BASIC ECONOMICS REVIEWER PDF

BAECON WEEK 1-2 introduction to Microeconomics Overview of Microeconomics Basic concepts: SCARCITY, TRADE-OFFS and OPPORTUNITY COST Economic systems and Methods WEEK 3-4 Consumer Behavior Utility Theory and Marginal Utility Budget Constraints Indifference Curve Consumer Optimization W...

BAECON WEEK 1-2 introduction to Microeconomics Overview of Microeconomics Basic concepts: SCARCITY, TRADE-OFFS and OPPORTUNITY COST Economic systems and Methods WEEK 3-4 Consumer Behavior Utility Theory and Marginal Utility Budget Constraints Indifference Curve Consumer Optimization WEEK 5-6 Demand and Supply Law of Demand and Demand Curves Factors Affecting Demand Price and Quantity in Demand Equation Law of Supply and Supply Curves Factors affecting Supply Market Equilibrium Microeconomics Microeconomics is the branch of economics that studies the behavior of individual consumers and firms Microeconomics is a branch of economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. ECONOMIST 1. Adam Smith – he was an 18th-century Scottish philosopher; he is considered the father of modern economics. Smith is most famous for his 1776 book, "The Wealth of Nations." The recorded history of Smith's life begins at his baptism on June 5, 1723, in Kirkcaldy, Scotland. His exact birthdate is undocumented, but he was raised by his mother, Margaret Douglas, after the death of his father, Adam Smith. He attended the University of Glasgow at the age of 13 and attended Balliol College at Oxford University, where he studied European literature. Founder of Modern Economics Advocated for laissez-faire policies Author of "The Wealth of Nations" Created concept of gross domestic product (GDP) Smith's most prominent ideas—the "invisible hand" and division of labor—are now foundational economic theories. His theories on economics continue to live on in the 21st century in modern economic theory. The Invisible Hand Theory According to Smith's beliefs and theory, a wealthy nation is one that is populated with citizens working productively to better themselves and address their financial needs. In this kind of economy, a man would invest his wealth in the enterprise most likely to help him earn the highest return for a given risk level. The invisible-hand theory is often presented in terms of a natural phenomenon that guides free markets and capitalism in the direction of efficiency, through supply and demand and competition for scarce resources, rather than as something that results in the well-being of individuals. Gross Domestic Product (GDP) The ideas in "The Wealth of Nations" provided the genesis for the concept of gross domestic product (GDP) and transformed the importing and exporting business. Before the publication of "The Wealth of Nations," countries declared their wealth based on the value of their gold and silver deposits. 2. John Maynard Keynes - John Maynard Keynes was an early 20th-century British economist, best known as the founder of Keynesian economics and the father of modern macroeconomics. One of the hallmarks of Keynesian economics is the idea that governments should actively try to influence the course of economies, especially by increasing spending to stimulate demand in the face of recession.  In his seminal work, "The General Theory of Employment, Interest, and Money"—considered one of the most influential economics books in history—Keynes advocated for government intervention as a solution to high unemployment. British economist John Maynard Keynes was the founder of Keynesian economics. Keynesian economics argues that demand drives supply. To create jobs and boost consumer buying power during a recession, Keynes held that governments should increase spending, even if it means going into debt. Critics attack Keynesian economics for promoting deficit spending, stifling private investment, and causing inflation. Keynes' father was an advocate of laissez-faire economics, an economic philosophy of free- market capitalism that opposes government intervention. Keynes himself was a conventional believer in the principles of the free market (and an active investor in the stock market) during his time at Cambridge. The theories of John Maynard Keynes, known as Keynesian economics, center around the idea that governments should play an active role in their countries' economies, instead of just letting the free market reign. Specifically, Keynes advocated federal spending to mitigate downturns in business cycles. The most basic principle of Keynesian economics is that demand—not supply—is the driving force of an economy. 3. Milton Friedman - one of the leading economic voices of the latter half of the 20th century, popularized many economic ideas that are still important today—most importantly, free-market capitalism and monetarism. Friedman's economic theories became what is known as monetarism, which refuted important parts of Keynesian economics, a school of thought that was dominant in the first half of the 20th century. Friedman’s advocacy of monetarism was so effective that he turned the tide of economic thought away from Keynesian fiscal policy toward monetary policy focused on control of the money supply to control inflation. Over the course of his academic career, Friedman wrote influential articles on the modern economy and published pioneering books that changed the way economics is taught. 4. Karl Marx - His best-known works are the 1848 pamphlet The Communist Manifesto (with Friedrich Engels) and his three-volume Das Kapital (1867–1894); the latter employs his critical approach of historical materialism in an analysis of capitalism, in the culmination of his intellectual endeavours. Marx's ideas and their subsequent development, collectively known as Marxism, have had enormous influence on modern intellectual, economic and political history. Marxism, a body of doctrine developed by Karl Marx and, to a lesser extent, by Friedrich Engels in the mid-19th century. It originally consisted of three related ideas: a philosophical anthropology, a theory of history, and an economic and political program. 