Describe the Basic principles of the American Economy?

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Answered by: Tony, An Expert in the Basics of US Economy Category
The Basic Principles of the American Economy are derived from the concept of Supply and Demand. Anytime a person goes to a supermarket, shoe store, or Automobile Dealership, their status as a potential consumer causes the price of goods to fluctuate up or down. The idea is that a product's price will increase as it is demanded more, and will decrease as it is demanded less. As such, the price of an iPad was far greater than a mp3 player made by Sony because the consumer base for Apple Products is currently far greater than that for similar products made by Sony.



This could further be seen with HP's new TouchPad. Because the current price was far greater than the consumer base (which was relatively small at the time) would accept, HP was forced to lower the price of the product tremendously just to clear their inventory.

This idea is supplemented by how much or how little of the product is supplied by a given company. For instance, two very similar products (for instance, a car) are demanded by exactly the same number of people (let's say 1,000). If company A decides to release 200 cars and company B decides to release 500 cars, then experience would tell us that competition between consumers would drive the price of company A's car higher than that of company B's car.



Again using the iPad example, we can assume that, with a constant consumer base, the lower the total number of iPads that are released is, the higher the price for each unit would become. Once again, competition between consumers causes the price to go up as each consumer attempts to outbid other consumers on the open market.

The key basic principles of the American Economy are finalized when the ideas behind supply and demand are combined, as it the case in the real-world. The American Economy is a very complex system made up of millions of consumers and retailers who are each seeking the maximum payoff for their input. What ends up happening is that everyone must compromise in order to keep their personal gains from being at the highest level that is realistically attainable. Companies are constantly determining how much of a product to release out into the market based on the number of potential consumers they anticipate. On the other hand, consumers are adjusting their willingness to pay a certain price based on how badly they want a product and how much is actually available. When these two sides collide, it becomes obvious that a compromise must be made. Release too little of a product, and the company will take a financial loss as their revenue will suffer. Release too many, and they risk saturating their consumer base and ruining the selling value of their product (as HP found with the TouchPad). Once a point of equilibrium is discovered, then that is the point at which a product will be bought and sold under the open market. At this point, the unit price allows a company to cover their costs while still preserving a consumer base driven by competition.

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