Have you ever wondered how your parents got you your favorite toy, delicious pizza, or that cool hair cut? Do you ask yourself why some people in our country are rich while others are poor? To understand these and other related issues, you should start by learning about what the economy is and how it works. The economy has a lot to do with how money is made and how it is spent. People called economists study a subject called economics, which looks at how money and goods are moved around, including ideas like supply and demand and ways that people spend, invest, or earn money.
Any economy consists of buyers and sellers. Buying and selling things is the basis for any economy. For a trade to take place, the buyer and seller have to agree on a price at which goods or services will be exchanged. Goods are things you can hold in your hand, like a piece of fruit or a toy, things that have to be grown or made by sellers. Services are things people sell that you can’t hold in your hand, like time or talent: For instance, if someone pays you to mow their lawn or fix their fence, you’re selling your services.
When people make decisions about spending, they have to think about needs and wants. While needs are things that we can’t do without, wants are goods and services that we don’t need but wish to have. Examples of needs include clothes, shelter, and food. Wants are things like ice cream, toys, and designer clothes.
A key idea in economics is supply and demand. Demand refers to how much of a product people want: How many people want it? How much will they buy? How much will they pay? Supply is how much of a product there is. These two things work together to set the prices of products. For instance, if there are a lot of bananas to sell but nobody wants to eat them, the price of bananas will fall: If supply is high and demand is low, sellers need to drop their prices until someone buys what they’re selling. But if supply is low and demand is high, prices go up. Think about a hot new toy or limited-edition collectible and how things like these sometimes disappear from store shelves, then show up for sale online at twice the price. If everybody wants something but there aren’t very many, sellers can charge more, knowing that someone out there will want the product enough to pay more for it. When the supply balances out with the demand, so the amount available is close to the amount people want to buy, the price reaches equilibrium; it settles in one place and stays steady.
Think of some of the things you would like to have. You might want to buy a new video game and have plenty of money, but the game you want is sold out. Or you might really want a new laptop, but you don’t have enough money. Scarcity is when there isn’t enough of something, and it makes people make tough choices. When a product is in scarce supply, a seller can raise the price. But when money is in scarce supply, you need to make tough choices about what you’ll do with the money you do have and what you’ll live without.
Interdependence means that we all depend on other people for some of our needs. Since no single person can make everything that they need, we have to buy some of the goods and services we need or want from others.
Inflation is a trickier economic topic, but basically, it’s when prices go up faster than the amount of money people have can keep up. When there’s inflation, you’ll be able to afford less of a product for the same amount of money than you would have before inflation kicked in. A little bit of inflation is normal over time, but too much at once can really hurt people and the economy.
Another thing you might hear people talking about when they talk about the economy is the stock market. Stock is an investment in a company: When you buy a share of stock, you basically buy a piece of the company. When the company makes more money, your stock grows in value, too.
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