Rest of Unit 3

Cost and price

Cost vs Price

Costs: An amount that must be paid or spent to buy or obtain something.
The effort, loss, or sacrifice necessary to achieve or obtain something.
The money spent for the inputs used in producing a good or service (see
costs of production)

Costs of production: Amounts paid for resources (land, labor, capital,
and entrepreneurship) used to produce goods and services.

Price: The amount consumers pay whenever they buy a good or service;
the amount the producer receives whenever they sell a good or service.

Cost is what it takes, in terms of dollars or resources, to produce a
particular good or service. If you are buying corn from the local
Farmer’s Market this would include the amount of money spent on
seeds, labor, transportation to the market, equipment like tractors, and
more.

The price, on the other hand, is the amount that the consumer is willing
to pay to be able to have that corn on the table for dinner.

Basically, costs are all of the things that the producer has to pay for in
order to get the corn to the market. The price is what the consumer
will pay to get the corn from the producer

Cost vs Price of Corn

Open Ended

If the government raises the minimum wage, what will this do to the
cost of labor? How will this affect the price of corn? Why?

Open Ended

The farmer finds a company that sells corn seed at a lower cost than
what the farmer had been paying. How will this affect the cost and
the price of corn?

Open Ended

The supply of gasoline in the United States goes down. How will this
affect the cost of corn? What about the price of corn? Explain your
answer.

You Tell ME
Price or Cost?

Multiple Choice

Food Lion pays Barbara $12 an hour

• Price

• Cost

Multiple Select

Bob’s Bicycle Store buys bike tires from Tom’s Tires in order to build the bikes that
they sell at the store

• Price

• Cost

Multiple Choice

Currently, gas cost $5.06 a gallon

• Price

• Cost

Multiple Choice

A gym buys 4 new treadmills for $2,299 each for its customers to use

• Price

• Cost

Multiple Choice

Jennifer buys a box of chocolate for $3.78

• Price

• Cost

Multiple Choice

Amazon pays an average of $2.67 to deliver each item that its customers buy online

• Price

• Cost

The price must be higher than the cost

What must be true about cost

and price in order for a

producer to stay in business?

Why can’t the cost be the same or higher than

the price?

If the cost of producing something is higher
than the price that I sell it for, than I will lose

money instead of making money.

So what happens, whenever the cost of
production changes???

- The price changes!!!

Rising Cost

Rising costs tend to decrease profits and/or lead to higher prices of
goods and services

In other words, when the costs of inputs rise…

1.Profits will fall

AND/OR

2.The price of the good or service will increase and sales may
decrease

Ex. When the costs of lumber (wood) goes up, home-builder profits will
fall or the price of houses will go up.

Falling costs tend to increase profits and/or lead to lower prices of goods and
services.

In other words, when costs decrease through a reduction in the cost of inputs…

1.Profits can increase

AND/OR

2.The price of the good or service can be decreased and sales may increase

Ex. When the price of lumber decreases, home-builder profits will increase
and/or the price of homes will decrease. Supply may increase as well.

Falling Cost

Calculating Profit

Revenue vs Profit

Revenue: The income generated by the sale of goods and services
(price x quantity)

Profit: The amount remaining when all costs are subtracted from revenue.

Profit (or Loss) = Total Revenue - Total Costs

Open Ended

What are some of the costs that a restaurant must pay to run its operations?

There are so many costs that go into running a restaurant

-Ex. rent, salaries for workers, food, drinks, delivery costs, electricity,

water, cleaning supplies, and more.

Say you are running a lemonade stand. To get the lemonade stand up
and running, it costs you 25 dollars total (signs, cups, making the
lemonade, etc).

After running your lemonade stand for the 1st day, you sold 53 dollars
worth of lemonade.

Even though you sold 53 dollars worth, you only made 28 dollars of
profit. This is because you had to reimburse yourself the 25 dollars you
already spent to get the lemonade stand up and running.

Profit Example

Sugar

-$1

Lemons

-$2

Signs

-$5

Cups

-$2

Pop Up Stand

-$15

1st Day Cash

+$53

Total Profit

$28

​Lemonade Stand

How do rising costs affect profits?

