What Is an Economic System?
Demand- is the quantity of goods and
Economics - is a social science concerned
with how people satisfy their demands for
goods (things you can buy) and services
(things people do for a fee).
Economics - is all about the flow of goods
and services between people.
An economic system (or economy) is a
method used by a society to allocate goods
and services among its people and to cope
with scarcity.
Every economic system answers four basic
questions. They are the fundamental
questions of economics.
Fundamental Questions of Economics:
 What goods and services are
produced?
 What quantity of goods and services
are produced?
 How are goods and services
produced?
 For whom are goods and services
produced?
Types of Economic Systems
Two very different types of economic systems
are often used to compare how societies deal
with the fundamental questions of
economics. These two types of economic
systems are the command economy and the
market economy.
In a command economy, the government
controls the production, allocation, and
prices of goods and services.
In a market economy, suppliers and
consumers control the production, allocation,
and prices of goods and services.
Voluntary exchange is a transaction in which
both suppliers and consumers believe they
benefit.
Another name for the market economy is the
free enterprise system.
Supply and Demand
Supply- is the quantity of goods and services
a business is willing to sell at a specific price
and a specific time.
services consumers are willing to buy at a
specific price and a specific time.
Supply and Demand Curves:
A supply curve on a graph shows the quantity
of a product or service a supplier is willing to
sell across a range of prices over a specified
period of time.
A demand curve on a graph shows the
quantity of a product or service consumers
are willing to buy across a range of prices
over a specified period of time.
A supply and demand curve is a graph that
includes both a supply curve and a demand
curve.
The equilibrium point is where the supply
curve and the demand curve intersect.
The x-axis coordinate of the equilibrium
point identifies the equilibrium quantity.
The y-axis coordinate of the equilibrium
point identifies the equilibrium price.
Competition in a Market Economy
 Competition is common in a market
economy. People are free to start and
operate businesses that compete
against each other, so suppliers are
often offering similar products or
services. Buyers are free to compete
against each other to buy products they
need and want.
Competition between Suppliers
 If a supplier lowers the price of a
product or service, consumers typically
buy from that supplier rather than
from others.
Competition between Consumers
 In a market economy, there is not only
competition between suppliers but also
competition between consumers.
When consumers compete against
each other to buy a product, they push
prices upward.
The profit motive is an incentive that
encourages entrepreneurs to take business
risks in the hope of making a profit.
Benefits of Profit
 Entrepreneurs who consistently make
a profit over time can build their own
wealth and ensure financial
independence.
 Many entrepreneurs use profit to
benefit their existing businesses, start
new ones, or invest in the enterprises
of others. Profit can be used to grow a
business,
The Global Economy
The global economy is the flow of goods and
services around the whole world.
Exporting and Importing
Exporting- is the business activity in which
goods or services are sent from a country and
sold to foreign consumers.
Importing- is the business activity in which
goods and services are brought into a country
from foreign suppliers.
Entrepreneurs and International Trade
 Entrepreneurs can benefit from
international trade by exporting goods
or services that are in demand in
foreign countries.
Trade Barriers
Governments are often protective of the
resources within their borders.
A trade barrier is a governmental restriction
on international trade.
The most common trade barriers are tariffs
and quotas on imports. A tariff is a fee,
similar to a tax that importers must pay on
the goods they import. A quota is a limit on
the quantity of a product that can be
imported into a country.
Foreign Exchange Rates
 Many types of money are in use
around the world. In general, each
country or group of countries has its
own type of money.
Fair Trade
Fair trade is a policy encouraged by private
organizations with the goal of ensuring that
small producers in developing nations earn
sufficient profit on their exported goods to
improve their working, environmental, and
social conditions.
Respecting Other Cultures
Entrepreneurs who wish to engage in
international trade need to show respect for
the culture of the people with whom they
want to do business. “Culture” includes
language, beliefs, attitudes, customs,
manners, and habits.
The Local Economy
Effects of Entrepreneurship on the Local
Economy
A local economy covers a limited area, such
as a community or town. Because many
entrepreneurs operate small businesses that
sell primarily to local consumers,
entrepreneurship has a profound effect on
local economies. Entrepreneurs can benefit
their local economies in the following ways:
⦁ Purchasing materials and supplies from
local merchants
⦁ Opening an account at a local bank, credit
union, or other financial institution
⦁ Joining a local business association, trade
group, or civic organization that supports
local economic development
⦁ Paying local taxes that benefit schools and
other public services
⦁ Investing money in local businesses
⦁ Donating money, time, or goods to local
charities and organizations
⦁ Hiring local
⦁ Supplying goods and services to local
consumers
Importance of Sustainability
It is important that economic development
does not harm society or the environment
but ensures that human and natural resources
are maintained for future generations. This is
referred to as sustainable economic
development, or sustainability.