supply and demand the law of supply and demand affects the price of a product an open market is when...
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Supply and Demand
The law of supply and demand affects the price of a product
An open market is when products are based on supply and demand
Supply
S
10 20 30 40 50 60
$35
$30
$25
$20
$15
$10
Number of DVDs
The amount of goods that producers are willing to supply at a certain price
Demand
D
10 20 30 40 50 60
$35
$30
$25
$20
$15
$10
Number of DVDs
The amount of goods that consumers are willing to buy at a certain price
Market Price set by Supply and Demand
S
D
10 20 30 40 50 60
$35
$30
$25
$20
$15
$10
Number of DVDs
Market Price
Where the two meet is called the equilibrium price or market price
• Real life is not quite like this – not so neat, either you have an oversupply or undersupply
• With oversupply sales or prices decreases to get rid of inventory– Oversupply – nail salons
• With undersupply prices increase– Red sox tickets, tickets to concert, flights to
Florida
Market Price set by Supply and Demand
S
D
10m 20m 30m 40 50 60
$3.00
$2.50
$2.00
$1.50
$1.00
.50
OPEC
• Law of Demand says that as PRICE declines the demand for a product increases– Ex. DVD, Ipods, Iphone
Whether a country is industrialized (high literacy and standard of living) or a less developed country (more concerned with survival) or a developing country (changing power) countries are categorized by their level of economic development. These are influenced by
• Literacy level– Better education systems provide better
goods & services– Knowledge is power– Product have higher quality
• Technology– Automated production, distribution, and
communication systems create products quickly
• Agricultural vs. Industrial– Higher manufacturing provides greater
quantity and higher quality
• Also look at their infrastructure– A nation’s transportation, communication, and
utility system • Must be good in order to distribute your product
Economic systems are affected by decision-making
When countries and nations go through a process to determine
the economic questions
Opportunity costs
• When making choices very often have to give up something in return
• Examples: college for money or time
homework for TV or computer
develop electronics industry or
develop agriculture
What Products Do we Export?
• Countries will export products for which they have a low opportunity cost
Leads us to another principle of international trade:
Absolute advantage or
comparative advantage
Absolute Advantage• One country is more efficient in producing
a given product using the same amount of resources as another country at less cost
• Happens for 2 reasons– Country has raw materials necessary to
produce goods– Country has low labor costs
• Known as specialization
Comparative Advantage
• The ability of a country to produce a product at a lower opportunity cost than another country
• Known as Law of Comparative Advantage
Example of Comparative Advantage
Country A
Soybeans
10 million
Corn
50 million
Country B
8 million
25 million
Making Good Decisions?Measures of Production
• Gross Domestic Product– Measures the total value of all goods and services
produced with resources within a country’s borders• Includes items produced with foreign resources
• Gross National Product– Measures the total value of all goods & services
produced by resources of a country within and outside a country’s border
– Measured in per capita comparison – value of goods produced divided by population
• Inflation– An increase in the average price of goods and
services• Two basic causes
– Demand pull inflation (when demand exceeds supply) causes prices to increase
– Cost-push inflation (expenses of a business increase) companies spending more money to make their products so turn around and charge customer
• Consumer Price Index– Bureau of Labor Statistics publishes a report
measuring inflation each month
Measure of International Trade
• Balance of trade– Difference between a country’s exports and
imports• Trade surplus – exports more than it imports• Trade deficit – imports more than it exports
Just as businesses keep records of their cash flow nations keep records of their trade – therefore special forms and licenses filled out for trade