together to determine the price of a
product and the quantity offered.
• Price affects the demand of a product in
the same way that it affects the amount
supplied.
How does the market determine
the price of a product?
• The higher the price, the more of a given
product will be offered by producers.
• The lower the price, the more of a given
product will be demanded by consumers.
• Market price or the price at with buyer and
seller agree to trade occurs where the
supply curve intersects with the demand
curve.
Market Price
1) If market price is determined by the law
of supply and demand, what would be
the price of bag of potato chips?
2) According to this graph, at $0.75 how
many bags of potato chips will producers
be willing to offer?
3) Producers would rather sell their chips
for $1.00 a bag, however, what problem
would occur?
Supply and Demand for Video
Games
1) What would occur of producers attempted
to sell their video game for $40?
Supply and Demand for Video
Games
2) Based on information in the graph, which
would be the best price for a new video game?
Supply and Demand for Video
Games
3) What would occur if the video game manufacturer
produced under 192 copies of their game?