Grades 5, 6, 7, 8

Scarcity

Decision Making

Allocation

Incentives

Trade

Specialization

Markets and Prices

Role of Prices

Competition and Market Structure

Institutions

Money and Inflation

Interest Rates

Income

Entrepreneurship

Economic Growth

Role of Government and Market Failure

Government Failure

Economic Fluctuations

Unemployment and Inflation

Scarcity is the condition of not being able to have all of the goods and services that one wants. It exists because human wants for goods and services exceed the quantity of goods and services that can be produced using all available resources. Scarcity is experienced by individuals, governments, and societies.

Making good choices should involve trading off the expected value of one opportunity against the expected value of its best alternative.

The choices people make have both present and future consequences.

The evaluation of choices and opportunity costs is subjective; such evaluations differ across individuals and societies.

To determine the best level of consumption of a product, people must compare the additional benefits with the additional costs of consuming a little more or a little less.

Marginal benefit is the change in total benefit resulting from an action. Marginal cost is the change in total cost resulting from an action.

As long as the marginal benefit of an activity exceeds the marginal cost, people are better off doing more of it; if the marginal cost exceeds the marginal benefit, they are better off doing less of it.

Many people have a tendency to be impatient, choosing immediate consumption over saving for the future.

Scarcity requires the use of some distribution method to allocate goods, services, and resources, whether the method is selected explicitly or not.

There are essential differences between a market economy, in which allocations result from individuals making decisions as buyers and sellers, and a command economy, in which resources are allocated according to central authority.

People in all economies must address three questions: What goods and services will be produced? How will these goods and services be produced? Who will consume them?

National economies vary in the extent to which they rely on government directives (central planning) and signals (prices) from private markets to allocate scarce goods, services, and productive resources.

As consumers, people use resources in different ways to satisfy different wants. Productive resources can be used in different ways to produce different goods and services.

Responses to incentives are usually predictable because people normally pursue their self-interest or deviate from their self-interest in consistent ways.

Changes in incentives usually cause people to change their behavior in predictable ways.

Incentives can be monetary or non-monetary, or both.

When people buy something, they value it more than it costs them; when people sell something, they value it less than the payment they receive.

Free trade increases worldwide material standards of living.

The gains from free trade are not distributed equally, and some individuals or groups may lose more than they gain when trade barriers are reduced.

Despite the mutual benefits from trade among people in different countries, many nations employ trade barriers to restrict free trade for national defense reasons, to protect key industries, or because some companies and workers are hurt by free trade.

Imports are foreign goods and services that are purchased from sellers in other nations.

Exports are domestic goods and services that are sold to buyers in other nations.

Voluntary exchange among people or organizations gives people a broader range of choices in buying goods and services.

Labor productivity is output per worker.

Like trade among individuals within one country, international trade promotes specialization and division of labor and increases the productivity of labor, output and consumption.

As a result of growing international economic interdependence, economic conditions and policies in one nation increasingly affect economic conditions and policies in other nations.

Market prices are determined through the buying and selling decisions made by buyers and sellers.

The term 'relative price' refers to the price of one good or service compared to the prices of other goods and services. Relative prices are the basic measures of the relative scarcity of products when prices are set by market forces (supply and demand).

The market clearing or equilibrium price for a good or service is the price at which quantity supplied equals quantity demanded.

If a price is above the market clearing price, it will eventually fall, causing sellers to produce less and buyers to purchase more; if it is below the market clearing price, it will eventually rise, causing sellers to produce more and buyers to purchase less.

An exchange rate is the price of one nation's currency in terms of another nation's currency. Like other prices, exchange rates are determined by the forces of supply and demand. Foreign exchange markets allocate international currencies.

An increase in the price of a good or service encourages people to look for substitutes, causing the quantity demanded to decrease, and vice versa. This well-established relationship between price and quantity demanded, known as the law of demand, exists as long as other factors influencing demand do not change.

An increase in the price of a good or service encourages producers to supply more, and vice versa. This relationship between price and quantity supplied is normally true as long as other factors influencing costs of production and supply do not change.

Markets are interrelated; changes in the price of one good or service can lead to changes in prices of many other goods and services.

Scarce goods and services are allocated in a market economy through the influence of prices on production and consumption decisions.

Sellers compete on the basis of price, product quality, customer service, product design and variety, and advertising.

Competition among sellers results in lower costs and prices, higher product quality, and/or better customer service. When competition among sellers is limited, sellers have some control over the prices they set.

