Law of supply - Wikipedia
Thus an important part of Economics is the study of policies and activities for the is related to the value of Gold, which in turn is valued by amount or number of goods the relation between gold and currencies is not as strict as it used to be. Economists use calculus in order to study economic change whether it involves the Using variables to denote quantities allows general relationships between . The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known.
This method aggregates the sum of all activity in only one market. General-equilibrium theory studies various markets and their behaviour. It aggregates the sum of all activity across all markets. This method studies both changes in markets and their interactions leading towards equilibrium. Production theory basicsOpportunity costEconomic efficiencyand Production—possibility frontier In microeconomics, production is the conversion of inputs into outputs.
Introduction to Economics
It is an economic process that uses inputs to create a commodity or a service for exchange or direct use. Production is a flow and thus a rate of output per period of time. Distinctions include such production alternatives as for consumption food, haircuts, etc. Opportunity cost is the economic cost of production: Choices must be made between desirable yet mutually exclusive actions. It has been described as expressing "the basic relationship between scarcity and choice ".
Part of the cost of making pretzels is that neither the flour nor the morning are available any longer, for use in some other way. The opportunity cost of an activity is an element in ensuring that scarce resources are used efficiently, such that the cost is weighed against the value of that activity in deciding on more or less of it.
Opportunity costs are not restricted to monetary or financial costs but could be measured by the real cost of output forgoneleisureor anything else that provides the alternative benefit utility. Other inputs may include intermediate goods used in production of final goods, such as the steel in a new car. Economic efficiency measures how well a system generates desired output with a given set of inputs and available technology.
Efficiency is improved if more output is generated without changing inputs, or in other words, the amount of "waste" is reduced. A widely accepted general standard is Pareto efficiencywhich is reached when no further change can make someone better off without making someone else worse off. An example production—possibility frontier with illustrative points marked.
The production—possibility frontier PPF is an expository figure for representing scarcity, cost, and efficiency.
In the simplest case an economy can produce just two goods say "guns" and "butter". The PPF is a table or graph as at the right showing the different quantity combinations of the two goods producible with a given technology and total factor inputs, which limit feasible total output. Each point on the curve shows potential total output for the economy, which is the maximum feasible output of one good, given a feasible output quantity of the other good.
Scarcity is represented in the figure by people being willing but unable in the aggregate to consume beyond the PPF such as at X and by the negative slope of the curve. This is because increasing output of one good requires transferring inputs to it from production of the other good, decreasing the latter.
The slope of the curve at a point on it gives the trade-off between the two goods. It measures what an additional unit of one good costs in units forgone of the other good, an example of a real opportunity cost. Thus, if one more Gun costs units of butter, the opportunity cost of one Gun is Butter.
Along the PPF, scarcity implies that choosing more of one good in the aggregate entails doing with less of the other good. Still, in a market economymovement along the curve may indicate that the choice of the increased output is anticipated to be worth the cost to the agents. By construction, each point on the curve shows productive efficiency in maximizing output for given total inputs.
A point inside the curve as at Ais feasible but represents production inefficiency wasteful use of inputsin that output of one or both goods could increase by moving in a northeast direction to a point on the curve. Examples cited of such inefficiency include high unemployment during a business-cycle recession or economic organization of a country that discourages full use of resources. Being on the curve might still not fully satisfy allocative efficiency also called Pareto efficiency if it does not produce a mix of goods that consumers prefer over other points.
Much applied economics in public policy is concerned with determining how the efficiency of an economy can be improved. Recognizing the reality of scarcity and then figuring out how to organize society for the most efficient use of resources has been described as the "essence of economics", where the subject "makes its unique contribution.
Specialization is considered key to economic efficiency based on theoretical and empirical considerations. According to theory, this may give a comparative advantage in production of goods that make more intensive use of the relatively more abundant, thus relatively cheaper, input. Even if one region has an absolute advantage as to the ratio of its outputs to inputs in every type of output, it may still specialize in the output in which it has a comparative advantage and thereby gain from trading with a region that lacks any absolute advantage but has a comparative advantage in producing something else.
It has been observed that a high volume of trade occurs among regions even with access to a similar technology and mix of factor inputs, including high-income countries. This has led to investigation of economies of scale and agglomeration to explain specialization in similar but differentiated product lines, to the overall benefit of respective trading parties or regions.
Among each of these production systems, there may be a corresponding division of labour with different work groups specializing, or correspondingly different types of capital equipment and differentiated land uses. More total output and utility thereby results from specializing in production and trading than if each country produced its own high-tech and low-tech products.