-As costs go up, profits decrease. In order to continue making
profits, producers have to raise the price of the goods and
services that they sell.

How do rising costs affect supply?

-If costs go up, producers won’t be able to afford to produce as
much as they did before. This means producers will supply less of
their goods and services for consumers.

-Also, if prices go up because of rising costs, consumers will buy
less because they won’t be able to afford as much.

Let’s Think This Through…

A loss is when the costs are greater than the amount of revenue that is brought in. So if my company generates revenue of $2,000, but the company’s costs total $2,600, we will have a loss of $600.

But, Wait! What About a Loss?

Investing
in Human Capital
& Improving
Productivity

Human Capital:

-The health, education, experience, training, skills, and values of people.
-Basically, all of the things that make you valuable to an employer.

Productivity:

-The amount of output (goods and services) produced per unit of input
(productive resources) used. In other words, it’s the measure of how much I can make with a certain amount of a resource.
-Example, through years of study a farmer figures out a way to grow
twice as many apples per acre as he did before. This means he is
producing more apples per acre of land that he uses. (He is being more
productive because he invested in his human capital)

Vocabulary

-Education
-Why would people with higher education degrees earn more
money?

-Training
-Your employer may offer you training opportunities that allow
for you to learn new things and figure out ways to improve
your productivity.

-Improving Your Fitness

-Learning a New Skill

How to Invest?

By investing in human capital, workers how to produce more
efficiently, thus increasing productivity.
Productivity can also be increased through the use of
physical capital (tools and machinery).

-Ex. A sewing machine allows for me to sew much more
than if I did it all by hand.

Increases in productivity result from advances in technology
and improvements in physical or human capital. This means
that we make more goods and services for everyone, which
raises the standard of living.

To make MONEY, Profit!!!

Profit=the money earned after all expenses (bills) have been paid

What is the main GOAL of a

business?

Because resources are limited, businesses have to use them in the best way (efficiently)

Productivity and Specialization help businesses use resources in the best way.

What is the key to making

Profit?

The amount of goods and services workers can produce in a time period with a certain
amount of resources

What is Productivity?

More goods and services are produced quicker

Less labor is required

Goods and services become less expensive to make

Likely to make profits

Why is Productivity Important

to Businesses?

Understanding GDP

What is Gross Domestic Product?

GDP is the total monetary value of all finished goods and services produced within a country's borders in a specific time period

Measures the overall economic output of a nation

Key indicator of a country's economic health and standard of living

Usually calculated on an annual basis, but can be quarterly

Components of GDP

1. Consumer Spending (C)

Largest component in most economies

Includes purchases of goods and services by households

2. Business Investment (I)

Spending by companies on equipment, buildings, and inventory

3. Government Spending (G)

Expenditures on public goods and services

4. Net Exports (X - M)

Difference between exports (X) and imports (M)

Types of GDP

1. Nominal GDP

Calculated using current market prices

Does not account for inflation

2. Real GDP

Adjusted for inflation

Allows for comparison across different time periods

3. GDP per capita

Total GDP divided by population

Measures average economic output per person

Importance of GDP

Economic Growth: Measures how fast an economy is growing

Standard of Living: Higher GDP often correlates with better living standards

Policy Making: Helps governments make economic decisions

International Comparisons: Allows for comparing economic performance between countries

The Circular Flow

Interdependent-mutually dependent on each other.
One decision an individual makes can effect the next
individual

●

A market economy works through a process of
voluntary exchange or interaction between willing
parties in the system. This circular flow of goods and
services is what creates a country’s wealth.

●

The key factor in this circular flow is the market. The
market is the place where buyers and sellers meet to
exchange goods and services for money.

We are All Interdependent

•Individuals/Households- This is your role in the circular flow. You provide
a service, labor to the factor market in exchange for wages. You also
purchase goods and services from the product market using your income.

•Factor or Resource Market- This is where factors of production are bought
and sold. The Factor Market gives productive resources (goods used to
produce other goods; like capital goods) to Businesses in exchange for
payment.

