Changes

In learning what something '''''is''''', it sometimes helps to learn what it is '''''not'''''.  Put another way, listing what is irrelevant to an important concept can help illuminate what that concept really means.

In learning what something '''''is''''', it sometimes helps to learn what it is '''''not'''''.  Put another way, listing what is irrelevant to an important concept can help illuminate what that concept really means.

The preference of any single individual, such as yourself, is nearly irrelvant to the public supply and demand.  You may dislike the Yankees, but your own view is less than a "drop in the bucket" compared to the view of the public.  The opinion of the wealthiest person in the world does not affect supply and demand any more than the opinion of the poorest person can, in a free market.  Wealthy people may avoid Wal-Mart, but that did not keep it from becoming the greatest store in the world.  '''''Supply and demand transcends and is above the views, preferences, and buying habits of any individual or small group of people.'''''  Supply and demand is like a massive ocean, and it's not going to change based on what a few people do.

The preference of any single individual, such as yourself, is nearly irrelvant to the public supply and demand.  You may dislike the Yankees, but your own view is less than a "drop in the bucket" compared to the view of the public.  Similarly, the opinion of the wealthiest person in the world does not affect supply and demand any more than the opinion of the poorest person can, in a free market.  Wealthy people may avoid Wal-Mart, but that did not keep it from becoming the richest and most successful store in the world.  '''''Supply and demand transcend and are above the views, preferences, and buying habits of any individual or small group of people.'''''  Supply and demand is like a massive ocean, and it's not going to change based on what a few people do.

Note also that supply and demand do not care who a person is or what his background may be.  The store owner sells a chocolate candy bar for the same price to the richest man in the world as to the poorest man in the world.  The President pays the same price as the most disliked person in town.  Supply and demand, and the free market, treats everyone fairly and equally.  Supply and demand do not care about someone's status in society.  The free market is independent and above prejudice.  A restaurant owner is just as happy to serve, and makes the same amount of money, off the most popular person in society as the most disliked person in society.

Note also that supply and demand do not care who a person is or what his background may be.  The store owner sells a chocolate candy bar for the same price to the richest man in the world as to the poorest man in the world.  The President pays the same price as the most disliked person in town.  Supply and demand, and the free market, treats everyone fairly and equally.  Supply and demand do not care about someone's status in society.  The free market is independent and above prejudice.  A restaurant owner is just as happy to serve, and makes the same amount of money from, the most disliked person in society as the owner makes from the most popular person in society.

It is worth noting other irrelevancies to the free market.  The "market price" set by supply and demand often is usually unrelated to the historical cost of the good.  Someone may have paid $300,000 for his house in 2006, when houses were high in value, but the market price for that same house in 2009 may be only $150,000.  When that person tries to sell his house in 2009 it does not matter what he paid for it in 2006.  All that matters is what the supply and demand for that house is at the time he tries to sell it.

It is worth noting other irrelevancies to the free market.  The "market price" set by supply and demand often is usually unrelated to the historical cost of the good.  Someone may have paid $300,000 for his house in 2006, when houses were high in value, but the market price for that same house in 2009 may be only $200,000.  When that person tries to sell his house in 2009 it does not matter what he paid for it in 2006.  All that matters is what the supply and demand for that house is at the time he tries to sell it.

The free market and supply and demand are similar to a sports competition.  It really doesn't matter how many trophies one team may have won in prior years, or who likes which side better, or who thinks which side should win.  All that matters is which team is better on game day.  Likewise, all that matters to setting the price in a free market is the supply and demand at the time of sale.  In some ways that might seem harsh if it causes someone to lose money, just as it can be sad when someone trains extremely hard to win a match, but is defeated in an upset by someone nobody likes.  But in other ways this fair, because it gives full opportunity for someone to do well no matter who he is and no matter where he comes from.  As long as the seller obtains the free market price, he does not care who the buyer is.

The free market and supply and demand are similar to a sports competition.  It really doesn't matter how many trophies one team may have won in prior years, or who likes which side better, or who thinks which side should win.  All that matters is which team is better on game day.  Likewise, all that matters to setting the price in a free market is the supply and demand at the time of sale.  In some ways that might seem harsh if it causes someone to lose money, just as it can be sad when someone trains extremely hard to win a match, but is defeated in an upset by someone nobody likes.  But in other ways this is fair, because it gives full opportunity for someone to do well no matter who he is and no matter where he comes from.  As long as the seller obtains the free market price, he does not care who the buyer is.

