1. Introduction to Economics.pdf

 ECONOMICS One standard definition of economics is the study of the production, distribution, and consumption of goods and services. But the main thing about economics is that everything revolves around choices -- that is, concerning the allocation of scarce re...

 ECONOMICS One standard definition of economics is the study of the production, distribution, and consumption of goods and services. But the main thing about economics is that everything revolves around choices -- that is, concerning the allocation of scarce resources. ALFRED MARSHALL Marshall may be the least recognized of the great economists as he did not champion radical theories. However, he is credited with attempting to apply rigorous mathematics to economics to turn economics into more of a science than a philosophy. He published “Economics of Industry” in 1892, in which he popularised the use of supply and demand functions and equilibrium as tools of price determination. ALFRED MARSHALL Marshall was the first to develop the standard supply and demand graph demonstrating several fundamentals regarding supply and demand, including the supply and demand curves, market equilibrium, the relationship between quantity and price regarding supply and demand, the law of marginal utility, the law of diminishing returns, and the ideas of consumer and producer surpluses. Economists now use this model in various forms, using different variables to demonstrate several other economic principles.  THE LAW OF SUPPLY The law of supply is the microeconomic law that states that all other factors being equal, P₃ as the price of a good or service increases, C the number of goods or services that P₂ suppliers offer will increase, and vice versa. B Unlike demand, supply refers to the P₁ willingness of a seller to sell the specified A amount of a product within a particular price and time. Together with demand, the QS₁ QS₂ QS₃ law of supply forms half of the law of demand and supply. FACTORS AFFECTING SUPPLY OUTSIDE OF CETERIS PARIBUS COST OF PRODUCTION | NATURAL CONDITIONS | TECHNOLOGY | FACTOR PRICES AND THEIR AVAILABILITY | TRANSPORT CONDITIONS | PRICES OF RELATED GOODS AND SERVICES | GOVERNMENT POLICIES THE LAW OF DIMINISHING MARGINAL RETURNS Focused on the Supply side of the graph, ceteris paribus, if one factor of production is increased while other factors are held constant, the marginal output per unit will eventually diminish. Also known as “Diminishing Marginal Productivity.”  EQUILIBRIUM Consumers and producers react differently to price changes. Higher prices tend to reduce demand while encouraging supply, and lower prices increase demand while discouraging supply. Economic theory suggests that, in a free market, there will be a single price that brings demand and supply into balance, called equilibrium price. The equilibrium price is also called the “Market Clearing Price” because, at this price, consumers will buy the exact quantity producers take to market, and there will be nothing ‘left over.’ This is efficient because there is neither excess supply and wasted output nor a shortage – the market clears efficiently.  