Supply – Economic Lowdown, Ep. 1



Hi, I'm Scott Wolla and this is the Economic
Lowdown Video Companion. If you listened to Episode 7 in our podcast
series, you'll know it's all about supply. Economists define supply as the quantity of
a good or service that producers are willing and able to offer for sale at each possible
price during a given time period. For example, let's say I own a firm that produces
and sells widgets – a piece of hardware people used to improve the performance of their computers. My objective as a business owner is to make
a profit, which is the difference between my cost of producing the widgets, and the
price that I receive for selling the widgets to buyers. The law of supply says that as the price of
a good or service rises, the quantity of the good or service also rises. Likewise, as the price of a good or service
falls, the quantity of the good or service also falls. Notice that I included only two variables:
price and quantity. That's all the law of supply does; it states
how a change in the price of a good or service will affect the quantity supplied. Picture This: If we put the quantity of widgets on the X,
or horizontal axis of a graph, and the price of widgets on the Y, or vertical axis, we
can start to plot the relationship between the two variables. I will only produce a larger quantity of widgets
if the market price of widgets increases. The same principle can be applied at each
possible price, and by connecting the points on the graph, we'll begin to see an upward-sloping
line. The upward slope means that there is a direct
relationship between price and quantity supplied: when price rises, the quantity supplied rises,
and when price falls, the quantity supplied falls. In fact, we could recreate this same scenario
with almost any good or service and get the same result-an upward-sloping line. This upward-sloping line is called a supply
curve. The supply curve is a helpful tool, but it
is not static or unchanging. It shifts back and forth as conditions in
the market change. For example, if new technology allowed me
to produce widgets at a substantially lower cost than my current production cost, the
increased profit would cause me to increase my production of widgets. In this case, the original supply curve no
longer tells the whole story: it must be shifted to the right to accurately reflect the new
widget supply. Or, put another way, the widget-supply curve
shifted to the right because the quantity of widgets supplied by me-and other widget
sellers-would be greater at each of the given prices. Or, consider a change of the cost of inputs
to the production process. Let's assume that widgets are made of copper. If copper prices rise, my cost of producing
widgets would rise as well. This higher cost of production would mean
that my profits-the difference between my costs and the price-would be lower than before,
so I would produce and sell fewer widgets. Other widget producers would likely do the
same. This would shift the widget supply curve to
the left. Other things that might cause a supply-curve
shift to the right or to the left include a change in the number of producers in the
market; government policies, such as taxes, subsidies and regulations; and expectation
of future prices. We call these factors a change in market conditions. Notice we have describe two types of movements:
a shift along the curve that we call a change in the quantity supplied that reflects the
change in price, and the shift of the curve that we call the change in supply that reflects
in change in market conditions. That's all the time we have for today. Thanks for watching. This video is brought to you by the Federal
Reserve Bank of St. Louis. For more information, visit us online at stlouisfed.org.

