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Supply and Demand and Study Guide

We pass our years, most of us, contemplating the relationship between the money we earn and the money we need, our thoughts suspended, as it were, between the two. Economics is about what we earn and what we get for it. So an understanding of economics is an understanding of life’s principal preoccupation”. as well as its role in keeping us abreast of policy issues of relevance: “There’s another thing it can do for you. The newspaper headlines, when they escape from sex and the Middle East, are largely concerned with the economic decisions of governments.

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If people make no effort to understand these decisions, do not have an intelligent position and do not make that position known, they obviously surrender all power to those who do understand, pretend to understand or believe they understand. And you can be sure that the decisions so made will rarely be damaging to those who make them or to the people they represent”. Source: Galbraith J. and N. Salinger (1978) Almost everyone’s guide to economics, Boston: Houghton Mifflin, p. Economics is concerned with what is termed the economic problem. This fundamental problem, which is faced by all individuals and communities, centres on the inability of available resources to produce the goods and services that are required to satisfy all the material needs and wants of individuals and communities and that choices must be made between alternatives. Aim The aim of this unit is to help you to develop the understanding, knowledge and practical decision-making skills expected of professionals in the modern economy.

Microeconomics will introduce you to the meaning and applications of fundamental economic principles and analytical techniques. Learning objectives This unit is designed to introduce students to the meaning and application of fundamental economic principles, and techniques, within a market context. On completion of this unit, students should be able to: • describe some of the fundamental methods and tools of economics • describe the scientific method of analysis explain the economic factors affecting individuals and firms in modern market economies • analyse the market mechanism for allocation and distribution • describe the impact of incentives on individual and firm behaviour and simple models of how actors respond to incentives in a variety of situations • analyse simple market relationships in a variety of individual, firm–based and international contexts • identify the limitations of the market mechanism and the role of government in markets • identify elementary economic principles, models and data in a range of contexts • apply elementary microeconomic principles in new contexts

Overview of the unit “The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else. ” Source: John Maynard Keynes, (1936) The General Theory of Employment, Interest and Money, Harcourt, Brace & World Inc. Economic ideas provide a conceptual framework for understanding the forces that shape our personal and public lives. Economies (people! ), faced with scarcities, have to make decisions about the way resources are allocated.

• construct a supply schedule and a supply curve • make predictions about price changes using the demand and supply model. Demand and supply In this topic we are going to look at the choices of individual consumers and producers and how they affect the price and quantity of goods and services traded in the market. In doing so we will determine the demand for goods and services by consumers and the supply of goods and services by producers. This will enable us to learn about the laws of demand and supply and to derive the main model used in economics, that of demand and supply. The law of demand

The law of demand describes the inverse relationship between the price of a good or service and the quantity that consumers are willing and able to buy, all other things remaining constant. You should understand the explanation in terms of income and substitution effects (see page 77 of the text). Demand schedule or curve The quantity demanded of a good or service is the amount consumers plan to buy in a given period of time and is represented by the demand schedule or curve. The amount consumers plan to buy depends on many factors. These are covered in the textbook, pages 76–84. Figure 3. 4 provides a compact summary and is particularly important.

Students often use the terms movements along the demand curve and shifts of the demand curve interchangeably. It is important that you should make sure you understand the difference. Supply schedule or curve Producers must also deal with scarcity when making decisions about production of goods and services. They must deal with limited resources and technology levels. The quantity of a good or service that producers are prepared to supply at a given period of time is represented by the supply schedule or curve. The rationale for an upward sloping supply curve is given on pages 84–85. Businesses are only prepared to supply a larger quantity at a higher price because they need to be compensated for the higher costs they have incurred in producing more.

We will return to consider this in greater detail in Topic 5. The amount that any individual firm is prepared to supply also depends on many factors, which are covered in the textbook, pages 84-89. Figure 3. 6 is particularly important. Equilibrium Whereas consumers and producers make individual decisions, the price and quantity traded in the market is determined by the interplay of their decisions. When the demand curve for consumers and the supply curve for producers are placed together in one model, the point of intersection will determine the equilibrium in the market. The equilibrium price is the only price that is simultaneously on both the demand and the supply curve.

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