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

• Unemployment rate– Loss of income means no purchasing power

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

• Balance of Payment– Flow of money going out of a country versus

coming into a country• Favorable balance of payment

– More money coming in than going out

• Unfavorable balance of payment– More money going out of the country than coming in