Because resources are limited, our wants will always be greater than the resources available to satisfy those wants. We also do not have an endless amount of whatever is needed (time, money) to obtain those resources. We have to make choices, or select one thing to do or buy over another.

When we make a choice, we give up whatever experience we would have had by choosing another option. Opportunity cost is the next best alternative we give up when we make a choice. For examples, if you choose McDonald’s over Wendy’s, your opportunity cost may be that you can’t get a Frosty, chili, or a baked potato. Another example would be if you chose to play video games when you have a test to study for: your opportunity cost may be a higher grade on the test.

Resources are the factors of production that are used in the production of goods and services. There are 4 types of resources. The first type is the entrepreneur, or the person with the idea who starts a business. Then there are natural resources, like forests, water, oil, and wind, which are occur naturally. There are also human resources, which are the people whose labor produces goods and services. Lastly, there are capital resources, which is money & what it can be used for to make products, like buildings, tools, and machines.

Production is the use of these resources to make goods and provide services- producers make products to meet our needs and wants.

Consumption is the act of using goods and services- consumers are the people who buys goods and services. Incentives are things that motivate behavior.

Entrepreneurs start a business because they want to make money, which means they have a profit motive, and they produce what customers buy the most. For instance, Apple makes a lot of iPhones b/c a lot of people buy them. If products aren’t selling, entrepreneurs may also lower the cost (put items on sale) to incentivize people to buy the product.

Consumers are motivated to buy products by personal preferences (things they like) and how much the products cost- consumers will buy things they want and need as long as the cost is reasonable.

Supply is the amount of a good or service that producers are willing and able to sell at a certain price. Demand is the amount of a good or service that consumers are willing and able to buy at a certain price. The interaction of supply and demand determines price, or the amount of money exchanged for a good or service.

The law of demand states that consumers will buy more of a product at a lower price than a higher price, and the law of supply states that producers will provide more of a product at a higher price than a lower price. In other words, if demand is greater than supply, the price will be higher; and if demand is less than supply, the price will be lower price.

Price also determines who will buy the product, as only the customers who buy a product are the customers who can afford to do so.

In dealing with economic concepts, there are 3 questions that all types of economies address: 1) What will be produced?, 2) Who will produce it?, and 3) For whom will it be produced? Each type of economy answers these three questions differently.

Traditional economies are found in remote areas in the world, economic decisions are based on long-standing customs. People often perform the same type of work as their parents and grandparents, regardless of their potential and ability. The methods of production & consumption are passed down from generation to generation, and change little over time because traditional societies are slow to change. Examples of economic activities in a traditional economy include hunting & gathering, fishing, and bartering.

In a free market economy, economic choices are made by private individuals, not a central authority (government). There is private ownership of property & resources in a free market economy, and businesses compete to attract buyers and increase profits.

In a free market economy, individuals can sell their labor and use their pay to buy what they want. Their buying decisions tell businesses what goods and services to produce (consumer sovereignty- the consumer rules).

There is minimal government involvement in a free market economy, meaning that the government does not force businesses to make products and does not force consumers to buy them, but the government also does not protect consumers and businesses against unfair or unethical practices.

In a command economy, property and resources are centrally owned, usually by the government. The government decides what will be produced, how it will be produced, and how it will be distributed.

Individuals have few choices, as the government controls what they buy, and may even control what type of work they will do & how much they will be paid.

The command economy is a key aspect of many communist governments, such as Cuba and North Korea.

A mixed economy is made up of a public sector (the part of the economy controlled by the government) and a private sector (the part of the economy not directly controlled by the government). Individuals and businesses are owners and decision makers for the private sector, while the government is the owner and decision maker for the public sector.

The government also regulates activities in the private sector, such as limiting monopolies & price gauging. The government’s role is greater than in a free market economy and less than in a command economy. Most economies today, including the United States, are mixed economies.

In the private sector, individuals, businesses, and the government make exchanges every day, creating a flow of resources, goods, services and money, which is known as the circular flow.

Individuals sell their labor to businesses to wages in return, sell or rent property to businesses to receive payments in return, lend or invest money in businesses to receive interest, which is a sum paid for the use of money, in return. Individuals use wages and earnings to buy products and services from businesses.

Businesses use investments and profits from sales to buy more production resources.

There is also flow from the private sector to the public sector. Individuals and businesses pay taxes to the government. The government uses this tax revenue to provide public goods and services, and the government may also sell or rent resources and buy products from businesses and individuals.