Economics

Economics

What is Economics?

In previous grades you’ve learned a little about economics and that economics deals with choices. We all make choices every day. We make choices about what to buy. We make choices about whether to save or spend money. You will learn in this chapter that economics is about more than just choices. Economics is the study of how individuals and societies use resources to produce goods and services. It is about competition and prices and trade. As you learn you will be working as an economist, someone who studies economics. 

Goods and Services

A resource is a supply of something that can be useful such as money. To study economics we must talk about resources, goods and services. A good is an item that is produced in an economy. If you go to a store and buy an apple, the apple is the good. You traded or exchanged money in order to get it. A service is an activity that a business or person trades for payment. If you’ve ever gotten your hair cut by a professional and given them money to do it, they’ve provided you a service. 

Multiple Choice

Is a haircut an example of a GOOD or a SERVICE?

• Good

• Service

Multiple Choice

Is a brand new sports car a GOOD or a SERVICE?

• Good

• Service

Multiple Choice

Is a new tire for a car a GOOD or a SERVICE?

• Good

• Service

Multiple Choice

Is a box of cereal a GOOD or Service?

• Good

• Service

Multiple Choice

Is mowing the lawn a GOOD or a SERVICE?

• Good

• Service

Multiple Choice

Is tree removal a GOOD or a SERVICE?

• Good

• Service

Economists

Economists ask many questions to help them study their area of social studies. There are many more than the ones listed here. These are simply to introduce you to economics as a whole.

• What is produced?

• How is it produced?

• How much is produced?

• Who gets what is produced?

• What role does the government play in the economy? 

Learn more about the exchange of goods and services in the School House Rock video   

Producers and Consumers

Pretend for a moment that you’re going to open a lemonade stand. What resources will you need to open one? You may need lemons, sugar, cups and chairs to sit on. What other resources might you need? At your lemonade stand, you are the producer. A producer is the person or business that creates, sells or offers the good or service. Simply put, you produced the lemonade and offered it for sale to others. Your neighbors who purchased the lemonade were the consumers. A consumer is a person purchasing the good or service. 

Three Kinds of Resources

In building your lemonade stand you’ll be using three kinds of resources: human, natural, and capital. You probably learned about these in a previous grade. You are the human resource - you’ll probably be making the lemonade that you sell. You’ll also have to set up and take down your lemonade stand. You will probably be the person selling the lemonade. The natural resources you’ll be using include the lemons, the sugar and the water. These are resources that grow and are harvested. Finally, you’ll also be using capital resources. You might not want to stand all day, so you’ll bring a chair with you. That chair was probably purchased by your parents, so it cost money at one point. The pitcher you pour the lemonade from and the cups your pour the lemonade into are also capital resources, products purchased for use in your lemonade stand. 

How To Run A Lemonade Stand

What resources did these children use to create their lemonade stand?

Scarcity and Choice

In previous grades you learned that scarcity occurs when there is not enough of something. Scarcity leads people to make choices. In the previous section you read about opening a lemonade stand. Imagine however that lemons are scarce this year. What do you do when you have a problem like this? You have to make a choice. Maybe you choose not to sell lemonade because the price of lemons is simply too high. You could decide that a glass of fresh squeezed orange juice is just as refreshing on a hot day. People make choices like this every day. This short example dealing with lemonade is a scenario that both businesses and people in the United States encounter. Scarcity forces people and businesses to make choices about what is produced based on what is (or isn’t) available. Resources in a society are limited, but people’s wants are not. 

When making an economic choice, people try to answer three important questions:

• What should be produced?

• How do we produce it?

• Who gets what is produced?

• 
  

  An economic system is the system a society uses to answer the three basic economic questions. 

Market Economy

In a market economy, almost all businesses are privately owned by individuals or corporations, not the government. Therefore, businesses are free to make choices as long as they follow the law. You may not realize it, but even kids help make many economic decisions. You have probably contributed to our market economy and its economic decisions many times. 

Silly Bandz

If a market system is a system where the consumer drives many economic decisions, you might understand how this works by looking at an example like Silly Bandz. Silly Bandz were colorful bracelets that were shaped like animals. Silly Bandz were so popular that when many kids got to the store to buy them, the shelves were empty. There was a lot of demand for them.

Supply and Demand

Demand is the amount of a consumer’s desire to pay a price for a good or service. When demand is high, sometimes supply is low. Supply is the amount of a product or service in the market. When demand is high for a good or service and the supply is low, the price goes up. Silly Bandz were expensive and did not usually go on sale. Many companies wanted to make things that looked like Silly Bandz so that they could make money. Soon, every store had more than enough Silly Bandz to go around. Soon after, Silly Bandz weren’t as popular so kids weren’t saving their money to purchase them. When that happened, can you guess what happened to the price of them? The price went way down. Kids were no longer buying the product and as such, factories stopped producing them. Kids demands in the case of Silly Bandz played a huge part in factories producing more when the demand was high, and producing less when they were no longer popular. 

Open Ended

What other products can you think of that have a similar outcome as a story of Silly Bandz?

How do Positive and Negative Incentives Influence Behavior in a Market Economy?

