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Traditional Economy

A society in which most economic decisions are based on customs.

Command Economy

A society in which the government makes the economic decisions.

Free Market Economy

A society in which economic decisions are made by individuals and businesses.

Mixed Economy

A society in which economic decisions are made by individuals and businesses with some government regulations.

Proprietorship

A business owned by one person.

Partnership

A business that has two or more owners that share risks and profits.

Corporation

A business owned by stockholders (investors) whose risk is limited to the amount of their investment.

Cooperative

A business owned by the people that use its services.

Consumer

Someone who purchased goods or services for personal use.

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Producer

A business that produces or provides goods and/or services.

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Scarcity

Scarcity means that resources are limited. The two most common limited resources are time and money.

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Choices

Because of scarcity, people, businesses, and government have to make choices.

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Opportunity Cost

When you give up a second choice, that choice is called the opportunity cost.

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Natural Resources

Natural Resources are provided by nature.

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Capital Resources

Capital Resources are the tools and equipment a business uses to produce goods or services.

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Human Resources

Human Resources are the labor and skills people provide to businesses.

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Circular Flow

The diagram shows the circular flow in economics.

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Labor and Skills

Households sell labor and skills to businesses.

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Goods and Services

Households buy goods and services from businesses.

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Supply

Supply is determined by producers.

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Demand

Demand is determined by consumers.

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Price

Price is determined by the interaction of supply and demand.

Lets look at how this interaction between supply and demand works, how price is determined.

For some people, a long day at the beach is best ended with a big juicy cheeseburger.

But how much will that cheeseburger cost?

What determines its price?

Of course the restaurants can put any price they want on the menu.

$1.98

$3.75 $2.50 $5.98

But what will happen if the price is higher than people are willing and able to pay?

If restaurants set the price too low, they may sell out before the end of the day.

$1.98

$3.75 So the price cant $2.50 $5.98 just be set by the

restaurants. Customers play an important role.

Lets say we ask all the customers at the beach how many cheeseburgers they would be willing to buy at various prices.

The table shows the total number of cheeseburgers the people are willing to buy. Notice as the price goes up, they are less willing to buy.

Price
$1.00 $2.00

Quantity Demanded 4,000 2,500

$3.00
$4.00 $5.00 $6.00

1,750
1,250 800 500

This is called a demand schedule.

Now lets ask the restaurants how many cheeseburgers they would be willing to sell at various prices.

The table shows the total number of cheeseburgers the restaurants are willing to sell. Notice as the price goes up, they are more willing to sell.

Price
$1.00 $2.00

Quantity Supplied 500 1,700

$3.00
$4.00 $5.00 $6.00

2,500
3,100 3,600 4,000

This is called a supply schedule.

We can find the equilibrium price, the best price for both the consumer and the producer, by graphing the information from the charts.

Demand

Supply

5
Price ($)

3
2

Equilibrium Price

1 750 1500 2250 3000 3750 4500

Quantity