In chapter one we are introduced to what economics is and why it is relevant to us. Economics is the study of how humans make different types of decisions (family/business/societal/individual) while there’s scarcity . Scarcity is when the demand for goods,services, and resources are greater than the available supply. Today’s economy is shown through division of labor where people are getting paid for specializing in what they produce and then using that money to buy what they want or need. Division of labor and specialization help companies produce more products faster and more efficient. Economics cover a lot of ground and that is why it is divided into two main parts: Microeconomics and Macroeconomics. Microeconomics is the study of specific factors in the economy and how individual decisions affects the economy. Macroeconomics is the study of the economy as a whole with the use of monetary policy and fiscal policy to help them pursue their goals such as growth in the standard of living, unemployment, and inflation. Monetary policy is how central banks create economic growth by managing liquid assets through lending, interest rates, and financial capital markets (all of which is in the Federal Reserve) . Fiscal policy involves how the government adjusts its spending and taxes to influence the economy. Economics is not math, it is analyzed through the use of theories and models. Theories are simplified representations of the possible ways to determine an answer to economic problems while models are visual representations (such as the Circular Flow diagram). There are different economic systems and societies are usually categorized as traditional, command, or market-oriented economies. But nowadays, societies are beginning to become more interdependent because of the growth in commercial and financial networks that cross borders and therefore, causing a mix of all three economic systems. When we learn economics we start to understand major problems in our economy worldwide and this helps us become better people, citizens, and thinkers.
As we move on to chapter two we begin to learn more about choice in a world of scarcity. Many of us know that we cannot have everything we want, we sometimes have to give something up in order to get something else that’s more beneficial or simply more desired. This in economics is known as tradeoffs. With the use of a budget constraint, which represents the combinations of goods and services that a consumer may buy given the price of the supply and the consumers income, economics study consumer choices. Choices beyond the budget constraint is considered to be unaffordable. Opportunity cost studies the relationship between scarcity and choice by measuring the value of the forgone alternative. Decisions and tradeoffs aren’t all or nothing, they’re more about decisions on the margin, they involve little more or little less.
As mentioned before, economists love the use of theories and models, a profound model is the production possibilities frontier. A production possibilities frontier is a diagram used to display the productively efficient( when it is impossible to produce one good/service without decreasing the quantity produced of another good/service) combinations of two products that an economy can produce given the resources it has available.
The PPF shape is usually an outward curve and choices that are unattainable are outside the frontier while choices that are wasteful are inside the frontier. A growing economy will cause the PPF to move outward. In the law of diminishing returns, there is a marginal output decrease as the amount of a single factor of production is incrementally increasing while other factors are constant. The specific choice along a PPF that reflects the mix of goods society desires is known as allocative efficiency. Not all PPF diagrams will look the same, the curvature is different depending on the country and its comparative advantage with different goods. Comparative advantage is known to be when a county can carry out the making of a specific product more efficiently than another country because it cost less. If countries focused more on producing specialized goods that they have comparative advantage with they would be able to increase total production.
When it comes to confronting objections, economists make sure to carefully understand the contrast between positive statements, which is objective and provide facts only when describing the world as it is, and normative statements, which is subjective and value based when describing how the world should be. Also, even when there is a middle ground between the positive and normative statements, economists try to remain rooted in a positive analysis of the actual people who inhabit the actual economy instead of a normative analysis.
Demand is consumer desire and willingness to buy goods or services at each price while holding all other factors constant. The ability to pay is also a factor because if you cannot pay for the supply you don’t have any effect on the demand. In a demand curve displays how the demand for goods/ services will vary with a change in price. The law of demand says that when prices increase, demand for the supply/good will decrease.
On the other hand, Supply is the amount the producers of a product is willing to supply it at each price. A supply curve will show the correlation between price and quantity supplied. The law of supply states that when there is a increase in price, the quantity supplied will also increase.
In an economic equilibrium, the supply and demand are equal. This is where sellers and buyers agree upon a price and the amount of supply. On a diagram, supply curve and demand curve will meet at a point. Usually there is excess amount of supply and demand. When there’s an excess amount of supply , the price will be above the equilibrium level. When there’s an excess demand, the price will be below the equilibrium level. When it comes to demand and supply, economists mainly focus on a concept known as Ceteris Paribus which means “other things being equal” where other factors other than supply and demand are constant. But there are always factors that can cause a shift in a diagram. Some factors that may cause a shift in demand include changes in taste, population, income, prices of substitute or complement goods, and expectations about future conditions and prices. Factors that can shift the supply curve include input prices, natural conditions, changes in technology, and government taxes, regulations, or subsidies. When there’s a shift in either supply or demand curve, there’ll be a change in the equilibrium price and quantity. There are four steps when considering changes in the equilibrium, they include (1) sketching a supply and demand diagram to see what the market looked like before, (2) decide if the factor affect supply or demand, (3) decide if the affect is positive or negative and draw the appropriate shift, and (4) compare the before and after of the market.
Sometimes there are arguments on whether prices are too high or too low and in order to regulate prices, the governor has price control laws called price ceiling and price floors. Price ceiling refers to the maximum price a product can be priced, while price floor refers to the minimum price a product can be priced. When a price ceiling is below the equilibrium level that means quantity demand will be higher than that of quantity supply. When a price flooring is above the equilibrium level that means the quantity supply will be more than quantity demand. It must be cleared up that neither price ceiling or price floors cause demand or supply to change it is just implemented to set price limits. Consumer surplus is the amount that buyers would’ve been willing to purchase a supply minus the price that they actually paid. On a diagram it is the area above the market price and below the demand curve. While producer surplus is the amount that the sellers would’ve been willing to accept minus the actual cost. On a diagram it is the area between the market price and the segment of the supply curve below the equilibrium. When these two are summed up it is known as social surplus (or economic surplus or total surplus). Social surplus is larger at the equilibrium quantity and price than at any other quantity. When the economy produces an inefficient quantity of goods and services, there is deadweight loss because there’s also loss in total surplus.