The basic economic problem
Economics begins with scarcity: resources such as land, labour, capital and time are limited, but human wants are almost unlimited. Every society must answer three questions:
- What should we produce?
- How should we produce it?
- For whom should it be produced?
In many economies, markets help answer these questions.
What is a market?
A market is any place or system where buyers and sellers exchange goods and services. Markets can be:
- physical: a farmers’ market, a mall
- online: shopping websites, apps
- for goods (food, phones), services (haircuts), labour (jobs) or money (loans)
Supply and demand
Demand
Demand is how much of a good buyers are willing and able to buy at different prices.
Law of demand: as price goes up, quantity demanded goes down, and vice versa.
Things that shift demand: income, tastes and trends, prices of related goods, the number of buyers, expectations about the future.
Supply
Supply is how much of a good sellers are willing to sell at different prices.
Law of supply: as price goes up, quantity supplied goes up, because producers can earn more.
Things that shift supply: costs of materials and labour, technology, weather, number of sellers, government rules.
Equilibrium
The equilibrium price is where the quantity supplied equals the quantity demanded.
| Price of a cup of hot chocolate | Quantity demanded | Quantity supplied |
|---|---|---|
| $1 | 100 | 20 |
| $2 | 70 | 40 |
| $3 | 50 | 50 |
| $4 | 30 | 70 |
| $5 | 10 | 90 |
At $3, buyers want 50 cups and sellers offer 50: equilibrium.
- If the price is too high, there is a surplus (too much supply), and sellers lower prices.
- If the price is too low, there is a shortage (too much demand), and prices rise.
Real-world examples
- Gas prices rise when oil supply is disrupted or demand rises in summer.
- Concert tickets for a hugely popular artist sell out fast; resale prices soar.
- Housing prices in growing cities rise when demand outpaces supply.
- Face masks in early 2020: demand spiked, causing shortages and higher prices.
Competition
Competition happens when many sellers try to attract buyers. It tends to:
- lower prices
- improve quality
- encourage innovation
When one company controls a market, it’s a monopoly, and prices may be higher. Governments use competition laws to prevent unfair practices.
Why trade?
Trade lets people and countries specialize in what they do best.
Comparative advantage means producing something at a lower opportunity cost than others. Even if one country is better at making everything, both countries benefit when each specializes in what it gives up the least to produce, and then trades.
Example: Canada has abundant land for wheat and canola; another country may have a warm climate for coffee and bananas. Both gain by trading.
Trade terms
- Exports: goods sold to other countries
- Imports: goods bought from other countries
- Tariffs: taxes on imports, which can protect local industries but raise prices for consumers
- Free trade: trade without tariffs or limits
Try it yourself
- Draw supply and demand curves using the hot chocolate table and mark the equilibrium.
- Explain what happens to the price of snow shovels after a big storm.
- Identify a market in your community that has strong competition and one that doesn’t.
- Use comparative advantage to explain why two students might split a group project’s tasks.
Quick recap
- Scarcity forces societies to decide what, how and for whom to produce.
- Markets bring buyers and sellers together.
- Demand falls as prices rise; supply rises as prices rise.
- The equilibrium price balances supply and demand.
- Competition and comparative advantage make markets and trade more efficient.