Basic Economic Theories

Resources

A resource- is something that you own or have control over and is used to help you sell or create your good or service. A list of resources includes: time, money, energy, education and employees.

Supply and Demand

The concept of Supply and Demand is considered to be the foundation of economic theory and thought. Supply - is the number or amount of a good or service that you have available to sell. For instance, if you have 10 bicycles in stock, this is considered your supply. Demand – is the number of people or companies who want to purchase your good or service.

In economic theory, a product such as a hamburger, movie or a gallon of gasoline is sold at the price that the public is willing to pay. Price – is the cost that a good or service is selling for. A Good – is something that you can see, touch, smell or taste. Examples include: cars, boats, bicycles, books, magazines and hamburger.A service - is something that you an do to help others. Examples include: cutting hair, cleaning pools, and mowing lawns.

Changing the price of a good or service will inversely change the demand for that same good or service. A shift in demand can change the number of units sold or purchased and this affect how much money is made.

There is a Low of Supply that says

By raising the price of the good or service – the demand will go down

because people will think twice about paying the price asked.

There is a Law of Demand

By lowering the price of a good or service, more people will be

encouraged to purchase the good or service because they feel that

the are getting a “deal”, thus, increasing the demand for that good or service.

The marketing equilibrium- is when the Law of Supply and the Law of demand are equal and people are willing to pa the price the suppliers have set o sell their good s or services.

To increase the demand for products, companies or stores run advertising or specials to encourage you to buy their products.

Many times, by lowering the price of a product or service, people will purchase because they can get a “deal”.

Common methods for stores or companies to increase demand of a product or service are to: Run Sales

Issue Coupons

Decrease the Price of a Product

Give Away Free Samples

Offer Rebates

Supply and Demand Curves

The supply and demand for products is best illustrated by using a graph or chart. To show supply and demand, three charts need to be created. A chat for the supply curve, one for the demand curve, and one in which shows them together, the equilibrium.

The supply curve shows – the number of units supplied at various price points and generally slopes upward, starting from the bottom left to the top right.

The demand curve shows – the number of units that re willing to be purchased at various price points and generally slopes downward, starting on the top left to the bottom right.

The equilibrium shows – where the supply and demand lines meet and the price of a product can be set.

Another term used to describe the rise in prices or goods or services over a period of time is inflation. Inflation – is caused when there is an excess amount of money available in the market place and a shortage of goods and services.

Inflation is highest when many people are employed , or when there is a low unemployment rate. As people have more money to spend, they will purchase more goods and services and eventually create a shortage in supply and increase in demand for the goods or services. When there is a shortage in supply, prices will rise, thus causing inflation.

Average inflation is around 3% each year. Employers cover the rise of good and services caused by inflation by giving employees a cost of living adjustment in their paycheck.

Do You Know The Real Value of Money

Inflation changes the value of money. Inflation decreases a dollar’s worth, thus, what you can buy this year in goods or services for a dollar, will not allow you to buy the same amount of goods or services for a dollar next year. The fact that money losses value or purchasing power each year based upon the average inflation rate is an economic theory called Real Value of Money.

Who Drives Up Prices of Products or Services?

A monopoly – is when a business has the ability to or attempts to control the price of a product, and/or if a business plans to, or attempts to exclude a competitor from doing business.

Monopolies are considered bad because they purposely drive up the price of a product or service by reducing the supply available to the public. In addition, they attempt to control the market place, competitors are unable to complete thus reducing the choices available for a good or service.

Two Congressional Acts were passed to prevent the creation and running of a monopoly. These two acts were the Sherman Act of 1890 and the Clayton Act of 1914. These two congressional acts made it illegal to own or conspire to create a monopoly, thus protecting our citizens from unfair business practices.

Thanks to:

Neffe –

– Lesson Eleven, Consumer Awareness

– p. 14, Week One, Basic Economic Principles

– Week One Introduction To Economic Conepts