==Equilibrium==

==Equilibrium==

The important concept of “equilibrium” arises frequently in economics.  It is similar to the concept of equilibrium in chemistry or chemical reactions.  The term “equilibrium” means a state of balance between opposing forces.  It is a settling down.  In a tug of war between opposing teams, “equilibrium” would be where the rope is stationary with each side pulling an equal amount on it.  But usually one side wins in a tug of war, so that is not the best example.  A better example of an “equilibrium” is when you have eaten just enough to satisfy your hunger, and not too much to make you feel bloated or nauseous.  You are then in “equilibrium” between hunger and overeating.  If you're still hungry then you eat more; if you overate then you stop until later.

The important concept of “equilibrium” arises frequently in economics.  It is similar to the concept of equilibrium in chemistry, as in chemical reactions.  The term “equilibrium” means a state of balance between opposing forces.  It is a settling down.  In a tug of war between opposing teams, “equilibrium” would be where the rope is stationary with each side pulling an equal amount on it.  But usually one side wins in a tug of war, so that is not the best example.  A better example of an “equilibrium” is when you have eaten just enough to satisfy your hunger, and not too much to make you feel bloated or nauseous.  You are then in “equilibrium” between hunger and overeating.  If you're still hungry then you eat more; once you are "full", you stop eating until later.

“Equilibrium” is “where things are going” or where they have already arrived.  Economic equilibrium is when all the imbalances in the forces of selling and buying prices have disappeared and a perfect balance between the sellers' desire to make more money (that's like hunger) and the buyers' desire to pay as little as possible (that's like not eating).  When the market has reached a balance in these two powerful, opposing forces, then it is equilibrium.  The opposing forces of the sellers to make money and the buyers to keep money are what "drive" the price to its equilibrium level, like a tug of war.   

“Equilibrium” is “where things are going” or where they have already arrived.  Economic equilibrium is when all the imbalances in the forces of selling and buying have disappeared and a perfect balance between the sellers' desire to make more money (that's like hunger) and the buyers' desire to pay as little as possible (that's like not eating).  When the market has reached a balance in these two powerful, opposing forces, then it is equilibrium.  The opposing forces of the sellers to make money and the buyers to keep money are what "drive" the price to its equilibrium level, like a tug of war.   

When there is perfect competition, then the ultimate equilibrium is when the marginal revenue to the seller (the extra dollar that he charges) equals his marginal cost in producing the good (the extra dollar he pays).  At that point his marginal profit (the extra dollar that he can keep after paying his costs) has fallen to zero and he has no incentive to produce any more goods.  In other words, the supplier keeps producing more and more goods until its marginal profit on each extra good falls to very close to zero.  That profit decline may be because the goods are not selling as quickly or due to unsold goods.  For example, the first SUV produced by Ford may sell at a high price, but its last SUV in a given year will have to be discounted heavily.  Ford doesn’t want to make any more SUVs in a given year that it might have to take a loss on.  It produces just enough so that marginal revenue falls to marginal cost, as best as can be predicted.  Do not worry if you do not completely understand this last paragraph, as we'll discuss this in greater detail in a future lecture.

When there is perfect competition, then the ultimate equilibrium is when the marginal revenue to the seller (the extra dollar that he charges and receives as revenue) equals his marginal cost in producing the good (the extra dollar he paid to produce the good).  At that point the seller's marginal profit (the extra dollar that he can keep after paying his costs) has fallen to zero and he has no incentive to produce any more goods.  In other words, the supplier keeps producing more and more goods until its marginal profit on each extra good falls to zero, and he does not make any more money by selling additional quanity.   

 

That decline of marginal profit towards zero is due to the inevitable difficulties in selling additional goods.  For example, the first SUV produced by Ford could sell at a high price, but Ford does not want to get stuck with making too many SUVs and not being able to sell them at a profit.  Ford doesn’t want to make any more SUVs in a given year that it might have to take a loss on.  Ford keeps producing SUVs until its marginal revenue falls to its marginal cost, and its marginal profit falls to zero.  Do not worry if you do not completely understand these last two paragraphs; we'll discuss this again in greater detail in a future lecture.

==Example: the National Debate over Health Care==

==Example: the National Debate over Health Care==