Economics. Demand, supply, and elasticity

Oaaea?aeueiia aaaionoai ii ia?aciaaieth

Ainoaea?noaaiiia ia?aciaaoaeueiia o/?aaeaeaiea aunoaai
i?ioanneiiaeueiiai

ia?aciaaiey

Ooeueneee ainoaea?noaaiiue oieaa?neoao

Oaeoeueoao Yeiiiieee e i?aaa

?aoa?ao ii aeenoeeieeia «Aiaeeeneee ycue»

«Economics. Demand, supply, and elasticity»

Auiieiee *a?iuoiaa Ae.A.

a?oiiu 720151

Iao/iue ?oeiaiaeeoaeue Eaiaaaa E.N.

Ooea, 2007

Contents

Introduction 3

1. Economics 4

2. Demand, supply, and elasticity 8

Summary 11

List of literature 12

Introduction

Economics is the ancient science. Economics is the method and the
instrument of thinking. It is helps us to come to a right conclusion. It
always attracts attention of scientific and educated people. Today the
interest for economics is growing.

Although for many people concern for the economy goes no further than
the price of tuition or the fear of losing a job. Many others, however,
know that their job prospects and the prices they pay are somehow
related to national trends in prices, unemployment, and economic growth.

The scope of economics is indicated by the facts with which it deals.
These consist mainly of data on output, income, employment, expenditure,
interest rates, prices and related magnitudes associated with individual
activities of production, transportation and trade.

1. Economics

As a scholarly discipline, economics is two centuries old. The first
scientist who made extraordinary contributions in economics was Adam
Smith. At the age of 28 Adam Smith became Professor of Logic at the
University of Glasgow. Some time later he became a tutor to a wealthy
Scottish duke. Then he received a grant and with the financial security
of this grant, Smith devoted 10 years to writing his work “The Wealth of
Nations” which economic science. It was published in 1776. His
contribution was to analyze the way that markets organized economic life
and produced rapid economic growth. Almost a century later, as
capitalist enterprises began to spread, there appeared the massive
critique of capitalism: Karl Marx’s “Capital”. Marx proclaimed that
capitalism was doomed and would soon be followed by business
depressions, revolutionary upheavals and socialism.

In 1936 John Maynard Keynes published “The General Theory of Employment,
Interest and Money”. Economics was supposed to help government monetary
and fiscal policies to tame the worst ravages of business cycles.

Economics is the study of how society allocates scarce resources and
goods. Resources are the inputs that society uses to produce output,
called goods. Resources include inputs such as labor, capital, and land.
Goods include products such as food clothing, and housing as well as
services such as those provided by doctors, repairmen, and police
offices. These resources and goods are considered scarce because of
society’s tendency to demand more resources and goods than are
available.

Most resources are scarce, but some are not — for example, the air we
breathe. Its price is zero. It is called a free resource or good.
Economics, however, is mainly concerned with scarce resource and goods,
as scarcity motivated the study of how society allocates resources and
goods.

The term market refers to any arrangement that allow people to trade
with each other. The term market system refers to the collection of all
markets, also to the relationships among these markets. The study of the
market system, which is the subject of economics, is divided into two
main theories; they are macroeconomics and microeconomics.

Macroeconomics

The prefix macro means large, indicating that macroeconomics is
concerned with the study of the market system on a large scale.
Macroeconomics considers the aggregate performance of all markets in the
market system and is concerned with the choices made by the large
subsectors of the economy — the household sector, which includes all
consumers; the business sector, which includes all firms; and the
government sector, which includes all government agencies.

Microeconomics

The prefix micro means small, indicating that microeconomics is
concerned with the study of the market system on a small scale.
Microeconomics considers the individual markets that make up the market
system and is concerned with the choices made by small economic units
such as individual consumers, individual firms, or individual government
agencies.

The distinction between makro- and microeconomics is a matter of
convenience. In reality, macroeconomics outcomes depend on micro
behaviour, and micro behaviour is affected by macro outcomes.

Economic Policy

An economic policy is a course of action that is intended to influence
or control the behavior of the economy. Economic policies are normally
implemented and administered by the government. The goals of economic
policy consist of value judgements about what economic policy should
strive to achieve. While there is some disagreement about the
appropriate goals of economic policy, there are three widely accepted
goals including:

1. Economic growth: It means that the incomes of all consumers and firms
(after accounting for inflation) are increasing over time.