Theory and observation set out the conditions such that market prices of outputs and productive inputs select an allocation of factor inputs by comparative advantage, so that relatively low-cost inputs go to producing low-cost outputs. In the process, aggregate output may increase as a by-product or by design.
A measure of gains from trade is the increased income levels that trade may facilitate. Supply and demand The supply and demand model describes how prices vary as a result of a balance between product availability and demand.
The graph depicts an increase that is, right-shift in demand from D1 to D2 along with the consequent increase in price and quantity required to reach a new equilibrium point on the supply curve S.
Prices and quantities have been described as the most directly observable attributes of goods produced and exchanged in a market economy. In microeconomicsit applies to price and output determination for a market with perfect competitionwhich includes the condition of no buyers or sellers large enough to have price-setting power. For a given market of a commoditydemand is the relation of the quantity that all buyers would be prepared to purchase at each unit price of the good.
Demand is often represented by a table or a graph showing price and quantity demanded as in the figure. Demand theory describes individual consumers as rationally choosing the most preferred quantity of each good, given income, prices, tastes, etc.
A term for this is "constrained utility maximization" with income and wealth as the constraints on demand. Here, utility refers to the hypothesized relation of each individual consumer for ranking different commodity bundles as more or less preferred. The law of demand states that, in general, price and quantity demanded in a given market are inversely related.
That is, the higher the price of a product, the less of it people would be prepared to buy other things unchanged. As the price of a commodity falls, consumers move toward it from relatively more expensive goods the substitution effect.
In addition, purchasing power from the price decline increases ability to buy the income effect. Other factors can change demand; for example an increase in income will shift the demand curve for a normal good outward relative to the origin, as in the figure. All determinants are predominantly taken as constant factors of demand and supply. Supply is the relation between the price of a good and the quantity available for sale at that price.
It may be represented as a table or graph relating price and quantity supplied. Producers, for example business firms, are hypothesized to be profit maximizers, meaning that they attempt to produce and supply the amount of goods that will bring them the highest profit. Supply is typically represented as a function relating price and quantity, if other factors are unchanged.
That is, the higher the price at which the good can be sold, the more of it producers will supply, as in the figure. The higher price makes it profitable to increase production. Just as on the demand side, the position of the supply can shift, say from a change in the price of a productive input or a technical improvement. The "Law of Supply" states that, in general, a rise in price leads to an expansion in supply and a fall in price leads to a contraction in supply.
Here as well, the determinants of supply, such as price of substitutes, cost of production, technology applied and various factors inputs of production are all taken to be constant for a specific time period of evaluation of supply. Market equilibrium occurs where quantity supplied equals quantity demanded, the intersection of the supply and demand curves in the figure above.
At a price below equilibrium, there is a shortage of quantity supplied compared to quantity demanded. This is posited to bid the price up. At a price above equilibrium, there is a surplus of quantity supplied compared to quantity demanded. This pushes the price down. The model of supply and demand predicts that for given supply and demand curves, price and quantity will stabilize at the price that makes quantity supplied equal to quantity demanded.
Similarly, demand-and-supply theory predicts a new price-quantity combination from a shift in demand as to the figureor in supply. For a given quantity of a consumer good, the point on the demand curve indicates the value, or marginal utilityto consumers for that unit.
Law of supply
It measures what the consumer would be prepared to pay for that unit. The price in equilibrium is determined by supply and demand. In a perfectly competitive marketsupply and demand equate marginal cost and marginal utility at equilibrium. If the seller's valuation is higher than the buyer's, the buyer will simply say "it's not worth it" or the seller will say "it's worth more than that" and no deal will be made. Of course, you don't haggle about price every time you buy a candy bar, but you still agree on a price.
It's just that the store owner has put up a sign with a price, and you can either accept it or reject it. Neither you nor him want to haggle about something that just costs eighty cents, because it's simply not worth the effort. So even though haggling is not a necessary part of the pricing, both the buyer and seller agrees on the price, and both think they are better off after the exchange.
If you would think you would be worse off after buying something, would you buy it? Of course not, so buying and selling is an act done by free will. Unless of course somebody is pointing a gun at you, but then it's not buying and selling, but stealing.
