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Line 120: − “Equilibrium” is “where things are going” or where they have already arrived. The equilibrium for the universe is complete disorder and chaos, with every creature extinct. A constant increase in entropy is what drives situations to their equilibrium. (Devolution is the process, not the so-called evolution.) Economic equilibrium is when all the imbalances in selling and buying prices have disappeared and there are no more trends to different price levels. Randomness and profit-making pressures drive pricing towards equilibrium.+ − − The ultimate equilibrium when there is perfect competition occurs when the marginal revenue to the seller equals its marginal cost of the product. 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.
Economics Lecture Two (view source)
Revision as of 00:56, September 5, 2009
, 00:56, September 5, 2009→Equilibrium & Information: better
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 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 & Information==
==Equilibrium==
===Consider these three basic principles of economics:===
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.
“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.
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.
==Three basic principles of economics==
# When demand exceeds supply at a given price, the price tends to rise. Likewise, when supply exceeds demand, the price tends to decrease.
# When demand exceeds supply at a given price, the price tends to rise. Likewise, when supply exceeds demand, the price tends to decrease.
Note the use of the verb “tend” in the laws of economics cited above. Companies that consistently lose money “tend” to go bankrupt and out of business. But it does not happen immediately, especially if the company is large. It takes time for the market to come to equilibrium. Ultimately supply does equal demand, but only after enough time and activity passes for the conditions to attain equilibrium.
Note the use of the verb “tend” in the laws of economics cited above. Companies that consistently lose money “tend” to go bankrupt and out of business. But it does not happen immediately, especially if the company is large. It takes time for the market to come to equilibrium. Ultimately supply does equal demand, but only after enough time and activity passes for the conditions to attain equilibrium.
== Imbalance in Information ==
Imbalances in information are a reason for the delay in pricing to reach equilibrium. Buyers do not immediately realize when they can obtain the same good more cheaply another way. For many years people continued to pay high costs for renting telephones after it became legal to buy inexpensive ones. The effects of competition are not often felt overnight. A lower-priced competitor has to educate the public of the availability of its goods, and that takes time.
Imbalances in information are a reason for the delay in pricing to reach equilibrium. Buyers do not immediately realize when they can obtain the same good more cheaply another way. For many years people continued to pay high costs for renting telephones after it became legal to buy inexpensive ones. The effects of competition are not often felt overnight. A lower-priced competitor has to educate the public of the availability of its goods, and that takes time.