5. David Ricardo - he was a classical economist best known for his theory on wages and profit, the labor theory of value, the theory of comparative advantage, and the theory of rents. David Ricardo and several other economists also simultaneously and independently discovered the law of diminishing marginal returns. His most well-known work is Principles of Political Economy and Taxation (1817). David Ricardo was a classical economist who developed several key theories that remain influential in economics. Ricardo was a successful investor and member of Parliament who took up writing about economics after retiring young from his fortunes. Ricardo is best known for his theories of comparative advantage, economic rents, and the labor theory of value. Ricardo's widely acclaimed comparative advantage theory suggests that nations can gain an international trade advantage when they focus on producing goods that produce the lowest opportunity costs as compared to other nations. Ricardo suggested that a good's value is determined by the labor hours invested in its production Comparative Advantage Theory Among the notable ideas that Ricardo introduced was the theory of comparative advantage, which argued that countries can benefit from international trade by specializing in the production of goods for  which they have a relatively lower opportunity cost in production even if they do not have an absolute advantage in the production of any particular good. Labor Theory of Value Another of Ricardo's best-known contributions to economics was the labor theory of value. The labor theory of value states that the value of a good could be measured by the labor that it took to produce it. The theory states that the cost should not be based on the compensation paid for the labor, but on the total cost of production. Theory of Rents Ricardo was the first economist to discuss the idea of rents, or benefits that accrue to the owners of assets solely due to their ownership rather than their contribution to any actual productive activity. In its original application, agricultural economics, the theory of rents shows that the benefits of a rise in grain prices will tend to accrue to the owners of agricultural lands in the form of rents paid by tenant farmers. 6. Friedrich Hayek - a famous economist, well-known for his numerous contributions to the field of economics and political philosophy. Hayek's approach mostly stems from the Austrian school of economics and emphasizes the limited nature of knowledge. He is particularly famous for his defense of free-market capitalism and is remembered as one of the greatest critics of the socialist consensus. Social theorist and political philosopher Friedrich Hayek and his colleague Gunnar Myrdal each won the Nobel Prize in Economics in 1974. His theory on how changing prices relay information that helps people determine their economic plans was a stunning milestone achievement in economics. Hayek's approach to economics mainly came from the Austrian school of economics. He was an ardent defender of free-market capitalism. Hayek is considered by most experts as one of the greatest critics of the socialist consensus. 7. Ragnar Anton Kittil Frisch - an influential Norwegian economist known for being one of the major contributors to establishing economics as a quantitative and statistically informed science in the early 20th century. He coined the term econometrics in 1926 for utilising statistical methods to describe economic systems, as well as the terms microeconomics and macroeconomics in 1933, for describing individual and aggregate economic systems, respectively He was the first to develop a statistically informed model of business cycles in 1933. Later work on the model, together with Jan Tinbergen, won the first Nobel Memorial Prize in Economic Sciences in 1969 Basic concepts: SCARCITY, TRADE-OFFS and OPPORTUNITY COST Scarcity: Scarcity happens when the demand for goods and services is greater than their availability. When scarcity occurs, individuals must allocate limited resources for them to be able to satisfy their needs. 5 SCARS – LAND, LABORER, Entrepreneur/entrepreneurship, Capital, Time TRADE – OFFS - Trade-offs refer to the decision-making process of choosing between several viable alternatives. It can also be defined as a situation in economics wherein a consumer has to choose between two competing alternatives, resulting in giving up one option to pursue another. Refer to the decision-making process of choosing between several viable alternatives. Involve sacrificing the benefits of the option not chosen Opportunity cost represents the potential benefits that a business, an investor, or an individual consumer misses out on when choosing one alternative over another. In microeconomic theory, the opportunity cost of a choice is the value of the best alternative forgone where, given limited resources, a choice needs to be made between several mutually exclusive alternatives. Assuming  the best choice is made, it is the "cost" incurred by not enjoying the benefit that would have been had if the second best available choice had been taken instead. Economic systems and Methods An economic system, or economic order is a system of production, resource allocation and distribution of goods and services within a society. It includes the combination of the various institutions, agencies, entities, decision-making processes, and patterns of consumption that comprise the economic structure of a given community. An economic system operates as the