When most of us think of economics, we think of money. But the world of economics is far more complex than just cash. Every culture has an economy and it is this economy that influences many decisions and elements of each culture. Currency, natural resources, trade, scarcity, credit, and supply/demand are all around us each day and play a central role in our culture. To varying extents, the economy of a given culture is one of its primary concerns and helps dictate elements of life for all members of a society. Unfortunately for us, the world of economics is highly complex and very abstract making it really difficult to understand. However, we can cover and learn the basics because having general knowledge and vocabulary will help us to better understand cultures from all around the world.
Glossary of Terms
Supply and Demand
Supply (S): the amount of a good or service which producers are willing and able to produce at a given price.
Demand (D): the amount of a good or service which consumers are willing or able to buy at a given price.
Producers: Those who are on the selling side and create the supply of a given product.
Consumers: Those who are on the buying side and directly influence the demand of a given product.
Market Clearing Price (MCP): the highest price that a seller can charge and still sell all of his or her products. This clears the seller out of the supply. It also clears out the demand because the MCP is low enough for the buyers to buy as much of the product as they want. Under the MCP the supply perfectly satisfies the demand. This is the point at which the equilibrium is established.
To make money in this cycle one must increase supply as demand starts to rise, and cut price as demand starts to fall. If one can increase supply to meet the rising demand, one can satisfy the demand and make money.
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Competition: In general, the actions of two or more rivals in pursuit of the same objective is considered competition. In the context of markets, the specific objective is either selling goods to buyers or alternatively buying goods from sellers. When several companies compete with one another to get the attention of consumers, it both lowers price and increases quality. When companies compete they strive to outdo one another thus inspiring more inventiveness and ingenuity and lower price since consumers are always looking for the lowest price possible. Competition generally benefits consumers but it also leads to better products which benefits everyone.
Monopoly: When one producer completely dominates an industry or product thus eliminating competition. If this producer possesses the means for production of the product and has no direct competition, it allows this producer to increase prices as much as it wants because no one competes for price. Monopolies can really only exist when the product is one that is needed by consumers. Gasoline, phone service, and electricity are all examples of products/industries that are susceptible to monopoly.
Credit: The promise of future payment in exchange for money, goods, services, or anything else of value. Car loans, mortgages, credit cards, and government securities are all forms of credit. In fact, credit is an extremely wide-spread and critical part of our economy. About one-third of the stuff consumers buy, and nine-tenths of business expenditures are completed with credit. Most business capital, and consumer car and home purchases would be impossible without credit.
Interest: It is important to note that with credit the lender generally charges interest as payment for loaning a consumer the money. For example, if I have been using my Visa card often I could accumulate a balance on that card for $1,000. If I donÕt have $1,000 to pay Visa to eliminate the balance, Visa will charge me interest. If Visa charges 10% interest per month, then if I have a balance of $1,000, I will have to pay Visa $100 per month as a fee for lending me the money. Credit works well for consumers because it allows them to purchase more expensive items without paying for them all at once. Purchases of homes, boats, and other very expensive items are sold more often as a result. At the same time, creditors (the lenders, i.e. Visa) also make a profit.
Key Questions About Economics
1. Which has more overall influence on the economy of a given culture, supply or demand? Explain why you made your choice with examples.
2. Why are monopolies dangerous for consumers? Why do you think the U.S. government has been trying to prevent monopolies in America since the 18th Century?
3. How do economics help influence the development, daily life, and sustainability of a culture? Use examples to make your points.
4. Why are raspberries so expensive in February?
a. Is the demand for raspberries lower in the winter than the summer, or is it the same?
b. Is the supply of raspberries more or less in the winter than summer? Explain.
c. What can you conclude about the price of raspberries based upon this information?
5. Why are bleacher seats $20 at Fenway Park, but only $8 in Yankee Stadium? Fenway Park has less seats but they offer a better view of the game than the bleacher seats at Yankee stadium.
a. What can you conclude about supply and demand of tickets based upon this information?