Lesson 4: Essential Economic Principles

Novus Business and IT Training Program

Essential Economic Principles

Objective: To understand the basic economic concepts that govern businesses and how they can influence the behaviors of consumers and suppliers.

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Economic Basics

• Scarcity – What we want is more than what we have

• Economics – How do we use limited resources?

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Types of Economies

• Planned

• Market

• Mixed

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Inputs and Outputs

GOODS and SERVICES(Outputs)

TYPES OF RESOURCES (Inputs)

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Consumers and Suppliers

• Consumers – those who buy• Suppliers – those who sell• Businesses can be both

• Workers are suppliers

Consumer of flour

Supplier of bread

The Flow of Income

Inputs for Production

Outputs of Production

$$$ Consumer Spending

$$$Salaries, Wages

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Economic Basics

• Supply and Demand

– The most basic economic concept

– Supply = what is available in the market

– Demand = what consumers want

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Supply and Demand

Equilibrium

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What Determines Demand?

• Income• Preferences• Weather• Time of Year• Relative Price• Consumer Expectation

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What Changes Market Demand?

• Distribution of Wealth

• Community Habits

• Number of Buyers

• Population Growth

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Supply, Demand and Price

• Higher demand+ same supply = higher equilibrium price

• Lower demand+ same supply = lower equilibrium price

• Higher supply+ same demand = lower equilibrium price

• Lower supply + same demand = higher equilibrium price

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Higher Demand = Higher Price

Price

P-1

Q-1

Demand Supply

Quantity

P-2

Q-2

Demand Supply

Normal Winter Colder Winter

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Opportunity Cost

• Relationship between scarcity and choice

• Different than financial cost

• Not having A because you chose B

• Applies to consumers and suppliers

Trade Improves the Quality of Life

• Everyone has different resources, skills, knowledge, etc.

• If people specialize in what they are best at, they can trade with others to make better use of everyone’s resources.

• Example - Time to prepare 1 kg of butter or cheese:

3 Hours

1 Hour

2 Hours

4 Hour

Butter Cheese You

Your Neighbor

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Summary