backbone of society, outlining how it creates, distributes, and consumes goods and services. The mode of production is a related concept. All economic systems must confront and solve the four fundamental economic problems: What kinds and quantities of goods shall be produced: This fundamental economic problem is anchored on the theory of pricing. The theory of pricing, in this context, has to do with the economic decision-making between the production of capital goods and consumer goods in the economy in the face of scarce resources. In this regard, the critical evaluation of the needs of the society based on population distribution in terms of age, sex, occupation, and geography is very pertinent. How goods shall be produced: The fundamental problem of how goods shall be produced is largely hinged on the least-cost method of production to be adopted as gainfully peculiar to the economically decided goods and services to be produced. On a broad note, the possible production method includes labor-intensive and capital- intensive methods. How the output will be distributed: Production is said to be completed when the goods get to the final consumers. This fundamental problem clogs in the wheel of the chain of economic resources distributions can reduce to the barest minimum and optimize consumers' satisfaction. When to produce: Consumer satisfaction is partly a function of seasonal analysis as the forces of demand and supply have a lot to do with time. This fundamental economic problem requires an intensive study of time dynamics and seasonal variation vis-a-vis the satisfaction of consumers' needs. It is noteworthy to state that solutions to these fundamental problems can be determined by the type of economic system The study of economic systems includes how these various agencies and institutions are linked to one another, how information flows between them, and the social relations within the system (including property rights and the structure of management). Resource allocation: Economic systems determine how available resources are allocated. Factors of production: These systems regulate land, capital, labor, and physical resources. Institutions and policies: Economic systems encompass institutions, policies, and procedures for making economic decisions. Capitalism is an economic system based on the private ownership of the means of production and their operation for profit. The defining characteristics of capitalism include private property, capital accumulation, competitive markets, price systems, recognition of property rights, self-interest, economic freedom, meritocracy, work ethic, consumer sovereignty, economic efficiency, limited role of government, profit motive, a financial infrastructure of money and investment that makes possible credit and debt, entrepreneurship, commodification, voluntary exchange, wage labor, production of commodities and services, and a strong emphasis on innovation and economic growth Capitalism or capitalist economy is referred to as the economic system where the factors of production such as capital goods, labor, natural resources, and entrepreneurship are controlled and regulated by private businesses. Capitalism - Capitalism generally features the private ownership of the means of production (capital) and a market economy for coordination. Corporate capitalism refers to a capitalist marketplace characterized by the dominance of hierarchical, bureaucratic corporations. Mercantilism was the dominant model in Western Europe from the 16th to 18th century. This encouraged imperialism and colonialism until economic and political changes resulted in global decolonization. Modern capitalism has favored free trade to take advantage of increased efficiency due to national comparative advantage and economies of scale in a larger, more universal market. Some critics have applied the term neo-colonialism to the power imbalance between multi-national corporations operating in a free market vs. seemingly impoverished people in developing countries. Mixed economy There is no precise definition of a "mixed economy". Theoretically, it may refer to an economic system that combines one of three characteristics: public and private ownership of industry, market-based allocation with economic planning, or free markets with state interventionism. In practice, "mixed economy" generally refers to market economies with substantial state interventionism and/or sizable public sector alongside a dominant private sector. Actually, mixed economies gravitate more heavily to one end of the spectrum. Notable economic models and theories that have been described as a "mixed economy" include the following: Georgism – socialized rents on land Mixed economy (It can be categorized under many titles) American School Dirigisme (Government-directed capitalist economy) Indicative planning, also known as a planned market economy Japanese system Nordic model (Social democrat economics of Nordic countries) Progressive utilization theory Corporatism (economies based on tripartite negotiation between labor, capital, and the state) Social market economy, also known as Soziale Marktwirtschaft (Mixed capitalist) New Economic Policy (Mixed socialist) State capitalism (Government-dominated capitalist economy) Socialist Market Economy (Mixed socialist) Socialist economy Socialist economic systems (all of which feature social ownership of the means of production) can be subdivided by their coordinating mechanism (planning and markets) into planned socialist and market socialist systems. Additionally, socialism can be divided based on their property structures between those that are based on public ownership, worker or consumer cooperatives and common ownership (i.e. non-ownership). Communism is a hypothetical stage of socialist development articulated