EQUILIBRIUM S The equilibrium price is the price at which the quantity demanded equals the P Equilibrium quantity supplied. It is determined by the intersection of the demand and supply curves. D Q  EQUILIBRIUM S P₃ Surplus - If the price exceeds the equilibrium price. EP Shortage - If the price is below the equilibrium price. P₁ D Q₁ EQ Q₃  MARKET SATURATION Market saturation is a situation that arises when the volume of a product or service in a marketplace has been maximized. In these kinds of “market is full” conditions, a supplier’s growth can be achieved through various product improvements, designing products to wear down with time, creating price differentiations such as low-cost or premium pricing, and being disruptive in a market to create demand.  The Demand Schedule P QD P 120 0 100 5 80 10 60 15 40 20 20 25 0 30 QD P The Demand Schedule 30 QD P 25 120 0 100 5 20 D 80 10 15 60 15 10 40 20 20 25 5 0 30 0 20 40 60 80 100 120 QD The Demand Schedule QD P 0 4 96 8 80 16 48 24 16 0  The Demand Function Qxᵈ(Px) = nQx - nPx Where: Qxᵈ = x-axis value (Px) = Independent Variables n = Delimiters / Given Qx = Quantity Demanded Px = y-axis value / Price  The Demand Function QD P Qxᵈ = 128 - 4Px 128 0 = 128 - 4(0) 4 = 128 - 0 96 8 Qxᵈ = 128 80 Qxᵈ = 128 - 4Px 16 (0) = 128 - 4Px 48 4Px = 128 Px = 32 24 16 0 32  P The Demand Function 32 QD P 128 0 4 96 8 80 16 48 24 16 QD 0 32 0 128  The Demand Function Qxᵈ = 128 - 4Px QD P Qxᵈ = 128 - 4Px (80) = 128 - 4Px = 128 - 4(4) 4Px = 128 - 80 128 0 = 128 - 16 4px = 48 112 4 Qxᵈ = 112 Px = 12 96 8 Qxᵈ = 128 - 4Px Qxᵈ = 128 - 4Px (48) = 128 - 4Px 80 12 = 128 - 4(16) 4Px = 128 - 48 =128 - 64 4px = 80 64 16 Qxᵈ = 64 Px = 20 48 20 Qxᵈ = 128 - 4Px Qxᵈ = 128 - 4Px 32 24 = 128 - 4(24) (16) = 128 - 4Px =128 - 96 4Px = 128 - 16 16 28 Qxᵈ = 32 4px = 112 Px = 28 0 32  P The Demand Schedule 32 QD P 128 0 28 112 4 24 96 8 20 80 12 16 64 16 12 48 20 8 32 24 16 28 4 QD 0 32 0 16 32 48 64 80 96 112 128 The Supply Schedule P QS Supply Function: Qxˢ(Px) = nQx + nPx 0 Qxˢ = 0 + 5Px Qxˢ = 0 + 5Px Qxˢ = 0 + 5Px 10 = 0 + 5(0) = 0 + 5(4) = 0 + 5(8) =0+0 = 0 + 20 = 0 + 40 4 Qxˢ = 0 Qxˢ = 20 Qxˢ = 40 30 Qxˢ = 0 + 5Px Qxˢ = 0 + 5Px Qxˢ = 0 + 5Px (10) = 0 + 5Px (30) = 0 + 5Px (50) = 0 + 5Px 8 -5Px = 0 - 10 -5Px = 0 - 30 -5Px = 0 - 50 -5Px = -10 -5Px = -30 -5Px = -50 -5 -5 -5 -5 -5 -5 50 Px = 2 Px = 6 Px = 10 The Supply Schedule P QS Supply Function: Qxˢ(Px) = nQx + nPx 0 0 Qxˢ = 0 + 5Px Qxˢ = 0 + 5Px Qxˢ = 0 + 5Px 2 10 = 0 + 5(0) = 0 + 5(4) = 0 + 5(8) =0+0 = 0 + 20 = 0 + 40 4 20 Qxˢ = 0 Qxˢ = 20 Qxˢ = 40 6 30 Qxˢ = 0 + 5Px Qxˢ = 0 + 5Px Qxˢ = 0 + 5Px (10) = 0 + 5Px (30) = 0 + 5Px (50) = 0 + 5Px 8 40 -5Px = 0 - 10 -5Px = 0 - 30 -5Px = 0 - 50 -5Px = -10 -5Px = -30 -5Px = -50 -5 -5 -5 -5 -5 -5 10 50 Px = 2 Px = 6 Px = 10 Solving for Equilibrium Equilibrium Function: Qxᵈ = Qxˢ Qxᵈ = 100 - 3P P* = 16 If Qxᵈ = 100 - 3P = 100 - 3(16) Qxˢ = 20 + 2P Q* = 52 = 100 - 48 (Q*, P*) = (52, 16) Qxᵈ* = 52 Qxᵈ = Qxˢ S 100 - 3P = 20 + 2P Qxˢ = 20 + 2P 100 - 20 = 3P + 2P = 20 + 2(16) 80 = 5P = 20 + 32 16 5 5 Qxˢ* = 52 P* = 16 Qxᵈ = Qxˢ D 52