2. Full employment: It means that every member of the labor force who
wants to work is able to find work.

3. Price stability: It means to prevent increases in the general price
level known as inflation, as well as decreases in the general price
level known as deflation.

Economic analysis

Opportunity cost is the important concept in economic analysis. The
opportunity cost of a decision or choice that one makes is the value of
the highest valued alternative that could have been chosen but was
instead forgone. For example, suppose that you is faced with several
ways of spending an evening at home. The choice made is to study English
(perhaps because there is an English test tomorrow). The opportunity
cost of this choice is the value of the highest valued alternative to
the time spent studying English. While there may be many alternatives to
studying English — making a date, watching TV, talking on the phone —
there is only one alternative that has highest value. In this example,
the alternative with highest value depends on one’s own preferences.
Say, it may be making a date. It would be considered the opportunity
cost of studying English. There is also a fundamental assumption used in
many economic models ceteris paribus. It is Latin for “all else being
equal”.

Common pitfalls in economic analysis

There are two “pitfalls” that should be avoided when conducting economic
analysis: the fallacy of composition and the false-cause fallacy. The
fallacy of composition is the belief that if one individual or firm
benefits from some action, all individuals or all firms will benefit
from the same action. While this may in fact be the case, it is not
necessarily so. Suppose a hairdresser’s decides to lower the prices it
charges on all its services. It believes the lower prices will attract
customers away from other hairdressers’. If, however, the other
hairdressers’ follow suit and lower their prices by the same amount,
then it is not necessarily true that all hairdressers’ will be better
off; while more people may choose to cut their hair, each hairdresser’s
will receive less money per client, and each hairdresser’s market share
is unlikely to change. Hence the profits of all hairdressers’ could
fall.

The false-cause fallacy often arises in economic analysis of two
correlated actions or events. When one observes that two actions or
events seem to be correlated, it is often tempting to conclude that one
event has caused the other. But by doing so, one may be committing the
false-cause fallacy, which is the simple fact that correlation does not
imply causation. For example, suppose that new tape-recorder prices have
steadily increased over some period of time and the new tape-recorder
sales have also increased over this same period. One might then conclude
that an increase in the price of new tape-recorders causes an increase
in their sales. This false conclusion is an example of the false-cause
fallacy; the positive correlation between the two events does not imply
that there is any causation between them. In order to explain why both
events are taking place simultaneously, one may have to look at other
factors — for example, rising consumer incomes, inflation, or rising
producer costs.

2. Demand, supply, and elasticity

In every market, there are both buyers and sellers. The buyers’
willingness to buy a particular good (at various prices) is referred to
as the buyers’ demand for that good. The sellers’ willingness to supply
a particular good (at various prices) is referred to as the sellers’
supply of that good.

Reasons for a change in demand

It is important to keep straight the difference between a change in
quantity demanded, and a change in demand. There is only one reason for
a change in the quantity demanded of some good: a change in its price;
however, there are several reasons for a change in demand for the good,
including:

1. Changes in the price of related goods: the demand for a good may be
changed by increases or decreases in the prices of the other, related
goods. These related goods are usually divided into two categories
called substitutes (for example, butter and margarine) and complements
(for example, shoes and shoelaces).

2. Changes in income: the demand for a good may also be affected by
changes in the incomes of buyers. Normally, as incomes rise, the demand
for a good will usually increase at all prices, and vice versa. Goods
for which changes in demand vary directly with changes in income are
called normal goods. There are some goods, however, for which an
increase in income leads to a decrease in demand and a decrease in
income leads to an increase in demand. Goods for which changes in demand
vary inversely with changes in income are called inferior goods. For
example, consider meat and bread. As incomes increase, people demand
relatively more meat and relatively less bread, implying that meat may
be regarded as a normal good, and bread may be considered an inferior
good.

3. Changes in preferences: as peoples’ preferences for goods and
services change over time, the demand for these goods and services will
also shift. For example, as the price for gasoline has risen, automobile
buyers have demanded more fuel-efficient, “economy” cars, and fewer
gas-guzzling, “luxury” cars.

4. Changes in expectations: if buyers expect that they will have a job
for many years to come, they will be more willing to purchase goods such
as cars and homes that require payments over a long period of time. If
buyers fear losing their jobs, perhaps because of an adverse economic
climate, they will demand fewer goods requiring long-term payments.

