Households, Business and Government
The word supply is the amount of goods and services producers want to provide at
different prices. As the price of goods goes up producers are willing to produce more goods.
If the price decreases producers are not willing to produce as much. The word demand
refers to the quantity of goods or services consumers are willing to purchase at different
prices. As the price of goods goes up producers are willing to produce more goods. If the
price decreases producers are not willing to produce as much. The word demand refers to
the quantity of goods or services consumers are willing to purchase at different prices. As
the price of goods goes down the supply will go down because consumers buy more (
demand increases). When the price increases supply will increase because consumers will
buy less ( demand decreases). A surplus is having more of a product than is demanded. A
shortage occurs when suppliers produce less than is demanded by consumers. As the
demand increases the price increases but the quantity decreases. As the supply increases
the price and quantity increase. As demand decreases the price decreases but the quantity
increases. As the supply decreases the price and quantity decrease. When supply and
demand reach equilibrium all of the goods produced will be sold and the market is said to
be cleared.
Complements are goods that make other goods more desirable, like peanut butter and jelly.
Substitutes are goods or services that are used to replace other goods and services. For
example you buy store brand cereal instead of a name brand. Three factors that affect
supply are: 1) Costs of production, 2) Degree of competition, 3) Changes in technology.
When cost of production decreases, profit increases and supply increases. If there is a high
degree of competition, more goods will be produced at a cheaper cost to the consumer. New
technology increases efficiency which lowers the cost of producing the product.
Two
factors that affect demand are: 1) Consumer tastes, 2) Change in income levels
Consumer tastes are things that the consumer wants to buy. As these tastes change so does
the demand for products and services. If income levels rise the demand for goods will
increase. If income levels decrease so will the demand for goods.
The government uses taxes to motivate people into certain actions . If the government
wants to stimulate the housing industry they will give a tax deduction on interest paid on
home loans. If they want to stimulate research and development they will give a tax
deduction to companies that work in that field. If the government wants to reduce the use
of tobacco or gas use they will raise the taxes on those products.
Antitrust laws: 1) Stop companies from forming monopolies, and 2) Stop companies from
selling products for a price below the cost of making the product, in order to drive smaller
companies out of business. This is called price fixing. The Federal Trade Commission
(FTC) enforces the antitrust laws. The Federal Communications Commission (FCC)
regulates the television and radio industries. The Department of Agriculture ensures that
meat products have been prepared in sanitary conditions and contain acceptable levels of
bacteria.
Free trade is the elimination of barriers to trade with foreign countries. Protectionism is
the policy of increasing trade barriers to reduce the imports into a nation. A trade deficit
occurs when a country imports more goods than it exports Balance of trade occurs when
the goods imported equals the goods exported. The foreign exchange rate is the value that
one currency trades for with respect to another currency. If the U.S. dollar is more
valuable than the British pound U.S. imports will go up and British exports will go down. If
the U.S. dollar is less valuable than the British pound then U.S. imports will decrease and
U.S. exports will increase.
One of the most important economic indicators is the stock market. When the economy is
good, people buy stocks, and companies have money to invest in capital. When the economy
is bad, people sell stocks, and companies do not have money to invest. Stock exchanges are
places where investors buy stock in a company. The New York Stock Exchange (NYSE)
and the National Association of Securities Dealers (NASDAQ) are two of the largest stock
exchanges. The percentage of unemployed workers is an indicator of how well the economy
is able to employ those that are looking for work. Inflation is a period in which prices
increase. Deflation is a period of time when prices decrease. If inflation gets too bad, people
will quit buying goods and factories will lay off people. If deflation gets too bad, producers
will not produce as much because they are not making a profit. The Consumer Price Index
(CPI) is the leading indicator of the amount of inflation or deflation in the country. The
Consumer Price Index is a measure of the average price of all goods and services sold
within the nation. A CPI greater than 100 means that inflation has occurred and a CPI of
less than 100 means that deflation has occurred. The Gross Domestic Product ( the value of
all goods and services / population ) is a measure of the standard of living in a country.
The government uses its tax revenues on programs of national interest such as: 1) Social
Security: provides a modest retirement income for those over 67 as well as income for
those who are disabled. Medicare provides medical benefits for those of retirement age.
Medicaid provides medical coverage for low income families or those on welfare, 2)Military
spending, 3) Making payments on the National Debt.
The Treasury Department is responsible for the printing and coining of money. The
Federal Reserve is responsible for controlling the Nation’s supply of money. The Federal
Reserve controls the Nation’s money supply by: 1) Buying treasury bills from the public.
This puts more money into the economy during deflation, 2) By changing interest rates.
Higher interest takes money out of circulation and lower rates puts money back into
circulation and 3) Changing bank reserve requirements. This is money that banks must
keep in their vault. Raising requirements takes money out of circulation. Lowering money
increases circulation of money. The Federal Deposit Insurance Corporation or ( FDIC)
ensures that everyone who deposits money into a bank account will not lose all their
deposits.