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Economics Made Simple
Just the Facts, ma'am ...
Welcome to the Economic Way of Thinking. My name is Equilibrium and I will be your guide throughout a simplified economic experience. I get a little excited every time I have the opportunity to talk about economic concepts! You will learn, I hope, about me and other economic concepts. Then, I trust you have a rudimentary knowledge of the economic way of thinking and will be just as excited about it as I am! Let's have fun as we learn The Economic Way of Thinking!
Let's discuss our objectives!
Having objectives keeps everyone focused. Realizing that economics isn’t as hard as it may sound should be an objective. The following are other objectives that you may desire to keep you on target. They may be ascertained directly or indirectly.
After completing this course you should:
- Understand the Market Concept
- Understand the Law of Demand
- Explain why the demand curve has a negative slope
- Understand the Law of Supply
- Explain why the supply curve has a positive slope
- Explain why equilibrium (that's me) though desirable is hard to achieve
- Explain a Price System
- Consider the best Opportunity Costs when faced with a decision
Let’s learn about Opportunity Cost
Microeconomics is the study of how people cope with limited resources in their attempt to satisfy personal needs and wants.
As an individual, for example, you face the problem of having only limited resources with which to fulfill your wants and needs, so, with your money, you must make certain choices. You’ll probably spend part of your money on rent, electricity, and food. Then you might use the rest to go to the movies and/or buy a new pair of designer jeans.
Economists, interested in the choices you make, inquire into why, for instance, you might chose to spend your money on a new blu-ray player instead of going to the theater or deciding to update your cable subscription. They would want to know whether you would rather spend money on repairing your 2005 Ford or buying a brand new 2017 Mustang.
The underlying essence of economics is trying to understand how both individuals and nations behave in response to certain material constraints. And this brings us to the subject of opportunity costs.
So, Just What Are Opportunity Costs?
Opportunity cost is the value of what is foregone in order to have something else. (Investopedia.com 2002)
This value is personal to each individual. Recently I sacrificed purchasing a big screen TV for the necessity of upgrading my computer. For me, the new computer had a greater worth than a big screen TV. Later I may decide that having a big screen TV can be just as important as working with my new computer. The opportunity cost of an individual’s decisions, therefore, is determined by his or her needs, wants, time, and resources (finances). (Investopedia.com 2002)
Deciding the Best Sacrificing Alternatives
This example can be expanded to that of a country’s possibility curve. A possibility curve takes into consideration all the different opportunities available along with the choices that can be applied.
If a student has a choice between going to a concert with a best friend and working after school then the opportunity cost will be the value of giving up time with your friend to attend the concert vs. working at Walgreen’s after school.
The Law of Demand
Demand refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded is the amount of a certain product people are willing to buy at a certain price, and the relationship between price and quantity demanded is known as the demand relationship.
The Law of Demand states that there is an inverse (opposite) relationship between the price of a good and the quantity buyers are willing to purchase.
A Demand Schedule shows the specific quantity of a good or service that people are willing and able to buy at different prices.
If there is a demand for the new movie that has been made available on DVD and there are just a few in stock—then the price will be higher because of the limited supply.
The Law of Supply
Supply represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The correlation between price and how much of a good or service is supplied into the market is known as the supply relationship. Price therefore, is a reflection of supply and demand.
The Law of Supply is the principle that there is a direct relationship between the price of a good and the quantity sellers are willing to offer for sale.
Supply Curves Have Positive Slopes.
Only at a higher price will it be profitable for sellers to incur the higher opportunity cost with producing larger quantities.
At Equilibrium, supply and demand are equal. The allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded.
Other Terms You Need to Know
A Market Is ….any arrangement in which buyers and sellers interact to determine price and quantity of goods/services sold.
You are familiar with your local supermarket. There you (the buyer) are presented with an array of items that are for purchase from the store (the seller.) Most of his goods are from others (manufacturer, wholesalers, and distributors) and are made available all in one place. Instead of you having to rush all over town to find sellers who can provide you with the goods you need—the supermarket has many items all “under one roof.”
Market Demand is …the summation of individual demand schedules
If you were to put together all the needs and desires of every single person; you would have a market demand.
Market Supply is …the horizontal summation of all the quantities supplied at various prices that might prevail in the market.
A Price System is …a mechanism that uses the forces of supply and demand to create equilibrium through rising and falling prices.
What Happens When Price Change?
When Prices Change …
The demand curve does not shift – there is a change in the quantity demanded
The supply curve does not shift– there is a change in the quantity supplied
Note: When something other than price changes …the whole demand curve shifts– there is a change in demand.
THE ECONOMIST'S TOOL KIT
Everyone studying Economics should have at their disposal a method of making the process manageable. As a good carpenter uses tools to accomplish his goals; so should you when studying economics. Here are your tools.
Finding the Equilibrium Price and Quantity
Step one: Label the vertical axis as the price per unit of the good or service and the horizontal axis as the quantity of the good or service per time period. Draw a downward-sloping demand curve and label it D. Draw an upward-sloping supply curve and label it S. Label the price where the quantity demanded equals the quantity supplied as P* and the corresponding quantity as Q*.
Step two: Choose a price above the equilibrium price and label it P1. Note that the quantity demanded QD is less than the quantity supplied QS and there is a surplus. The size of the surplus is the horizontal dotted line between QD and QS.
Step three: Choose a price below the equilibrium price and label it P2. Note that the quantity supplied QS is less than the quantity demanded QD and there is a shortage. The size of the shortage is the horizontal dotted line between QS and QD.
Step four: Note that in a price system without government interference the conditions of surplus and shortage drawn above is only temporary. After a trial-and-error period of time the forces of surplus and shortage will automatically restore the equilibrium price and quantity as originally drawn in step one.
- Inverse relationship between price and quantity buyers are willing to purchase—Law of Demand
- Demand Curve has a negative slope due to higher prices, few units bought
- Supply Curve has a positive slope, higher prices, and higher profits.
- Direct relationship between price of goods and quantity sellers will produce—Law of Supply
- Arrangement where buyers and sellers interact to determine price & quantity of goods—Market
- Price System—Mechanism that forces supply and demand to create equilibrium through prices
- Price Change—does not cause the demand/supply curve to shift, only quantity demanded and quantity supplied.
- Note: Price can have either a direct or inverse relationship with quantity. Depends on whether buyer or seller.
Now you are ready to explore the Economic Way of Thinking on your own.
(Charts that are from Investopedia.com 2002 are included with their copyright designation.)
Putting What We’ve Learned into Practice
Here is a self-test to check your understanding regarding economic concepts. Let’s say that you are an advent collector of rare books. You are visiting one of your favorite establishments when you discover what looks like an extremely old book. To your wonder and surprise it looks like an extremely rare copy of Jules Verne’s Journey to the Center of the Earth. You can hardly contain your joy. The book costs $75.00. However, you promised your best friends you would accompany them to an off-Broadway musical which also cost $75.00. You have been waiting all season to attend this production and this is the last day. You only have $80.00. Which will you choose?
© 2014 Jacqueline Williamson BBA MPA MS