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Ch 6 Economics

Making Decisions in a Market Economy. Ch 6 Economics. Allocating Resources. All societies have resources. Whatever their resources, all societies try to figure out how best to use them to produce goods and services. EX: Natural- fertile land, vast mineral deposits, Sophisticated machinery

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Ch 6 Economics

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  1. Making Decisions in a Market Economy Ch 6 Economics

  2. Allocating Resources • All societies have resources. Whatever their resources, all societies try to figure out how best to use them to produce goods and services. • EX: Natural- fertile land, vast mineral deposits, • Sophisticated machinery • Educated workforces

  3. Economics • The study of how societies decide what to produce, how to produce it, and how to distribute what they produce.

  4. Scarcity • All goods and services are scarce, somewhere. • Scarcity refers to the fact that too few resources are available for everyone in the world to consume as much as he or she would like.

  5. The Concept of Opportunity Cost • Because goods and services are scarce, producing one good means not producing another. • The opportunity cost of taking an action refers to the loss associated with the best opportunity that is passed up.

  6. Types of Economic Systems • All societies make decisions about how to allocate resources. Different types of economies make these decision in different ways. • The Command Economy • The Market Economy

  7. The Command Economy • In some countries, the govt. decides what goods and services are produced. This is Command Economy. • In a command economy, govt. planners decide how many tons of steel factories produce. • Decisions are made by command, not in response to consumer tastes.

  8. The Command Economy • Until the 1990’s, many countries in Eastern Europe had command economies. • Product quality was poor, and consumers often had difficulty finding the products they wanted. • Market shelves were often empty and clothing stores carried few styles of clothes.

  9. The Market Economy • Private companies and individuals decide what to produce and what to consume. • Govt. plays only a minor role, regulating business fairly. • Today, this is most countries, including the United States.

  10. The Market Economy • Based on competition • No one tells companies what to produce. • Each company makes its own decisions.

  11. Law of Supply and Demand • Read page 136 – 138. • Demand refers to the quantity of a good or service individuals are willing to purchase at various prices. • Demand depends on individuals’ needs and wants, also their income. • As the price of a good increases , the quantity of good demanded falls.

  12. Supply • Describes how price affects the amount of a good producers produce. • As the price of a good rises, producers are willing to supply more of the good.

  13. Equilibrium • The law of supply and demand determines the prices in the market economy. • The price of a good or service adjusts until the amount producers are willing to produce equals the amount consumers are wiling to consume. • The price at which supply equals demand is equilibrium price. • Page 139

  14. Determining Profits • Understanding supply and demand is important b/c it helps managers determine the prices they should charge. • This affects how much profit a business earns. • Profit= Revenue - Costs

  15. Determining Profits • Estimate Revenue, means estimate their sales. Forecast how much they will sell and gauge consumer demand. • Estimate Costs before they launch products. • Fixed • Variable

  16. Breakeven Analysis • Reveals how many units of a good or service a business needs to sell before it begins earning a profit. • The point at which revenue is sufficient to cover all costs is called the breakeven point.

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