You have learned that in a market economy like we have in the United States, that the actions of consumers drive the decisions. This includes what is produced, how much is produced, and the price of the good or service. Can consumer decisions be swayed? What are some of the things that encourage you to purchase a certain good? 

Open Ended

Your team has won the championship! To celebrate you are going out to have a pop. How will you decide where to go and buy your pop?

Incentives

You may have thought about the taste, size of portions, variety of flavors and price. Incentives could greatly influence your decision of where to purchase your pop and what flavor you buy. Positive incentives are things offered by businesses to increase the chance that a good or service will be purchased. You may decide to go to McDonalds because they are running a special sale (incentive) and for $1.00 (price) you can get any size you want. You may decide to go to the grocery store because you have a coupon (incentive) for fifty cents off a $1.00 purchase (price). Or, you might go to the candy store because even though the price is high, they have a wide variety of unusual flavors and they come in glass bottles (incentive).

Examples of Incentives

An incentive is something offered by a producer that makes consumers more likely to purchase what they are selling. Let's look at an incentive and think about how or why the incentive encourages consumers to use their business. We have talked about positive incentives, but do businesses ever provide negative incentives? The answer is – absolutely! Businesses and the government often provide negative incentives to encourage you to behave in a certain way. For example, many credit card companies charge you a late fee if you do not pay your bill on time. Your public library will charge you a late fee if you do not return your books on time. When you join a gym to work out, you usually sign a contract. If you choose to cancel your contract before the year is up, you may have to pay a large penalty. These are all examples of negative incentives that were created to encourage you to pay your bills on time, return your library book when it is due, or keep your commitment to pay the gym for a full year. 

Why would this incentive effectively encourage consumers to purchase the good or service?

Open Ended

Why would this incentive effectively encourage consumers to purchase the good or service?

Competition

Competition can drive incentives. If there are many places in town to purchase the same item, such as pop, businesses are likely to start offering incentives such as coupons, additional rare flavors, or larger sizes in order to attract more customers from their competition. You’ll learn more about competition in the next section. In this case, McDonalds, the grocery store, and the candy store are all competitors. They are competing for your purchase! 

Competition exists in economics as well. Consider this story: You love to bake. You're really good at it, and everyone loves your chocolate chip cookies when you make them. You decide to open up a bakery in the downtown area. Your small bakery, which you called Egbo's Eatery (named after the relative who originally taught you how to bake) soon becomes a hit with people all over town. Because there aren't any bakeries in town you've fulfilled a need that the community had - a great place to come together and eat delicious baked goods. Egbo's Eatery is a hit. After a year or so, however, a large company purchases the building next to you. Within a few months a new store has opened: 

"Johnson's Java" a coffee shop. Initially you're not worried because you sell baked goods and they sell coffee. The entire town loves your store! Unfortunately, on the day it opens you decide to walk in and support the new business. You are shocked to discover that they don't just sell coffee. They sell a wide variety of cookies, muffins, and sandwiches - just like your small shop! Even worse, you charge $1.00 for one large chocolate chip cookie. They charge .75 cents. For TWO! You walk away from the store without buying anything and immediately rush to your kitchen to begin planning. How are you going to compete with the coffee shop next door if they sell the same products at lower prices?

How does Competition Work?

Egbo’s Eatery enjoyed a short period of time where your baked goods could sell at any price you wanted. If the people of the town had nowhere else to go to get homemade bread, muffins, and cookies you were able to sell your cookies at almost any reasonable price and still make a profit. Unfortunately, the coffee shop forced you to change your game plan. Because economics is about choices, you have some decisions to make. What might you do to compete against the new business next door? 

Poll

There are many things you could choose to do to compete against the business next door. You might choose to:

• Sell your cookies at the same price as the competition.

• Sell your cookies at a lower price than the competition.

• Add additional items to your menu (like coffee which you never sold before but the other store sells)

• Admit defeat and close your business.

You probably shouldn't choose to admit defeat and close your business at this stage of the game, and there are many other potential options you might come up with beside the ones listed above. All of them are part of competition in economics.

If you chose to sell your cookies at the same price as the competition it is possible that you won’t notice any difference in the number of people that come to Egbo’s Eatery. People like to make the fewest number of stops possible however, so the fact that Johnson’s Java sells coffee AND baked goods might make customers choose the store next door rather than yours.

Selling your cookies at a lower price sounds like a great idea but you didn’t just pick the price of $1.00 per cookie out of thin air. When you figured out how much it cost you to make a cookie, you set the price so you’d be sure to make a profit. The consequence of selling your cookies for a lower price means you might attract people to your building but you might not make as much money. 

Adding additional menu items could be a good idea. If people are attracted to Johnson’s Java for the great coffee they have there, and then they stay for the baked goods, you might be able to win some of those customers by making a mean cup of coffee yourself. The equipment to do that however will require money, and you may also need to hire another worker to help you run your business - you have a hard enough time baking all the bread and cookies and keeping up with the food orders as they come in. 

If extra time remains

We will go into a breakout room with 4-5 other students and pretend you are going to open an ice cream shop together.

1. List the resources you need to own your ice cream shop (Natural, Capital, and Human)

2. What incentives might you offer to increase your sales?