Lesson 1 How Our Economy Works

The goals for today’s lesson are:

1. Learning what an economy is

2. Learning how to think about a budget

3. Learning about the importance of competition and cooperation

What is an Economy?
Our economy is an active system or social network in which people earn money and spend money. In an economy money changes hands between people and groups of people again and again and again. For example, I earn money teaching you. Then I buy food. The grocery store gets my money, and then it pays its workers. After the grocery store pays its workers, the workers can pay for haircuts or put gas in their cars. Then the hair cutters and gas station workers get money which they spend on food and a place to live. The people who own these businesses also get money which they spend on food and a place to live. This cycle goes on and on- people earning money and spending money. We have a local economy (near where you live), a state economy, a national economy and even a world economy.


 The government has a role in the economy. It collects tax dollars, which it spends on schools, roads, social security and public defense … among other things.


This picture shows you how an economy works. There are 4 basic parts of an economic network. Read how the 4 parts relate to each other.


Whether an economy gets better or worse depends on the actions and decisions of families, workers, businesses and the government.

When the economy is good, there are plenty of jobs. When there are more jobs than people, wages go up. When wages go up, it is easier for families to pay their bills and they have more money to spend... or to save. When businesses sell more things, they make more money, and they can hire even more workers. This is a description of a growing economy, also known as a vibrant economy, or a strong economy. This is good for you and your family.

However, the economy isn’t always growing. Sometimes, it slows down. When the economy slows down, people have less money, and they spend less money. They don’t have money to spend on extras. Maybe they stop buying new clothes or stop going out to eat. Then, when these businesses (department stores and restaurants) sell fewer products, they have less money to pay their bills. What happens then is that these business owners have to lay off workers or reduce workers’ hours or reduce their pay. Workers then have less money to pay their bills. They shop less too. This is a description of a weak economy. If it goes on long enough, it is called a Recession or Depression. This is bad for you and your family.

There is an important law that governs the economy. It is called the Law of Supply and Demand. When the demand for a product, like a smart phone or a new drink, goes up (everyone wants to buy the same thing) then the price for the product goes up too. When the demand for a product goes down, like bathing suits in September, the price goes down too.

Therefore, one key to having a successful business is to choose a product or service with a high demand or lots of buyers but also a low supply or few competitors.


Circle the correct answer.

Q1. Most people love ice-cream. There is a high / low demand for ice-cream.

Q2. Most people go see the dentist. It takes a long time to study to be a dentist and there are only a few dentists in a city, so their pay is high / low.

Q3. If there are few jobs and people aren’t spending money, the economy is strong / weak.

Q4. If there are a lot of jobs and only a few workers, worker pay will increase / decrease.


Here are some important questions about the economy. Take a couple of minutes and ask a partner these questions.

Q1. Why do some jobs pay more than other jobs?

Q2. What are things people want to buy, but don’t really need?
Q3. Why do some businesses grow while others fail?

Q4. What kind of business are YOU interested in?





Remember that the economy is a system wherein people make money and spend money. The economy changes. Sometimes it is strong. Sometimes it is weak. When you think about having a business, you need to remember the law of supply and demand.


A value is the building block of an economy. It is the foundation upon which the economy is built and puzzled together one piece at a time. These pieces establish their value in relationship to one-another and build upon that like a puzzle or the links in a chain. Break one of the links, or attempt to force the puzzle piece where it does not belong and the foundation of your economy is weak. The stronger the links and the tighter the fit of the pieces; you have the makings of a vibrant economy.

A budget is how you organize your money. You look at how much money you have and make a plan how to spend it. Do you budget your money… or do you just spend it without a plan? Our economy is made up of millions of families, businesses and the government budgeting their money.

What happens if you don’t budget your money?

The business you will design in this course will need a budget. A business budget is like a family budget. Both businesses and families need to make sure that the money coming in each month is greater than the money being spent each month.


