Essay on Economics: Supply and Demand and Demand Lower Price

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Economics (Autumn)

Introduction to Economics

A price signal is information conveyed, to consumers and producers, via the price charged for a product or service, thus providing a signal to increase supply and/or decrease demand for the priced item.

Problem of resources and scarcity

Production possibility frontier

What to produce? How much to produce? For who to produce?

Circular flow of income
Marginal decisions – decisions to buy a bit more or a bit less
Specialisation – creation of comparative advantage, division of labour, globolisation – Adam Smith
Types of economies – free market, command, mixed economies

Demand and supply

The determinants of quantity demanded: the demand function * the price of the product * the prices of other products (substitutes, complimentary) * the consumer’s income and wealth * the consumer’s tastes * various individual-specific tastes or environmental factors

The law of demand
Lower price – more demand and visa versa

Normal and inferior (giffen) goods
Complements and substitutes

The determinants of quantity supplied: the supply function * the price of the product * the prices of inputs to production * the state of technology

Excess demand and excess supply
The price is $1.5
If prices are below 1.5$ then quantity demanded exceeds quantity supplied – excess demand
If prices are above $1.5 then quantity supplied exceeds quantity demanded.

Law of price adjustment (for stability)
When supply exceeds demand – price will fall
When demand exceeds supply – price will rise

Administered prices/fixed prices –set by supplier who then just waits to see how much of the product sells at that price (consumer goods)
Flexible/auction prices – adjust on a continuous basis to equate demand and supply (oil, petrol)

Elasticity of demand and supply
How to find elasticity

Consumer demand: utility and indifference
Indifference curve is for developing consumer choices

Economics (Spring)
Gross national product

Gross domestic product

Real National income – Income of the whole resources of the country adjusted for inflation

Nominal wealth – wealth not adjusted for inflation

Aggregate demand - The total level of expenditure in the economy at any given price level is the sum of Consumption, investment, gov. spending and net exports

Consumption – total planned household spending on goods and services
Real expenditure = real output = real income in Circular flow of income.

Balance of payments - is the record of all international transactions for a country

SRAS LRAS

In the short run there are fixed costs (interest on loan, rent) or at least one. In the long run there are no fixed costs, there are variable costs

Relationship between Budget deficit and unemployment
In boom more people are employed – spending on benefits paid goes down – budget deficit decreases
In recession more people are unemployed – spending on benefit goes up – budget deficit increases

Budget deficit leads to National debt

Decrease in taxation leads to increase in consumption. Budget deficit then increases and it is a good thing in the short-run as more people are employed due to increase in AD

Use of more resources = less unemployment
Supply-side policies – are those that emphasize the importance of the supply side rather than aggregate demand (Keynesian Economics)

These policies are aimed at shifting LRAS to the right
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