Economics: Scarcity, Supply, and Demand

Basic Concepts in Economics

• Economics studies how entities make choices about resource allocation.
• Scarcity is the limited availability of resources to meet unlimited consumer wants and needs.
• Resources are finite, while human desires are virtually limitless.
• Resource distribution is uneven, leading to scarcity in specific areas.

When Scarcity Occurs

• Population growth increases resource demand, leading to scarcity.
• Economic development consumes more resources, depleting them faster.
• Natural disasters disrupt resource supply, causing scarcity.
• Wars and political instability affect resource distribution, contributing to scarcity.
• Technological changes can increase consumption and exacerbate scarcity.
• Scarcity is an inherent issue due to limited resources and unlimited wants.

Supply and Demand

• It's the relationship between the quantity of a good/service sellers offer and the quantity buyers want.
• Interaction determines market prices and is fundamental in economics.

Supply and Demand Relationship

• Law of Demand: Price decreases, demand increases, vice versa
• Individuals tend to buy more when something is cheaper.
• Law of Supply: Price increases, supply increases, vice versa
• Producers tend to sell more when they can sell at a higher price.
• Equilibrium is where supply and demand curves intersect, resulting in balanced market.

Factors Influencing Demand

• Price is a primary factor
• Higher income levels lead to increased demand for goods
• Changes in consumer preferences affect demand
• Prices of substitutes and complements affect demand
• Expectations of future price increases can increase current demand
• Population increases lead to higher demand for goods

Factors Influencing Supply

• Higher production costs decrease supply
• Technological advancements increase supply through efficient production
• Rising prices of related goods can reduce the supply of the original good.
• More suppliers increase total market supply
• Subsidies increase supply; taxes decrease supply.
• Weather and natural disasters impact supply, especially in agriculture.

Market Dynamics

• Increased demand leads to rising prices and encourages increased production.
• Increased supply leads to falling prices and encourages increased consumption.
• Decreased supply/demand can lead to higher prices/lower quantities.
• Understanding these relationships aids business and policy decisions.

Opportunity Cost

• It represents the value of the next best alternative when making a decision.
• It includes time, effort, and resources, not just financial costs.
• It helps make better decisions by considering trade-offs.

Factors Influencing Opportunity cost

• Limited resources increase opportunity costs
• Different entities value outcomes differently.
• Market price fluctuations affect opportunity costs
• Immediate and long-term costs vary.
• Better information lowers opportunity costs through informed decisions.
• Uncertainty and risk increase perceived opportunity cost.
• Personal/organizational goals shape perceptions of opportunity cost.
• Understanding the concept helps allocate resources effectively.

Gross Domestic Product (GDP)

• GDP measures a country's economic performance.
• It represents the total value of all goods and services produced within its borders.

How Is GDP computed

• Output calculates GDP by summing value added at each production stage.
• Income calculates GDP by summing wages, profits, rents, and taxes minus subsidies. GDP = Wages + Rent + Interest + Profits + Taxes - Subsidies
• Expenditure calculates GDP by summing all spending in the economy. GDP = C + I + G + (X - M)
• C =; Consumption: Household spending on good and services
• I = Investment: Spending on capital to be used for future production
• G = Government: Spending: Expenditure by the government on goods and services
• (X-M) = Net Exports: Exports - Imports

Significance of GDP to the Economy

• GDP measures a nation's overall economic activity
• Growing GDP signals a healthy economy
• Governments use GDP data to make informed policy decisions
• Weak GDP growth may lead to stimulus measures.
• Businesses use GDP data to make investment decisions.
• GDP per capita estimates the average standard of living.
• GDP allows for comparisons between different countries/regions.
• Governments/businesses use GDP forecasts to plan budgets and activities.
• GDP does have limitations as it doesn't account for: income distribution, environmental factors, or non-market activities.

Inflation

• That's the rate at which the general level of prices for goods and services is rising.
• It decreases purchasing power - need more money to buy the same goods.

Why and When Inflation Occurs

• Demand-Pull Inflation: Demand exceeds supply, and often happens during economic growth with consumer confidence.
• Cost-Push Inflation: Rising production costs lead to higher prices and it can be triggered by raw materials, wages, or supply chain issues.
• Built-In Inflation: Businesses/workers expect future inflation, leading to rising wages and prices. A cause is wage increases are demanded and granted, which in turn raises production costs and subsequently prices.
• Monetary Inflation: Results from increased money supply. The cause is that central banks printing more money or reducing interest rates increases the money supply.

Causes of Inflation Occurs

• Strong economic activity and consumer confidence lead to demand-pull inflation
• Supply shocks cause cost-push inflation
• Central bank actions can increase the money supply, fueling inflation.
• Fiscal policies boost demand, contributing to inflation.

Implications of Inflation

• It erodes the value of money, reducing purchasing power
• Higher prices increase the cost of living
• Central banks may raise interest rates to combat this
• Real income declines if wage growth doesn't keep up
• It erodes the value of savings and Investors seek higher returns
• High and unpredictable Inflation creates economic uncertainty
• It disproportionately affects those on fixed incomes, widening inequality.

Unemployment

• It's being without work despite actively seeking it
• Occurs when capable, willing individuals can’t find work.
• A key indicator reflects the health of an economy.