Supply

The buyers’ demand for goods is not the only factor determining market
prices and quantities. The sellers’ supply of goods and services also
plays a role in determining market prices and quantities. According to
the law of supply, a direct relationship exists between the price of a
good and the quantity supplied of that good. A change in supply is not
caused by a change in the price of the good being supplied; that would
induce a change in the quantity demanded. A change in supply is caused
by other factors, including:

1. Changes in the prices for other goods: suppliers are often able to
switch their production processes from one type of good to another. For
example, farmers might decide to grow less corn and more wheat on the
same land if the price of wheat rises relative to the price of corn.

2. Changes in the prices of inputs: the prices of the raw materials or
inputs used to produce a good also cause supply to change. An increase
in the prices of a good’s inputs will raise costs to suppliers and cause
them to supply less of that good at all prices.

3. Changes in technology: advances in technology often have the effect
of lowering the costs of production, allowing suppliers to supply more
goods at all prices. For example, the development of pesticides has
reduced the amount of damage done to certain crops and therefore has
reduced the cost of farming. The result has been an increase in the
supply of these crops at all prices.

Equilibrium

Earlier we have examined the demand decisions of buyers and the supply
decisions of sellers, separately. However, in the market for any
particular good, the decisions of buyers interact simultaneously with
the decisions of sellers. When the demand for a good equals the supply
of the good, the market for the good is said to be in equilibrium.
Associated with the market equilibrium will be an equilibrium quantity
and an equilibrium price.

Elasticity

In addition to understanding how equilibrium prices and quantities
change as demand and supply change, economists are also interested in
understanding how demand and supply change in response to changes in
prices and incomes. The responsiveness of demand and supply to changes
in prices or incomes is measured by the elasticity of demand or supply.

If the percentage change in quantity demanded is greater than the
percentage change in price, demand is said to be price elastic, or very
responsive to price changes. If the percentage change in quantity
demanded is less than the percentage change in price, demand is said to
be price inelastic, or not very responsive to price change. Similarly,
supply is price elastic when the percentage change in quantity supplied
is greater than the percentage change in price, and supply is price
inelastic when the percentage change in quantity supplied is less than
the percentage change in price. The price elasticity of demand or supply
will differ among goods.

Summary

In this report I consider terms “economics”, “macroeconomics”,
“microeconomics”, “economic policy”, “demand”, “supply” and others.

Economics is the study of how society allocates scarce resources and
goods. Resources are the inputs that society uses to produce output,
called goods. The subject of economics is divided into two main
theories; they are macroeconomics and microeconomics. Macroeconomics
considers the aggregate performance of all markets in the market system
and is concerned with the choices made by the large subsectors of the
economy — the household sector, which includes all consumers;

Microeconomics considers the individual markets that make up the market
system and is concerned with the choices made by small economic units
such as individual consumers, individual firms, or individual government
agencies.

An economic policy is a course of action that is intended to influence
or control the behavior of the economy. There are goals of economic
policy:

1. economic growth;

2. full employment;

3. price stability.

In every market, there are buyers and sellers. The buyers’ willingness
to buy a particular good (at various prices) is referred to as the
buyers’ demand for that good. The sellers’ willingness to supply a
particular good (at various prices) is referred to as the sellers’
supply of that good.

1. changes in the price of related goods;

2. changes in income;

3. changes in preferences;

4. changes in expectations.

The law of supply: a direct relationship exists between the price of a
good and the quantity supplied of that good. A change in supply is
caused by factors, including:

1. changes in the prices for other goods;

2. changes in the prices of inputs;

3. changes in technology:

When the demand for a good equals the supply of the good, the market for
the good is said to be in equilibrium.

I think studying economics is very important for people. Economics is
the study of how society allocates resources and goods. If people know
what economics, economic policy, economic analysis are they understand
the economic processes.

List of literature

1. Aetheaiiaa I.I. Aiaeeeneee ycue aeey yeiiiienoia: O/aa.iiniaea. – I.:
EIO?A-I, 2006. – 320 n.

2. Aieueoie aiaei-?onneee yeiiiie/aneee neiaa?ue / Ninoaaeoaee N.N.
Eaaiia, Ae.TH. Ei/aoeia. – I.: CAI Oeaio?-iieea?ao, 2005. – 620 n.

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