Circular Flow – Economic Lowdown, Ep. 6



Let’s face it, the economy is complex and
can be difficult to understand. Luckily, economists have developed models
to help us learn and understand how the economy functions. One of the most useful is the circular
flow model. The circular flow model highlights the “flows”
within the economy―the flow of economic resources, goods and services, and the flow
of money. To demonstrate the usefulness of the circular
flow model, let’s follow a few dollars through a cycle. Imagine you are a hungry consumer who hears
the homemade fries at the diner down the street calling your name. You take your money to
the diner for a tasty meal. When you pay your check, you are buying goods
and services. But the money doesn’t remain in the cash register for long. Alice, the diner owner, uses the money to
purchase resources. She buys homegrown potatoes from a farmer; pays the server, who took your
order, his wages; and makes a payment on the loan she got to buy new equipment for the
diner. All of these are costs of production. After she has paid her costs of production,
the remaining revenue is her profit—the income she earns as an entrepreneur owning
and operating her diner. Let’s say your money goes to the farmer,
and that for him is income. That money won’t remain in his wallet forever, though. Before
you know it he will spend it, and the cycle will begin again. The circular flow model shows the interaction
between two groups of economic decision-makers―households and businesses―and two types of economic
markets―the market for resources and the market for goods and services. While the real
economy is much more complex, the simple circular flow model is useful for understanding some
key economic relationships. Let’s start with the two groups of economic
decision-makers. On one side of the model are households. Households
consist of one or more persons who live in the same housing unit, such as a family. Households
own all the economic resources in the economy. The economic resources are land, labor, capital,
and entrepreneurial ability. Land resources are natural resources. For
example, these could be actual land owned by a farmer or other natural resources such
as oil, water, and trees. Labor is just what it sounds like―work for
which you are paid. Capital resources are goods used to produce
other goods and services. For example, think of a hammer used by a carpenter or a computer
used at a business. Finally, entrepreneurial ability is the human
resource that combines the other resources to produce new goods and services and bring
them to market. So, an entrepreneur might combine land, labor, and capital in new ways―taking
risks along the way―to bring a good or service to market. On the other side we have businesses. A business
is a privately owned organization that produces goods and services and then sells them. Businesses
can be large, such as an automobile manufacturer, or small, such as a diner. And, businesses
may produce goods, such as computers and bicycles, and services, such as haircuts and car repairs. But households and businesses are not isolated,
they interact in markets. At the top of the model we have the market
for resources. The market for resources is where households sell and businesses buy economic
resources―land, labor, capital, and entrepreneurial ability. Notice that it is households who
own all the economic resources. You might think of capital, say a delivery
truck, as being owned by a business. But who owns the businesses? You guessed it―households. Whether a small
diner owned by an individual, a partnership owned by several individuals, or a corporation
owned by stockholders, all of these businesses are owned by people who are also members of
a household. Let’s look at some transactions in the market
for resources by a business. A diner:it uses a mix of economic resources, such as land―potatoes
for fries; labor―cooks and wait staff, and capital ―kitchen equipment; and cash register
resources to produce goods and services―in this case cheeseburgers, fries, and milkshakes.
The business buys these economic resources from households. For example, let’s say you work at the diner.
You are selling and the diner is buying your labor resources. Those homemade fries come
from potatoes―a natural resources―bought from a local farm, which is owned by a household.
The new milkshake machine and french fry cutter―capital resources―were bought from a business three
states over and the stockholders of that business are members of households. Finally, the diner
itself is owned by Alice, who is a member of a household and an entrepreneur who has
turned her skill of making the best homemade fries in town into a successful business. In exchange for their resources, households
earn income. Each resource has its own income category. Households receive wages for their labor,
rent for use of their land, interest for use of their capital, and profit for their entrepreneurial
ability. For working at the diner, for example, your income would be wages paid in the form
of a paycheck at the end of the month. So, in the market for resources, households
sell resources and businesses buy resources. The resources flow one way (counter-clockwise)
and money flows the other (clockwise). At this point in the cycle, households sell
resources to businesses. So, households are holding income and businesses are holding
resources. But, what do households do with the income? What do businesses do with the resources? To answer these questions, let’s focus on
the bottom of the model, the market for goods and services, where the goods and services
produced by businesses are bought. Let’s start with businesses. Businesses
use the economic resources they buy in the market for resources to produce goods, such
as computers and bicycles, and services, such as haircuts and car repairs. Businesses sell these goods and services to
households in the market for goods and services. For example, the diner produces cheeseburgers,
fries, and milkshakes. Households use part of their incomes to buy
goods and services. The payment businesses receive is called revenue. For example, at
the diner, revenue comes from customers paying for their food. In short, the market for goods and services
is simply where the goods and services produced by businesses are bought. So, in the markets for goods and services,
businesses sell goods and services and households buy goods and services. Products flow one
way (counter-clockwise) and money flows the other (clockwise). Let’s step back a bit and notice a few things
about the circular flow model. First, it shows how businesses and households
interact in the two markets―the market for resources and the market for goods and services.
Notice that households and businesses are both buyers and sellers. Households are sellers in the market for resources.
Households sell land, labor, capital, and entrepreneurial activity in exchange for money,
which in this case is called income. Households are buyers in the market for goods
and services. Households exchange income for goods and services. Businesses are sellers in the market for goods
and services. Businesses sell goods and services in exchange for money, which in this case
is called revenue. Businesses are buyers in the markets for resources.
Businesses exchange the revenue earned in the market for goods and services to buy land,
labor and capital in the market for resources. In this case, the money spent is called the
cost of production. Second, the model shows the flow of money
in exchange for goods and services and resources. Money flows clockwise, while goods, services,
and resources flow counter-clockwise. The circular flow model is a simple tool for
learning about the economy. It shows the relationship between households and businesses and how
these different decision-makers in the economy fit together. Plus, it shows how money keeps economic resources
and goods and services moving around and around and around the economy. And that’s something
Alice appreciates.