•Businesses- Businesses buy productive resources from factor markets to
create a product that they sell to the Product Market.

•Product Market- the Product Market receives products from businesses
and provides goods and services directly to the individual consumer in
exchange for payment.

Participants of the Market

Product Market

Individuals/Households

Factor of Resource

Market

Businesses

Economic Activity

Individuals/Households sell resources. (Land, labor, capital, entrepreneurship)

In return, the Factors of Resources Market will pay for the resources

Individuals/Households & Factors of Resources

How Do They Interact

Product Market

Individuals/Households

Factor of Resource

Market

Businesses

Economic Activity

Sell resources

Earn income

FoP Market will sell resources to Businesses.

Businesses will pay for these resources.

Factors of Resources & Businesses

How Do They Interact

Product Market

Individuals/Households

Factor of Resource

Market

Businesses

Economic Activity

Sell resources

Earn income

Pay resources

Sell resources

Businesses will sell goods & services.

Product Market will pay revenue.

Businesses & Product Market

How Do They Interact

Product Market

Individuals/Households

Factor of Resource

Market

Businesses

Economic Activity

Sell resources

Earn income

Pay resources

Sell resources

Sell goods/services

Pay revenue

Product Market will sell goods/services to individuals/households.

Individuals/Households will spend their income.

Product Market & Individuals/Households

How Do They Interact

Product Market

Individuals/Households

Factor of Resource

Market

Businesses

Economic Activity

Sell resources

Earn income

Pay resources

Sell resources

Sell goods/services

Pay revenue

Sell goods/services

Spend income

Households

Firms

Goods and Services

Consumer Expenditure

Wages, rent, dividends

Factors of Production

Circular Flow

Model

Product Market

Individuals/Households

Factor of Resource

Market

Businesses

Economic Activity

Sell resources

Earn income

Pay resources

Sell resources

Sell goods/services

Pay revenue

Sell goods/services

Spend income

Government

Review

Scenario #1

Individual goes to Target and buys a video game

Target has to pay taxes to the government

The government hires a new employee

The new employee can go to Wal-Mart and buy a Blu-ray

Multiple Choice

Individual goes to Target and buys a video game

• Individual to Business

• Business to Government

• Government to Individual

• Individual to Government

Multiple Choice

Target has to pay taxes to the government

• Individual to Business

• Business to Government

• Government to Individual

• Individual to Government

Multiple Choice

The government hires a new employee

• Individual to Business

• Business to Government

• Government to Individual

• Individual to Government

Multiple Choice

The new employee can go to Wal-Mart and buy a Blu-ray

• Individual to Business

• Business to Government

• Government to Individual

• Individual to Government

Review

Scenario #2
The government needs to build a new interstate and hires a
paving company

The business hires employees

The employee pays taxes to the government on his wages

The government starts a building project

Multiple Choice

The government needs to build a new interstate and hires a
paving company

• Government to Business

• Business to Individual

• Individual to Government

• Individual to Business

Multiple Choice

The business hires employees

• Government to Business

• Business to Individual

• Individual to Government

• Individual to Business

Multiple Choice

The employee pays taxes to the government on his wages

• Government to Business

• Business to Individual

• Individual to Government

• Individual to Business

Multiple Choice

The government starts a building project

• Government to Business

• Business to Individual

• Individual to Government

• Individual to Business

Review

Scenario #3
A business pays their quarterly taxes

The government gives a $600 tax refund to all individual
taxpayers

The taxpayers buy laptops at Walmart

Walmart pays taxes on the laptops

Multiple Choice

A business pays their quarterly taxes

• Business to Government

• Government to Individuals

• Individuals to Business

• Individuals to Government

Multiple Choice

The government gives a $600 tax refund to all individual
taxpayers

• Business to Government

• Government to Individuals

• Individuals to Business

• Individuals to Government

Multiple Choice

The taxpayers buy laptops at Walmart

• Business to Government

• Government to Individuals

• Individuals to Business

• Individuals to Government

Multiple Choice

Walmart pays taxes on the laptops

• Business to Government

• Government to Individuals

• Individuals to Business

• Individuals to Government