Now, we know that the price ends up somewhere between the seller's valuation of the item and the buyer's valuation of the item. The question of what the price of an item will be, therefore depends on these valuations. What, then will these valuations depend on? If an object had an intrinsic, objective worth, and both seller and buyer were aware of it and had the same preferences, or valuationthe buyer's and seller's valuation of the object would never overlap, and no deal would ever be cut, because the seller would never be willing to sell it at a price less than the objective worth [or else he would be in loss] and the buyer would never be willing to buy it at a cost higher than the objective worth [why would he?
The subjectiveness of value is necessary for things to be sold and bought at all. Free and Regulated markets[ edit ] The description above is of a free market, where anyone can buy and sell, and where price is set by buyer and seller alone. This is not always the case.
Instead many markets are regulated. For example, not everyone is allowed to sell medicine, claim to be a doctor or drive a taxi. But it goes beyond public security, it can be generalized primarily as a way to protect special interest groups, more than the good of the general public.
Regulated markets include for instance valuable metals, currency, weapons, technical functions practice of medicine, drug production, prescription, sale and even educational accreditation and technology. Of course, it can be said today that all markets are regulated in some way. When the state sets up the rules for making the market function smoothly is not usually seen as making the market non-free, at best it is to exert control protect, managepreserve market social-economic stability and increase national competitiveness.
Money[ edit ] Money is such an obvious and integral part of today's society, that it is sometimes difficult to imagine society without it. It's also a very abstract concept, and can be hard to grasp.
It comes in many forms, from special types of sea-shells, to pigs, and via the paper and coin system to digital blips in a computer. But what is money, really? As we have seen, people value things differently.
But communicating this value to somebody else is a problem. The only way you can communicate this value is by comparing it with other things. But since all others, just like you, have subjective values, it becomes complex and confusing.
This gets evident if we look at how value impacts on barter The complexities of barter[ edit ] Note: While barter may indicate simply a system of exchange by which goods or services are directly exchanged for other goods or services without using a medium of exchange, such as money. This section covers only the simpler direct and immediate barter system, without inter-mediation or complex future planning. This can become an disingenuous comparison, in benefits and efficiency when in direct comparison with a more complex and elaborate system.
When exchanging goods by barter, you need to find something you want more than something you have, while the person you barter with has to value the thing you have more than the thing you want. There are four individual valuations that must match. An example might clear things up: If what you really want is some shoes, and the thing you have that you want to get rid of is a chair, you have to find a shoemaker that needs a chair, or you will not get any shoes.
Economics - Wikipedia
Say that the shoemaker instead needs a lamp. Then you can find somebody else that needs a chair, and has a lamp, barter that, and then go to the shoemaker. Now, the big problem here is that when you are to value the lamp, it is no longer what you think of the lamp that is important. It's what the shoemaker thinks of the lamp. You need to guess its average value, so that you can be reasonably sure that the shoemaker will want it.
The effect of this is that you pretty much need to know how people value almost everything, since you'll be forced into bartering almost everything. This type of direct barter system may seem to some as not very efficient, but in fact may be extremely efficient if done in the proper context and with the needed infrastructures, especially in today technological world.
The reason we don't do it like that? Well, we can only state that it is not the general norm. There are plenty of communities that still use barter systems.
Bartering is also the system that is adopted as soon as any other more complex system fails or loses trust. But due to the way trade evolved with the appearance of larger markets and adoption of currency the need of an increased level of economic control and taxation become evident to ruling classes and inevitable beyond the level of city states.
The essence of money[ edit ] So in essence, money is a common value system. It quantifies the value of an object in a way that everyone understands, and it makes communicating with others simpler.
Instead of weighing the values of the shoes against the lamp against the chair, you can set a number on it. You can say that your chair is worth five units, the lamp maker can value his lamp to three units and the shoemaker thinks his shoes are worth four units.
We can now instantly and easily compare values. Trading suddenly got much easier. But that's not all. With a common value system that is based on exchangeable entities, we can exchange these entities as payment. You can now go down with your chair to the market, sell the chair to the highest bidder, and then go with your money to the shoemaker, and buy a couple of shoes.
The shoemaker in turn takes the money and goes to the lamp maker. No longer do you need to evaluate the average market value of the lamp, or cut three-way deals. All you need to do is find somebody that is willing to pay what you think your chair is worth, and find a pair of shoes that is cheap enough for you. And it doesn't even end there! Money can be stored because it does not rot like wood or rust like steel. If you have a source of income that is seasonal you can keep the money you make during high-season and buy food with it during low season.
So money is simply a common value system based on exchangeable entities. But this simple concept makes life much less complicated in so many ways.