Competition among buyers of a product results in higher product prices.

The household is an important institution in which consumption and production take place.

Banks and other financial institutions channel funds from savers to borrowers and investors.

Labor unions have influenced laws created in market economies and, through the process of collective bargaining with employers, labor unions represent some workers in negotiations involving wages, fringe benefits, and work rules.

Not-for-profit organizations are established primarily for religious, health, educational, civic, or social purposes and are exempt from certain taxes.

As a store of value, money makes it easier for people to save and defer consumption until the future.

As a unit of account, money is used to compare the market value of different goods and services.

Money encourages specialization by decreasing the costs of exchange.

Inflation reduces the value of money.

An interest rate is a price of money that is borrowed or saved.

Like other prices, interest rates are determined by the forces of supply and demand.

Employers are willing to pay wages and salaries to workers because they expect to be able to sell the goods and services that those workers produce at prices high enough to cover the wages and salaries and all other costs of production.

To earn income people sell productive resources. These include their labor, capital, natural resources, and entrepreneurial talents.

A wage or salary is the price of labor; it usually is determined by the supply of and demand for labor.

More productive workers are likely to be of greater value to employers and earn higher wages than less productive workers.

Peoples' incomes, in part, reflect choices they have made about education, training, skill development, and careers. People with few skills are more likely to be poor.

Entrepreneurs compare the expected benefits of entering a new enterprise with the expected costs.

Entrepreneurs organize resources to produce goods and services because they expect to earn profits.

Entrepreneurs (as well as other sellers) earn profits when the revenues they receive from selling the products they sell are greater than the costs of production.

Entrepreneurs (as well as other sellers) incur losses when the revenues they receive from selling the products they sell do not cover the costs of production.

In addition to profits, entrepreneurs respond to other incentives, including the opportunity to be their own boss, the chance to achieve recognition, and the satisfaction of creating new products or improving existing ones. In addition to financial losses, other disincentives to which entrepreneurs respond include the responsibility, long hours, and stress of running a business.

Standards of living increase as the productivity of labor improves.

Productivity is measured by dividing output (goods and services) by the number of inputs used to produce the output. A change in productivity is a change in output relative to input.

Technological change results from an advance in knowledge leading to new and improved goods and services and better ways of producing them.

Increases in productivity can result from advances in technology or increases in physical or human capital.

Public goods and services provide benefits to more than one person at a time, and their use can not be restricted to only those people who have paid to use them.

If a good or service cannot be withheld from those who do not pay for it, producers expect to be unable to sell it and, therefore, will not produce it. Governments provide some of these goods and services.

Most federal government tax revenue comes from personal income and payroll taxes. Payments to Social Security recipients, the costs of national defense and homeland security, medical expenditures (such as Medicare), transfers to state and local governments, and interest payments on the national debt constitute the bulk of federal government spending.

Most state and local government revenues come from sales taxes, grants from the federal government, personal income taxes, and property taxes. The bulk of state and local government revenue is spent for education, public welfare (including hospitals and health), road construction and repair, and public safety.

Citizens, government employees, and elected officials do not always directly bear the costs of their political decisions. This often leads to policies whose costs outweigh their benefits for society.

Incentives exist for political leaders to favor programs that entail immediate benefits and deferred costs.

GDP is a basic measure of a nation's economic output and income. It is the total market value, measured in dollars, of all final goods and services produced in the economy in one year.

GDP can be computed by summing household consumption spending, investment expenditures, purchases by federal, state, and local governments, and net exports.

Net exports equal the value of exports (goods and services sold to other countries) minus the value of imports (goods and services bought from other countries). Net exports can be either positive (trade surplus) or negative (trade deficit).

GDP per capita is GDP divided by the population of a country.

When consumers make purchases, goods and services are transferred from businesses to households in exchange for money payments. That money is used by businesses to pay for productive resources (natural, human, and capital). Governments also provide goods and services that are paid for with tax receipts.

One person's spending is other people's income. Consequently, an initial change in spending (consumption, investment, government, or net exports) usually results in a larger change in national levels of income, spending, and output.

A recession occurs when overall levels of income and employment decline.

To be counted as unemployed, a person must be in the labor force. The labor force consists of people age 16 and over who are employed or actively seeking work. Thus the labor force is the sum of total employment and total unemployment.

When people's incomes increase more slowly than the inflation rate, their purchasing power declines.

The unemployment rate is the percentage of the labor force that is willing and able to work, does not currently have a job, and is actively looking for work.