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| | {{Economics_Lectures}} | | {{Economics_Lectures}} |
| − | A "free market" is one where there is no interference with price and quantity of goods sold. Government does not regulate the price in a free market, or limit the quantity. If there is a wage and price control imposed by government, then it is not a free market. Some of the "global warming" legislation, such as the proposed "cap and trade," would limit the supply of energy and thus would not result in a free market. But most of this course assumes we are in a free market.
| + | Recall that a "free market" is one where there is no interference with price and quantity of goods sold. In a free market, government does not regulate the price or limit the quantity. |
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| − | In a free market, supply equals demand for both price and quantity sold. That is one of the beauties of free enterprise. It is efficient, productive and minimizes waste. The supply and demand reacts almost immediately to changing needs and circumstances. The free market reacts much more quickly than government can. For example, government offices like the Post Office close at 4:30 or 5pm, but the free market is always working 24 hours a day. | + | In a free market, supply equals demand for both price and quantity sold. That is one of the beauties of free enterprise. It is efficient, productive and minimizes waste. The supply and demand reacts almost immediately to changing needs and circumstances. The free market reacts much more quickly than government can. For example, government offices like the Post Office typically close at 4:30pm, but the free market is always working 24 hours a day. |
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| | Prices change daily due to continual changes in supply and demand. During your next few trips to the supermarket, notice how much the prices fluctuate. This is because both supply and demand are constantly changing. Supply changes due to problems or improvements in manufacturing and shipping, or different yields in crops. Labor costs change over time, which also affects supply. Demand is constantly fluctuating also. Every day people lose or switch jobs, which affects their buying decisions. The changing of the seasons also affects demand, as do variations in personal tastes. | | Prices change daily due to continual changes in supply and demand. During your next few trips to the supermarket, notice how much the prices fluctuate. This is because both supply and demand are constantly changing. Supply changes due to problems or improvements in manufacturing and shipping, or different yields in crops. Labor costs change over time, which also affects supply. Demand is constantly fluctuating also. Every day people lose or switch jobs, which affects their buying decisions. The changing of the seasons also affects demand, as do variations in personal tastes. |
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| | Greed also plays a role. The suppliers of goods and services would like to increase their prices without losing sales, so that they can make more money. Before Wal-Mart made price-cutting so popular, it was routine for suppliers to increase their prices every year. Everyone expected it. | | Greed also plays a role. The suppliers of goods and services would like to increase their prices without losing sales, so that they can make more money. Before Wal-Mart made price-cutting so popular, it was routine for suppliers to increase their prices every year. Everyone expected it. |
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| | + | This week we build on several principles introduced last week, and also introduce some entirely new concepts. |
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| | + | == Three Basic Economic Principles == |
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| | + | Building on last week's class, we can now state the three most basic principles of economics with respect to price: |
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| | + | *A rise in price tends to increase supply and decrease demand. Conversely a fall in price tends to decrease supply and increase demand. '''LOWER PRICE MEANS HIGHER DEMAND''' (and higher price means lower demand). This is known as the '''Law of Demand''': demand changes inversely with price. |
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| | + | *When demand exceeds supply at a given price, the price tends to rise. Likewise, when supply exceeds demand, the price tends to decrease. |
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| | + | *Price tends to move towards the amount at which the quantity in demand is equal to the quantity in supply: '''EQUILIBRIUM IS WHERE SUPPLY EQUALS DEMAND'''. |
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| | + | Many of the problems in this course, and in any economics course, can be answered just by remembering and applying the above there principles about price. The equilibrium price is the result of a "tug of war" between the buyer and seller: the buyer wants to pay less (a lower price), and the seller wants to receive more (a higher price). Those opposing forces are constantly working to keep the price at equilibrium. |
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| | + | == Revisited: Supply and Demand Curves == |
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| | + | The graph of a demand curve is downward sloping because of the Law of Demand stated above. The demand curve represents the change in demand by the public based on a change in price for the good or service. |
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| | + | The supply curve is completely different from the demand curve, and not as obvious. <explain further> |
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| | + | == What Happens When the Supplier Increases His Price? == |
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| | Imagine yourself as president of a company that makes "widgets" (a "widget" is an imaginary good), and you are having a meeting to discuss your product. Inevitably an employee suggests increasing the price on the widget so that the company will make more money. People who have never studied economics think that increasing the price will always result in increased revenue from sales, because revenue is price times quantity sold. If quantity sold is constant, then increasing the price should have the effect of increasing the revenue from sales. | | Imagine yourself as president of a company that makes "widgets" (a "widget" is an imaginary good), and you are having a meeting to discuss your product. Inevitably an employee suggests increasing the price on the widget so that the company will make more money. People who have never studied economics think that increasing the price will always result in increased revenue from sales, because revenue is price times quantity sold. If quantity sold is constant, then increasing the price should have the effect of increasing the revenue from sales. |
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| | As owner, you then ask, “how much fewer sales will result if I increase the price?” If sales decline by a smaller percentage than the price increased, then overall revenue (price times quantity sold) will increase. If, however, sales decline by a larger percentage than the price increased, then overall revenue will decline. | | As owner, you then ask, “how much fewer sales will result if I increase the price?” If sales decline by a smaller percentage than the price increased, then overall revenue (price times quantity sold) will increase. If, however, sales decline by a larger percentage than the price increased, then overall revenue will decline. |
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| | ==Price Elasticity of Demand== | | ==Price Elasticity of Demand== |
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