by Karl Marx as "second stage socialism" in Critique of the Gotha Program, whereby the economic output is distributed based on need and not simply on the basis of labor contribution. The original conception of socialism involved the substitution of money as a unit of calculation and monetary prices as a whole with calculation in kind (or a valuation based on natural units), with business and financial decisions replaced by engineering and technical criteria for managing the economy. Fundamentally, this meant that socialism would operate under different economic dynamics than those of capitalism and the price system. Command Economic System Government drives the key economic decisions in command economies about what, how, and at what price goods will be produced, aiming for societal needs over profit. Command economies aim for societal needs fulfillment through centralized planning, but may struggle with creativity and consumer choice limitations. Market Economic System Market economies rely on interactions between producers and consumers, guided by private ownership, competition, and minimal government intervention. Although offering freedom and innovation, market economies can experience pricing volatility and potential business failures. Mixed Economic System Blending elements from both command and market systems, mixed economies feature governmental involvement in crucial sectors while leaving others to private enterprise. While aiming to leverage the advantages of both systems, mixed economies struggle to find the perfect equilibrium between governmental control and market freedom. Traditional Economic System Rooted in heritage and customs, traditional economies run on a system passed down through generations, focusing on self- sufficiency and sustainability but susceptible to external disruptions. Though embracing sustainability and cultural preservation, these economies may lag in technological advancement and adaptability to change. Market Problem and Solutions Market problems are challenges, problems, and unmet needs in a market, encompassing existing customers, target audience, and broader audiences. They are observable and measurable, identifying through qualitative and quantitative research methods. Customers buy products to solve market problems, and if a problem frustrates them and has a cost, such as financial losses or personnel demands, they are likely to value a solution. List of market problems and their solutions 1. Lack of Strategy: Teams without a solid marketing strategy risk wasting resources, misaligning campaigns, and missing business goals. Uncoordinated tactics, such as experimenting with ads, SEO posts, and influencer marketing, are ineffective as competitors adapt to trends. Solution: To solve this problem, it is a must before doing any activities such as wasting money on advertisements, hiring people, etc. The workers or the team should form a good plan, like researching for more innovative proposals, finding the current interests of consumers, planning the whole process, and preparing alternative solutions if problem arise during the process. And lastly, workers must work together to form a good unity, brainstorm, and accept suggestions to build more good solutions. 2. Keeping clients: The task of keeping customers is crucial for marketing teams. Given that attracting new clients is more expensive than keeping hold of current ones, it makes logical. Additionally, you can double your company's revenue with a 5% increase in customer retention. Solution: Reducing customer churn is essential for the sustained growth of your business. By focusing on retention strategies, you can create a strong bond with your current customers and enhance their loyalty towards your brand. One effective approach is to offer special discounts and promotions exclusively to existing customers as a token of appreciation for their continued support. In addition, promptly addressing any inquiries or concerns from customers can help build trust and strengthen the relationship. Furthermore, establishing a customer loyalty program can incentivize repeat purchases and encourage long-term engagement. By implementing these strategies, you can not only retain your existing customer base but also create advocates who will recommend your products or services to others, thereby contributing to sustainable business success. 3. Entering a new market: One of the market problems that businesses encounter during their long-term operations is how they can enter a new market, especially if they don’t have the guts to enter a new one and also have limited resources to enter a new one. Entering a new market is not required for business. but entering a new market can help their business become more successful and achieve more opportunities if they enter the perfect market. Solution: Before deciding if the business will enter a new market, they need to conduct market research to get customer insights, decide what market would fit their taste, check the feasibility, desirability, and viability of the product that would represent the market, check their target market, and lastly, be confident, take a risk, and stop being pessimistic. 4. Staying on top of trends: One of the biggest challenges in marketing is staying on top of trends. Trends change like a weather season; it depends on the influence of social media, people, and businesses. Not every business can keep up with the trends, especially if they don’t have enough resources. Solution: The greatest solution is to focus on trends relevant to the industry you work in. Not every popular dance or new social platform is a good fit for your business. Concentrate on the ones that match your brand. 