SupplyDemand Markets and Trade Economic Systems l Command

Supply/Demand, Markets and Trade

Economic Systems l Command Economy l l An economy in which most economic decisions about production and distribution are made through central planning and control Market Economy l A market economy is an economic system where production and prices are based on the interaction of supply and demand

Economic Systems l Mixed Economy: Economy is free, but there is some influence by the government (types of regulations)

Supply and Demand l Law lthe of Demand higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded.

Supply and Demand

Supply and Demand l Law of Supply lthe higher the price, the higher the quantity supplied. Producers supply more at a higher price because selling a higher quantity at a higher price increases revenue.

Supply and Demand

Supply and Demand

Markets and Trade: Key Terms Opportunity Cost: The alternative (or the value of that alternative) that must be given up when resources are used for one purpose instead of another. l Specialization: Division of labor into specific tasks and roles intended to increase the productivity l

Markets and Trade Markets allow specialization, leading to trade and growth. l When people trade, both parties expect to benefit from the trade. l

Markets and Trade l Otherwise, why would they have traded in the first place?

Comparative and Absolute Advantage l Absolute l The Advantage ability to produce more units of a good or service than some other producer, using the same quantity of resources/time

Comparative and Absolute Advantage l Comparative l The Advantage ability to produce a good or service at a lower opportunity cost than another producer. l This is the economic basis for specialization and trade (not Absolute Advantage)

Comparative and Absolute Advantage What does comparative and absolute advantage look like in a real example?

Should Lebron mow his own lawn?

Should Lebron mow his own lawn? Lets say Le. Bron is both a great basketball player and a great lawn mower l Le. Bron can mow his lawn in 2 hours. He could also film a Nike commercial in two hours and make $10, 000. So, James' opportunity cost of mowing his lawn is $10, 000. l

Should Lebron mow his own lawn? l Neighbor Scotty can mow Le. Bron's lawn in 4 hours. He could also work at Mc. Donald's for those 4 hours and make $8 per hour. So, Scotty's opportunity cost of mowing Le. Bron's lawn is $32.

Should Lebron mow his own lawn? Who has an absolute advantage in mowing the lawn? Le. Bron James-- he can do it in less time. So, James is better at mowing grass than Scotty. l Who has comparative advantage in mowing the lawn? Scotty-- he can do it at a lower opportunity cost (misses out on $32 versus $10, 000). l

Should Lebron mow his own lawn? l. Would Le. Bron or Scotty benefit from a trade?

Should Lebron mow his own lawn? BOTH! l As long as Lebron James pays Scotty more than $32 to mow his grass they both benefit from the trade l

Should Lebron mow his own lawn? l Specialization leads to higher production l Everyone has different Opportunity costs, everyone has comparative advantage/disadvantage in something.

Does everyone always benefit from trade and pursuing comparative advantage? http: //www. pbs. org/newshour/bb/business-jan-june 13 -surfers_03 -21/

Government Actions How do governments influence trade?

Government Actions l Tariff: an additional tax or duty to be paid on a particular import or export -Example: a tariffs can be placed on foreign goods in order to help protect domestic businesses from competition abroad

Government Actions l Subsidies: a sum of money granted by the government to assist an industry or business - helps keep the price of a product low or competitive

Government Actions l Trade agreements and multinational trade organizations -when two (or more) countries agree to abide by the same set of trade rules in order to try and keep things fair and competitive