Unformatted text preview: ne in the GDP. Prices fall, people buy fewer products, and
businesses go under. The consequences for the economy include: high unemployment, increased business failures, and
overall drop in living standards.
Economic Cycles, continued
A severe recession is called a depression. You have probably heard of the Great Depression of 1929-1933. However,
there is nothing great about an economic depression in which unemployment soars, consumer spending plummets, and
business production is dramatically reduced.
A recovery occurs when the economy stabilizes and begins expanding again, which can start the cycle all over again.
Business cycles rarely go all the way through to a depression phase. The United States has, however, experienced
several recessions, such as in 1990-1991 and 2001-2002.
4 stages in economic cycle: Expansion, Recession, Depression, Recovery. (depression is the least likely to occur).
The Free-Market System
The U. S. economy is based on the free-market system. This system provides an opportunity for a business to succeed or
fail on the basis of market demand.
The result is that companies that can manufacture and sell desired products efﬁciently will prosper. Those companies
that are inefﬁcient or selling less desirable products will likely fail in the face of competition.
The foundation of the free-market economy is supply and demand.
Supply refers to the number of products that businesses are willing to sell at different prices at a speciﬁc time.
Demand refers to the number of products people are willing to buy at different prices at a speciﬁc time.
How Free Markets Work
The market is really just you and me—and millions of other consumers. We send signals to producers about what to
make, how many we want, and what color we prefer. We do this every time we buy (or don't buy) certain products and
The price tells producers how much to produce. If something is wanted but isn't available, the price tends to go up. But
not permanently. After someone starts making more of that product, sells the ones already in stock, or makes a
substitute, the price then tends to drop. The lower price indicates we don't really want it anymore.
How Prices Are Determined
Prices in a free market are determined by buyers and sellers through negotiation in the marketplace. As a businessperson,
you may want to sell your great new t-shirts for $50 each, but the quantity demanded at that price may be rather low.
If as the seller you lower your price, the quantity demanded is likely to increase. Supply and demand determines a price
that is acceptable to you and your customers.
The Concept of Supply
Recall that supply refers to the number of products that businesses are willing to sell at different prices at a speciﬁc time.
In general, the amount supplied increases as the price increases. This is because sellers can make more money with a
The Concept of Demand
Recall that demand refers to the number of products people are willing to buy at different prices at a speciﬁc time.
In general, the quantity demanded increases as the price decreases.
The Concept of an Equilibrium Price
The equilibrium price is the price at which the number of products that businesses are willing to supply equals the
number of products that consumers are willing to buy at a speciﬁc point in time. Another term for equilibrium price is
Sellers want a high price. Buyers want a low price. The price at which these two wants cross one another, where the
quantity demanded equals the quantity supplied, is the equilibrium point. Over the long run, this price will become the
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This note was uploaded on 09/30/2013 for the course BUS 101 taught by Professor All during the Winter '07 term at SUNY Buffalo.
- Winter '07