5. Facing competition: Every market in which a business operates has competition; it is very difficult, especially if the competitor has more advanced resources. A business will be under pressure if its competitor is striving hard. Solution: Conducting a competitor analysis helps understand your competition's strengths and weaknesses, allowing you to capitalize on them. A strong digital marketing strategy is crucial for staying competitive and attracting qualified leads over your competition 6. Operational Failure: Operational failure is a disruption to an organization's operations, resulting from equipment malfunctions, procedural errors, communication breakdowns, or inadequate risk management, when one or more components of the operational ecosystem fail to function as intended. A business faces this kind of a failure if there is an issue in the equipment, supplies, employees. They cannot avoid this kind of problem even if they have an advance equipment. Solution: Since this accident cannot be control, the business should do their best to minimize the error, they should always train the employees to avoid more errors in the future events. The higher-ups must visit the working place more often to see if the equipment are still working perfectly. UTILITY THEORY In economics, utility is a term used to determine the worth or value of a good or service. utility is the total satisfaction or benefit derived from consuming a good or service. Economic theories based on rational choice usually assume that consumers will strive to maximize their utility. "Ordinal" utility refers to the concept of one good being more useful or desirable than another. "Cardinal" utility is the idea of measuring economic value through imaginary units, known as "utils." Marginal utility is the utility gained by consuming an additional unit of a service or good. Utility in economics was first coined by the noted 18th-century Swiss mathematician Daniel Bernoulli. Total Utility If utility in economics is cardinal and measurable, the total utility (TU) is defined as the sum of the satisfaction that a person can receive from the consumption of all units of a specific product or service Marginal Utility Marginal utility (MU) is defined as the additional (cardinal) utility gained from the consumption of one additional unit of a good or service or the additional (ordinal) use that a person has for an additional unit. Importance of Marginal Utility Marginal utility (MU) is crucial in understanding consumer behavior and decision- making. Consumers continue to consume more of a commodity or service when MU is higher than the marginal cost, which is the same as the price of the commodity or service. MU helps companies understand the effectiveness of their products in satisfying user demand, enabling them to design strategies and ensure consistent satisfaction. MU also helps identify market trends and determine product prices, helping companies retain customers and study customer behavior. Overall, MU is essential for understanding consumer equilibrium, identifying market trends, and determining product prices. Factors Affecting Marginal Utility - There are many factors that impact the utility, but the two most important ones are time and first use. Utility is influenced by time and first use. Time refers to the time a user consumes a product or service, such as coffee in the morning or reading books with friends. The right time can lead to more satisfaction. On the other hand, the first unit consumed, such as food, is more likely to provide satisfaction than the subsequent units. For example, consuming a burger when hungry can lead to more happiness. BUDGET CONSTRAINTS Most businesses have limited funds to spend on goods and services. They must, therefore, be selective about how much they spend on each item within their budget constraints. To stay within that budget, they need to determine how much to spend on various items and related costs. In this article, we discuss what budget constraints are, explain how they work and explore opportunity costs and sunk costs. Budget constraint is the total amount of items you can afford within a current budget. Budget constraint illustrates the range of choices available within that budget. Opportunity cost is the amount or item you give up in exchange for something else. In economics, a budget constraint represents all the combinations of goods and services that a consumer may purchase given current prices within their given income. Consumer theory uses the concepts of a budget constraint and a preference map as tools to examine the parameters of consumer choices. Both concepts have a ready graphical representation in the two-good case. The consumer can only purchase as much as their income will allow; hence they are constrained by their budget. The equation of a budget constraint is where is the price of good X, and is the price of good Y, and m is income. Budget constraint equation (P1 x Q1) + (P2 x Q2) = m P1 is the cost of the first item P2 is the cost of the second item m is the amount of money available Q1 and Q2 represent the quantity of each item you are purchasing. Indifference curve - An indifference curve is a chart showing various combinations of two goods or commodities that consumers can choose. Points along the curve represent combinations that will leave the consumer equally well off. A consumer is indifferent to changes in a combination as long as it falls somewhere along the curve. In economics, an indifference curve connects points on a graph representing different quantities of two goods, points between which a consumer is indifferent. That is, any combinations of two products indicated by the curve will provide the consumer with equal levels of utility, and the consumer has no preference for one combination or bundle of goods over a different combination on the same curve. One can also refer to each point on the indifference curve