Page 133 - ABCTE Study Guide_Neat

The original economic model worked on a system of barter. The barter system allowed for each individual
entity in the system to be both producer and consumer, since most people consumed what others
produced and produced what others consumed. The invention of currency as a universal standard of
value led to the dominance of price-based economies, where a certain amount of currency—affected by
supply of commodities, demand for commodities, and other factors—could be exchanged for any
available good or service. One of the factors outside of supply and demand that affects the price of
goods and services is overhead. In order for the producer to have a comfortable seat in any economic
system, the producer must cover his overhead and reap at least a little profit in the process.

Economic systems that include great numbers of people can be scaled up in three different tiers.

• The small tier, the lowest one to the ground, is the individual. In large economies, the
tier of the individual is chiefly one of consumption. The decisions made by any individual
consumer in an economic system cannot have too cataclysmic an effect on the system as a
whole.
• The middle tier of an economic system is business, a conglomeration of individuals
devoted to producing, transporting, and marketing goods for the individual to consume.
Businesses themselves also consume, usually different products and on a greater scale than
individuals. Entire businesses exist to supply other businesses, with no connection to the
individual consumer. Businesses vary in scope, from one or just a few individuals to hundreds
of thousands of individuals all working to further the same cause.
• A third tier, the interventionist government, rises to a greater level of necessity as
businesses grow larger within a single economic system. Without a regulatory body to place
sanctions on a free market business, a business could grow so powerful that economic
competition would no longer possible, and the equilibrium in the economic system would
break down.

Question

Chuck leases a 300-square foot shop to Benny for $678 per month. In this case, $678 is considered

A a sanction.

B a part of Chuck’s overhead.

C a portion of Benny’s profit.

D a part of Benny’s overhead.

Answer

Answer D is correct. Recall that overhead is the amount of money it takes just to keep a business
operational. While there are nonmonetary examples of overhead (time, for example), its value is mostly
measured in cash.

Some Key Concepts

Other important economic terms to remember are scarcity and opportunity cost.