Mandatory Expenses
A government, a business and a family have two kinds of expenses, things they spend money on. Some expenses are required (mandatory). You have to pay these expenses each month. These mandatory expenses include the rent, utilities (such as heat and water), car and health insurance and food. Let’s say a family brings home $3000 a month. Their income is $3000 a month. They need to make a budget with this $3000, to make sure they can pay for everything they need. When you make a budget, you start with the amount of money you have (your income) and then do a lot of subtraction. For example, out of their $3,000 income per month our family has a lot of mandatory expenses. They have to pay for rent -$1,500 per month, utilities - $100 per month, car insurance - $100 per month, health insurance - $400 per month and food- $100 per week or $400 per month. Here is the subtraction problem:

Income- $3000

- $1,500 rent

- $100 utilities

- $100 car insurance

- $400 health insurance

- $400 food

What is the total mandatory spending that this family has each month?

How much money does the family have left over after paying their mandatory expenses?

What do you want to save money for?

Discretionary Expenses
Families (and businesses and governments) also have a budget for their optional (discretionary) expenses. This is their plan how to spend their extra money. For a family these expenses can include going out to dinner or going on a trip to the zoo or buying some new clothes. Discretionary expenses are things you want, but that you don’t need. You can still live without going to the zoo, right? Our family budgets $100 per week or $400 per month for optional expenses. They do have an extra $500 every month, (as you found out by doing the subtraction problem), but they always put $100 in the bank each month to save for a rainy day. It’s good to have a savings account. You are more likely to save if you plan for it.

Needs versus Wants
Another way to look at budgeting is to think about needs and wants. Needs are things that are absolutely essential and things that people cannot live without like food, water and shelter. Needs are mandatory expenses.

Wants are things that are nice to have but are not absolutely essential, like movies and candy. You don’t really need a smart phone or candy to survive. Wants are discretionary expenses.

Urgent means things that are needed right away and that a person needs to have right now, like if you have to go to the bathroom or you break your arm and must go see a doctor. Not urgent means things that you do not need right away and can wait for it. You can wait for candy…right?

Categories Activity

Put the following items into your budget based on their importance.
Hint: Put things that are urgent and that you need in your budget first.

Food Clothes Cell phone Video game

Place to sleep Shoes Movie tickets Bicycle

Soccer ball Savings Heat Candy




Not Urgent




To have a successful business you need to have a budget. You have to know the difference between needs and wants. You need to be careful with money. You have to have a savings account to save money for a rainy day. You can have everything, but you can’t have everything at the same time!

Competition and Cooperation
We need to cooperate with others and to compete with others to have a successful economy.


Competition is when we want to be better than others. It does feel good to win a race or to make the best cookies. Our economy rewards the people who work the hardest and have the best ideas. When people want to be their best it makes our economy stronger.

Also, in our economy we have cooperation. When we help each other, it means we are cooperating. For example, to cooperate means to work for the benefit of all, like when we pay taxes to the government, so we can have public schools, public libraries, public roads and public parks. When we share our money, it benefits everyone and cost less than if each person tried to pay for their own schools, libraries, parks and roads.

Do you think our economy would be better with more cooperation or more competition? Explain.


Have you ever played the game of monopoly? The goal of the game of monopoly is to own all of the property. You compete with others when you play monopoly. When one person owns all of the property that person wins…. And that’s when the game of Monopoly is over. Monopolies decrease competition in an economy. They aren’t good.


For example, today you can buy hamburgers at many fast food restaurants like McDonald’s, Jack in the Box and Burger King. These places compete with each other for your business. Each place will have different specials to attract you. They sell different products, like different kinds of hamburgers, to attract you.

If the ONLY place you could ever buy a hamburger was McDonald’s, it would mean that McDonald’s had a monopoly on hamburgers. In that case, they could raise the price and change the quality of the burger very easily. This is because they have no one to compete with to try to be better. Without competition they could get lazy. How would you feel if the only place you could get a hamburger was at McDonald’s?

Monopolies hurt competition. When one company gets too much power it hurts entrepreneurs (people who want to start a business) and it hurts the customers. In fact, there is a law against monopolies in the US called the Sherman Anti-Trust Act. It was established in 1890. That was a long time ago!

Why do you think the government established the Sherman Anti-Trust law?