as rendering the same level of utility (satisfaction) for the consumer. In other words, an indifference curve is the locus of various points showing different combinations of two goods providing equal utility to the consumer. Utility is then a device to represent preferences rather than something from which preferences come. The theory of indifference curves was developed by Francis Ysidro Edgeworth, who explained in his 1881 book the mathematics needed for their drawing. There are infinitely many indifference curves: one passes through each combination. A collection of (selected) indifference curves, illustrated graphically, is referred to as an indifference map. The slope of an indifference curve is called the MRS (marginal rate of substitution), and it indicates how much of good y must be sacrificed to keep the utility constant if good x is increased by one unit. Given a utility function u(x,y), to calculate the MRS, one takes the partial derivative of the function u with respect to good x and divide it by the partial derivative of the function u with respect to good y. If the marginal rate of substitution is diminishing along an indifference curve, that is the magnitude of the slope is decreasing or becoming less steep, then the preference is convex. Vilfredo Pareto was the first author to actually draw these curves, in his 1906 book. The theory can be derived from William Stanley Jevons' ordinal utility theory, which posits that individuals can always rank any consumption bundles by order of preference. A graph of indifference curves for several utility levels of an individual consumer is called an indifference map. Points yielding different utility levels are each associated with distinct indifference curves and these indifference curves on the indifference map are like contour lines on a topographical graph. Each point on the curve represents the same elevation. If you move "off" an indifference curve traveling in a northeast direction (assuming positive marginal utility for the goods) you are essentially climbing a mound of utility. The higher you go the greater the level of utility. The non-satiation requirement means that you will never reach the "top," or a "bliss point," a consumption bundle that is preferred to all others Indifference curves are typically[vague] represented[clarification needed] to be: 1. Defined only in the non-negative quadrant of commodity quantities (i.e. the possibility of having negative quantities of any good is ignored). 2. Negatively sloped. That is, as quantity consumed of one good (X) increases, total satisfaction would increase[clarification needed] if not offset by a decrease in the quantity consumed of the other good (Y). Equivalently, satiation, such that more of either good (or both) is equally preferred to no increase, is excluded.[clarification needed] (If utility U = f(x, y), U, in the third dimension, does not have a local maximum for any x and y values.)[clarification needed] The negative slope of the indifference curve reflects the assumption of the monotonicity of consumer's preferences, which generates monotonically increasing utility functions, and the assumption of non-satiation (marginal utility for all goods is always positive); an upward sloping indifference curve would imply that a consumer is indifferent between a bundle A and another bundle B because they lie on the same indifference curve, even in the case in which the quantity of both goods in bundle B is higher. Because of monotonicity of preferences and non-satiation, a bundle with more of both goods must be preferred to one with less of both, thus the first bundle must yield a higher utility, and lie on a different indifference curve at a higher utility level. The negative slope of the indifference curve implies that the marginal rate of substitution is always positive; 3. Complete, such that all points on an indifference curve are ranked equally preferred and ranked either more or less preferred than every other point not on the curve. So, with (2), no two curves can intersect (otherwise non-satiation would be violated since the point(s) of intersection would have equal utility). 4. Transitive with respect to points on distinct indifference curves. That is, if each point on I2 is (strictly) preferred to each point on I1, and each point on I3 is preferred to each point on I2, each point on I3 is preferred to each point on I1. A negative slope and transitivity exclude indifference curves crossing, since straight lines from the origin on both sides of where they crossed would give opposite and intransitive preference rankings. 5. (Strictly) convex. With (2), convex preferences[clarification needed] imply that the indifference curves cannot be concave to the origin, i.e. they will either be straight lines or bulge toward the origin of the indifference curve. If the latter is the case, then as a consumer decreases consumption of one good in successive units, successively larger doses of the other good are required to keep satisfaction unchanged. Consumer Optimization Consumer optimization - Consumer optimization refers to the ways in which consumers make decisions to optimize their happiness or utility given their financial restrictions. Here are some crucial concepts: Utility maximization: Consumers want to obtain the most satisfaction out of their purchases. This entails selecting a set of goods and services that deliver the most utility within their budget Budget Constraint: This reflects the combinations of goods and services that a consumer can buy based on their income and prices Indifference Curves: These curves depict various combinations of items to which a buyer is indifferent. The point where the budget constraint is tangent to the maximum possible indifference curve reflects the optimal consumption bundle. Marginal