Introduction to Economics

It should be clear by now that economics covers the allocation of scarce resources. But the field of economics if often broken down into two categories: microeconomics and macroeconomics . Microeconomics Microeconomics is the branch of economics that studies the behaviour of individuals and firms in making decisions regarding the allocation of scarce resources and the interaction among these individuals and firms. One goal of microeconomics is to study the supply and demand and other forces that determine the price in a particular market. For example, what combination of goods and services would fit a specific household's needs and wants or how a specific company could maximize its productions and capacity and both microeconomics related questions. Macroeconomics Macroeconomics is the branch of economics that studies the behaviour and performance of an economy/industry as a whole and not just of specific companies. Macroeconomists  study aggregated indicators suc...

Disequilibrium characterizes a market that is not in equilibrium, meaning there is a difference between the quantity demanded and the quantity supplied. It usually occurs when  internal and/or external forces prevent market equilibrium from being reached or cause the market to fall out of balance. This can be a short-term byproduct of a change in variable factors or a result of long-term structural imbalances. There are two types of disequilibrium: Excess supply If the price is too high, higher than the price of equilibrium, excess supply will be created within the market. Thus there will be an allocative inefficiency. As we have shown in previous posts, the quantity supplied will be greater than the quantity demanded. Thus the supplier might look to lower the price in order to attract demand for the leftover goods. Excess demand When the price is set below the price of equilibrium then excess demand will occur. Because the price is so low, too many consumers want t...

We have previously described what supply and demand are and how the price fluctuates in order that the quantity demanded and the quantity supplied level out. Thus when these two are equal we reach a desired outcome which economists call equilibrium.  At this point the allocation of goods/resources is at its most efficient because at the given price producers are selling all the goods that they have produced and buyers are getting all the goods they have demanded. In this state the market benefits as a whole because when an equilibrium is reached the number of transactions being made is the highest possible. Picture the case of a shop that sells TVs. As you can see in the table below, the higher the price the lower the quantity demanded but the higher the quantity supplied and vice versa. In each case the amount of transactions being made can be expressed by the formula: Number of Transactions = min(Quantity Demanded, Quantity Supplied) This is obviously happening be...

Our lives are filled with everyday economic decisions. Whether you choose to spend one hour watching a TV show instead of studying or whether you choose to buy a book over music album you are essentially taking into account the opportunity cost of each. The time you spend watching TV can't be used to study and the money you spend on the book can't be used to buy the album. The opportunity cost is essentially the benefits you forgo when taking a certain set of actions. Thus we can define: Opportunity cost - When utilizing a certain resource, the opportunity cost represents the benefits of the next-highest-valued alternative use of that resource.  It is important to understand that when we talk about the opportunity cost we only take into account the benefits of the next highest valued resource instead of adding up all of the other alternatives. The opportunity cost is often expressed as the difference between the expected return value of the two options: Oppor...

Supply and demand relate implicitly to the production and consumption of a market.  Demand   refers to how much (quantity) of a product or service is desired by buyers. The demanded quantity is the amount of a specific product that people are willing to buy at a given price . The relationship between the price and the demanded quantity is known as the law of demand . The law of demand The law of demand states that, if all other factors remain equal, when the price of a product(good) increases, the demanded quantity decreases or, conversely, if the price of a good decreases, demand increases. It describes an inverse relationship between the price and the quantity  demanded .  Supply   represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The relationship between the price and the supplied quantity is known as the law of supply . ...

Economics is concerned with the production and consumption of goods and services. We already know that. We also know that the transfer of goods and services from producers to consumers  is achieved through exchange, often involving the consumers to offer money for the products they receive. This process is carried out through markets . Thus we can define : Markets - Markets are  mediums that allow buyers and sellers of a specific good or service to interact with each other in order to facilitate exchange.  However, markets come in very different shapes and forms. In economics, the term market structure  r efers to the nature and degree of competition in the market for goods and services. The structures of market both for goods market and service (factor) market are determined by the nature of competition prevailing in a particular market. There a four different types: 1.  Monopolistic competition , a type of imperfect competition such that many pro...