Causes of Unemployment

• Cyclical: Caused by business cycle fluctuations and the causes: economic downturns and reduced consumer spending.
• Structural: Mismatch between workforce skills and employer needs and its caused by technological advancements and automation
• Frictional: Short-term unemployment arising from matching workers with jobs and its caused by: voluntary job changes, recent graduates, and people relocating
• Seasonal: Occurs due to the nature of work.
• Natural: The sum of frictional and structural unemployment and is caused by: natural job turnover and structural shifts.
• Institutional: Results from long-term institutional factors and is caused by: minimum wage laws, labor unions, and employment protection regulations

Implications of Unemployment

• Reduced Output: Potential economic output falls as unemployed individuals are not contributing
• Lower Income: Unemployment lowers consumer spending
• Increased Government Expenditure: Increased unemployment benefits and social welfare programs
• Mental Health: Can lead to stress, depression, etc
• Social Stability: High unemployment can lead to social unrest
• Skills Deterioration: Makes re-entry more difficult
• Financial Strain: Financial hardships for individuals
• Economic Inequality: Increases inequality
• Demographic Shifts: High youth unemployment

Market Equilibrium

• Consumers' demanded quantity = producers' supplied quantity, resulting in a stable price
• It balances the market without shortages/surpluses

How and When It Happens

• Adjustments occur at the intersection of supply and demand curves

Adjustments to Reach Equilibrium

• Excess Supply (Surplus): Quantity supplied is superior to, potentially reducing, the quantity to meet the equilibrium.
• Excess Demand (Shortage): Quantity demanded is superior, potentially increasing, to the quantity to meet equilibrium.

Market Forces and Self-Correction

• Market forces adjust prices toward it
• Incentives motivate producers to supply based on prices; consumers buy more when prices are low

Factors Affecting Market Equilibrium

• Shifts in Demand: Can increase or decrease, potentially raising or lowering both equilibrium price and quantity
• Shifts in Supply: Can increase or decrease, potentially affecting both the equilibrium price and quantity
• External Factors: Government policies, etc., can impact the market
• Understanding these dynamic forces is essential for businesses, consumers, and policymakers.

Elasticity

• It shows how responsive is either the quantity or supply of a good in response to a change in price.
• Price Elasticity of Demand: measures how much the quantity demanded of a good changes in relation to changes in its price
• Price Elasticity of Supply: measures how much the quantity supplied of a good changes in relation to charges in its price
• Income Elasticity of Demand
• Cross-Price Elasticity of Demand

How Elasticity Is Computed

• Price Elasticity of Demand (PED): % Change in Quantity Demanded / % Change in Price
• Price Elasticity of Supply (PES): % Change in Quantity Supplied / % Change in Price
• Income Elasticity of Demand (YED): % Change in Quantity Demanded / % Change in Income

Examples of Goods

• Normal good will increase in consumer demand as that consumer's income increases
• Restaurant, travel, home renovation, luxury vehicles, etc
• Inferior sees a decrease in customer demand when consumer income increases

Formula to compute elasticity

• Cross Elasticity of Demand (XED): % Change in Quantity Demanded / % Change in Price of Good B

Economic effect of elasticity

• Businesses: pricing strategies such as, increasing income for small business by providing a inelastic product
• Government: tax policies such as, placing tax on inelastic goods
• Supply and demand is very important, can determine future decisions

Monetary Policy

• A central bank influences its country's economy.

Fiscal Policy

• It's when the government uses spending/taxation, including public spending, taxation, and borrowing.

Key elements of taxation

• If a good's price decreases, the quantity demanded increases and is known as (Law of Demand).

Simultaneous Demand and Supply Movements

• Occur when both curves shift in response to market changes
• The final impact makes it complex as the effects can reinforce or counteract.
• Understanding magnitude is crucia;

The Scenarios

• Both increase: Equilibrium quantity increases, price is ambiguous.
• Both decrease: Equilibrium quantity decreases, price is ambiguous.
• Demand increases, supply decreases: The Equilibrium price increasing is a greater amount then the equilibrium quantity.
• Demand decreases, supply increases: Equilibrium price down, equilibrium quantity ambiguous

The Rules

• If either supply or demand increase or decrease depend on the quantity's the price, there is still uncertainty
• In real complex markets, supply and demand shift simultaneously-
• Forecasting and understanding are most important

Market interventions

• Goverments actions to influence social functioning of markets
• They act to correct market failure, or achieve specific economic objectives.
• Price controls can keep goods affordable, direct tax, product standards by goverment

Trade Policy

• A goverment intervenes on international trade to direct the economy

Fiscal and Monetary Policy

• Governments can intervene with each through either action.

Individuals as Consumers

• Consumer actions lead to what can be produced, as consumer preference and feedback is important
• It helps improve all products remain in the market, and send signals to produces what action they should all take.

Individual As Workers

• Workers provide labor for the set wages which affects;
  • Labor Supply
• Skill Development
• Influence Wages
• Increased Econ Growth

Individual as Producers

• They start businesses and influence supply and market competition with their decisions

Individual as Saver

• Saves and invests money that impacts economic growth.

Taxation

• Influences governments and other programs

Price Elasticity Of Demand (PED) formula

• Formula: % Change in Quantity Demanded / % Change in Price