Utility: The additional satisfaction obtained from consuming one more unit of a good or service. Consumers optimize their spending by equalizing the marginal utility per dollar spent for all goods and services. Substitution and Income Effects: Changes in prices can lead to substitution effects (consumers switching to relatively cheaper goods) and income effects (changes in purchasing power) which influence consumer choices What is Demand? Demand is an economic concept that relates to a consumer's desire to purchase goods and services and willingness to pay a specific price for them. An increase in the price of a good or service tends to decrease the quantity demanded. The law of demand states that a higher price leads to a lower quantity demanded and that a lower price leads to a higher quantity demanded. Demand curves and demand schedules are tools used to summarize the relationship between quantity demanded and price. Economists use the term demand to refer to the amount of some good or service consumers are willing and able to purchase at each price. Demand is based on needs and wants—a consumer may be able to differentiate  between a need and a want, but from an economist’s perspective they are the same thing. Demand is also based on ability to pay. If you cannot pay, you have no effective demand. What a buyer pays for a unit of the specific good or service is called price. The total number of units purchased at that price is called the quantity demanded. An increase in the price of a good or service almost always decreases the quantity demanded of that good or service. Conversely, a decrease in price will increase the quantity demanded. Demand schedule and demand curve A demand schedule is a table that shows the quantity demanded at each price. A demand curve is a graph that shows the quantity demanded at each price. Sometimes the demand curve is also called a demand schedule because it is a graphical representation of the demand schedules. IMPORTANT: PRICE DOES NOT AFFECT THE DEMAND (None) Factors Affecting Demand 1. Weather 2. Income Normal Goods Upgraded Goods 3. Competition 4. Preferences/Taste 5. Number of Consumers 6. Price of Related Goods Substitute Complement 7. Expectation Ceteris paribus - literally "holding other things constant," is a Latin phrase that is commonly translated into English as "all else being equal." The demand curve shows the amount of goods consumers are willing to buy at each market price. A linear demand curve can be plotted using the following equation. Qd = a – b(P) Q = quantity demand a = all factors affecting QD other than price (e.g. income, fashion) b = slope of the demand curve P = Price of the good. Inverse demand equation The inverse demand equation can also be written as P = a -b(Q) a = intercept where price is 0 b = slope of demand curve The law of supply states that a higher price leads to a higher quantity supplied and that a lower price leads to a lower quantity supplied. Supply curves and supply schedules are tools used to summarize the relationship between supply and price. When economists talk about supply, they mean the amount of some good or service a producer is willing to supply at each price. Price is what the producer receives for selling one unit of a good or service. An increase in price almost always leads to an increase in the quantity supplied of that good or service, while a decrease in price will decrease the quantity supplied. Economists call this positive relationship between price and quantity supplied—that a higher price leads to a higher quantity supplied and a lower price leads to a lower quantity supplied—the law of supply. The law of supply assumes that all other variables that affect supply are held constant. The difference between supply and quantity supplied In economic terminology, supply is not the same as quantity supplied. When economists refer to supply, they mean the relationship between a range of prices and the quantities supplied at those prices—a relationship that can be illustrated with a supply curve or a supply schedule. When economists refer to quantity supplied, they mean only a certain point on the supply curve, or one quantity on the supply schedule. In short, supply refers to the curve, and quantity supplied refers to a specific point on the curve. Supply schedule and supply curve A supply schedule is a table that shows the quantity supplied at each price. A supply curve is a graph that shows the quantity supplied at each price. Sometimes the supply curve is called a supply schedule because it is a graphical representation of the supply schedule. Factors Affecting Supply (Not Sure) 1. Technology 2. Weather 3. Production cost 4. Resource Availability 5. Demand 6. Expectations 7. Inflation 8. Natural disasters What Is Equilibrium? Equilibrium is the state in which market supply and demand balance each other, and as a result prices become stable. Generally, an over-supply of goods or services causes prices to go down, which results in higher demand—while an under- supply or shortage causes prices to go up resulting in less demand. Market system is driven by two forces, which are demand and supply. This is because these two forces play a crucial role in determining the price at which a product is sold in the market. Price is determined by the interaction of demand and supply in a market. According to the economic theory, the price of a product in a market is determined at a point where the forces of supply and demand meet. The point where the forces of demand and supply meet is called equilibrium point. Conceptually, equilibrium means state of rest. It is a stage where the balance between two opposite functions, demand and supply, is achieved. Qd (P) = Qs (P) Where, Qd (P) is the quantity demanded at price P Qs (P) is the quantity supplied at price P