Equilibrium Point

Equilibrium

Supply Curve

Supply Schedule

Demand Curve

Demand Schedule

Demand And Supply

Market : A group of buyers and sellers of a particular good or service.

Competitive Market : A market in which there are many buyers and many sellers so that each has a negligible impact on the market price.

Competition: Perfect and Otherwise:

Characteristics of a perfectly competitive market:

• The goods being offered for sale are all the same.
• The buyers and sellers are so numerous that none can influence the market price.
• Because buyers and sellers must accept the market price as given, they are often called “price takers.”
• Agricultural market provide good example of perfect competition.
• A market with only one seller is called a monopoly market.
• A market with only a few sellers is called an oligopoly.
• A market with a large number of sellers, each selling a product that is slightly different from its competitors’ products, is called monopolistic competition.

Demand:

• Quantity Demanded: the amount of a good that buyers are willing and able to purchase.
• Law of Demand: the claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises.

Factors:

1. Price: Quantity demanded is negatively related to price. This implies that the demand curve is downward sloping.

2. Income: The relationship between income and quantity demanded depends on what type of good the product is.

• Normal Good: a good for which, other things equal, an increase in income leads to an increase in demand.
• Inferior Good: a good for which, other things equal, an increase in income leads to decrease in demand.

3. Prices of Related Goods

• Substitutes: two goods for which an increase in the price of one good leads to an increase in the demand for the other good.
• Complements: two goods for which an increase in the price of one good leads to a decrease in the demand for the other good.

4. Tastes and Preferences:

5. Expectations: This could include expectations of future income or expectations of future price changes.

The Demand Schedule and the Demand Curve:

• Demand Schedule: a table that shows the relationship between the price of a good and the quantity demanded.
• Demand Curve: a graph of the relationship between the price of a good and the quantity demanded.

Market Demand Versus Individual Demand:

• The market demand is the sum of all of the individual demands for a particular good or service.
• The demand curves are summed horizontally — meaning that the quantities demanded are added up for each level of price.
• The market demand is the sum of all of the individual demands for a particular good or service.
• The demand curves are summed horizontally — meaning that the quantities demanded are added up for each level of price.
• The market demand curve shows how the total quantity demanded of a good varies with the price of the good.

Supply:

• Quantity Supplied: the amount of a good that sellers are willing and able to sell.

1. Price: Quantity supplied is positively related to price.

Law of Supply: the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises.

2. Input Prices

3. Technology

4. Expectations

Market Supply Versus Individual Supply:

• The market supply curve can be found by summing individual supply curves.
• Individual supply curves are summed horizontally at every price.
• The market supply curve shows how the total quantity supplied varies as the price of the good varies.

Shifts in the Supply Curve:

1. When any determinant of supply changes (other than price), the supply curve will shift.

2. An increase in supply can be represented by a shift of the supply curve to the right.

3. A decrease in supply can be represented by a shift of the supply curve to the left.

Equilibrium (Demand & Supply are equal): The point where the supply and demand curves intersect is called the market’s equilibrium.

• Equilibrium: a situation in which supply and demand has been brought into balance.
• Equilibrium Price: the price that balances supply and demand.
• The equilibrium price is often called the “market-clearing” price because both buyers and sellers are satisfied at this price.
• Equilibrium Quantity: the quantity supplied and the quantity demanded when the price has adjusted to balance supply and demand.
• If the actual market price is higher than the equilibrium price, there will be a surplus of the good.

Surplus: a situation in which quantity supplied is greater than quantity demanded.

• To eliminate the surplus, producers will lower the price until the market reaches equilibrium.
• If the actual price is lower than the equilibrium price, there will be a shortage of the good.
• Shortage: a situation in which quantity demanded is greater than quantity supplied.
• Sellers will respond to the shortage by raising the price of the good until the market reaches equilibrium.

Law of Supply and Demand: the claim that the price of any good adjusts to bring the supply and demand for that good into balance.

Production Possibilities Frontier

Circular Flow Diagram

Thinking Like an Economist

ECONOMICS a SCIENCE & POLITICS: The essence of Science however, is the scientific method – the dispassionate development and testing of theories about how the world works.

• The interplay between theory and observation also occurs in the field of Economics.

• The theory might assert that high Inflation arises when the government prints too much money.

• It gets proved when Economist collects and analyzes data on prices and money from country.

• Theory & Observation like science, they do face an obstacle that makes their task especially challenging.

• Experiments are often difficult in Economics – thus shows the sign of politics. A scenario of unanticipation.

THE ROLE OF ASSUMPTIONS:

• Making an assumption greatly simplifies the problem without substantially affecting the answer.

• Assumptions can make the world easier to understand.

• For Instance, once we understand International trade in an imaginary world with two countries and two goods, we are in a better position to understand International trade in the more complex world in which we live.

• Assumptions help knowing the magnitude of at least two or more variables impact in the given Economy.

ECONOMIC MODELS:

• The doctors use major plastic organs like – the heart, liver, kidneys etc. to explain how the body organs functions.

• Likewise, Economist also uses models to learn about the world, but instead of being made of plastic, they are most often composed of diagrams and equations.

• “Models are structures involving relationships among concepts”

• Economic models omit many details to allow us to see what is truly important.

The Circular-Flow Model: The circular-flow model is a simple way to visually show the economic transactions that occur between households and firms in the economy.

The Production Possibilities Frontier: The production possibilities frontier is a graph showing the various combinations of output that the economy can possibly produce, given the available factors of production and technology.

Microeconomics and Macroeconomics:

• Microeconomics focuses on the individual parts of the economy. How households and firms make decisions and how they interact in specific markets
• Macroeconomics looks at the economy as a whole. How the markets, as a whole, interact at the national level.

Two Roles of Economists: When they are trying to explain the world, they are scientists. When they are trying to change the world, they are policymakers.

• Positive statements are statements that describe the world as it is. Called descriptive analysis.
• Normative statements are statements about how the world should be. Called prescriptive analysis.

Chapter: Thinking Like an Economist