Economic Choices Game

In this game you are going to have to cooperate and compete with your classmates. Imagine that you and your group of classmates are on a big boat on the ocean. You are on vacation together. Suddenly, a huge storm comes out of nowhere, with high winds and big waves. The boat suddenly starts taking on water. The captain of the boat says that the boat is going to sink in ten minutes. Thankfully, you can see an island not far from your sinking boat; you can swim there and there is a big life raft too. Below is a picture of various items that are on the boat. Unfortunately, you only have time to get 3 of these 20 items. By yourself choose the 3 items you think are the most important to bring and write your answers below. Then explain your choices to your classmates. Then decide as a group the 3 items you will bring.


Name the three items and explain why you chose each one:

Item 1: ____________________________________________

Reason: ___________________________________________

Item 2: ____________________________________________

Reason: ___________________________________________

Item 3: ____________________________________________

Reason: ___________________________________________

Economic Decision Making and Conflict Resolution

If you and your group members disagreed, how did you decide as a group which items you should actually bring?

Extended Game

How would your choice of items change if you knew the following information about the island:

Q1. The island has dangerous animals?

Q2. The island is cold during the night such that everything freezes?

Q3. The island has lots of fruit to eat?

Q4. The island is Hawaii and has hotels and grocery stores?




Economics is not so much about money but about how people make decisions about what is important to them. It can be difficult for any group of people to decide what is best for them and their economy. We live in a Representative Republic meaning that we elect people to make decisions about what is most important to put in our economic life raft. Different countries and different communities have different economies, because their people have different needs and different values and make different decisions about what is important to them.

Also, the economy that works for one generation in the past may not work for the next generation in the future. Some people today think that our economy is changing from a manufacturing economy and a service economy to a knowledge economy – where what people know will be more important than what they make, like a glass of lemonade or a hamburger. It will be up to you and your classmates to determine what kind of economy we will have in the future.

Q1. How do people make money in our community?

Q2. Have you ever talked to people about their jobs?

Q3. What kind of job seems cool to you?

Q4. Why are both competition and cooperation important?

Important Economy Terms

Community Network – A community is a series of interwoven networks that include local families, homes, apartments, businesses, schools, churches, parks, roads, police, government and other social organizations.

ValueThe amount of money, goods, or services considered a fair and equal trade for something else. (Example: 2-apples = 1-orange)

Economy – The economy is the way that people decide to use their time, money and resources. The economy can also be seen as the process by which money is exchanged within a local community for goods and services.

Economics – The study of how individuals make decisions about how to manage money, goods, services, needs and wants.

BudgetA list of all planned income and expenses. A plan by a family or business to make sure that expenses do not exceed income.

Budget versus ActualComparing the amount of budgeted income and expenses to the actual amount of income and money you spent.

SavingsAmount of money that is not spent but is set aside for future use – usually in a bank savings account.

BalanceThe amount of money the bank is holding for you – usually in a bank checking account.

Supply – The number of products or services available to be purchased.

Demand – The number of consumers to buy a product or service.

Abundance – When the supply exceeds the demand.

Scarcity – When the demand exceeds the supply.

Needs – Things that are absolutely essential and things that people cannot live without.

Wants – Things that are nice to have but are not absolutely essential.

Urgent – Things that are needed right away and that a person needs to have right now. Things that you do not need right away and can wait for are not urgent.

Free Market – A market with lots of willing buyers and lots of willing sellers who are in an equal position to negotiate a price that is fair to both the buyer and the seller.

Monopoly – A market with lots of buyers but only one seller who is therefore able to determine the price paid by the buyers.

Knowledge Economy – An economy where businesses make money from exchanging knowledge via websites like Google, Facebook, etc.

Government – A group of people who decide what rules families and businesses must comply with and controls certain public services such police, fire fighters, transportation and schools. Governments are funded by taxes and fees.


Circle the correct word.

1. When you have a monopoly / competition, one business controls everything.

2. A service / product business means you do something for people instead of selling them a thing like food or computers.

3. To cooperate / compete means to work together for the benefit of all.

4. Public / Private services usually are roads, schools and libraries.

5. When people want things, this is called supply / demand.

6. If the supply is low and the demand is high, prices go up /down.

7. An employee / entrepreneur is a person who wants to start a business.

8. Buying food is a mandatory / discretionary expense.


What’s Next?

Now that we understand some business basics, in the next lesson, we will will learn about how a successful business works.