Saturday, February 17, 2018

Economics with Picard: Lesson 1

Some people know Economics. Some people don't know Economics. Some people refuse to know Economics. I hope that, through this series, those who do not know Economics will learn.

Lesson 1: Supply and Demand:

A basic tenet of Micro- and Macro-economic theory is the supply and demand chart. The basic idea of this is explained in the intuitive laws of supply and demand

Law of Supply: The higher the market price of a good or service (price at which it is bought and sold) the more of it producers will produce.
Law of Demand: The higher the market price of a good or service, the less of it consumers will want to buy.
This lends itself to a simple graph relating the quantity bought or sold to the price of our good or service.

The supply graph is denoted in the picture below by S, and demand by D. As you can see, Supply slopes up and Demand slopes down, as our laws dictate. It's intuitive! If ties are expensive, I'll buy less new ties.
There's one more thing our graph shows us, at the intersection of the curves is what we call equilibrium. At this quantity "Q" and price "P", supply meets demand. You may ask, how does the market know equilibrium?
Short answer: competition.
Long answer:
If the price is above equilibrium, producers will be stuck with more products than consumers will buy. They will reduce their production, thus decreasing quantity, while lowering prices to outdo each other, until they reach equilibrium (this is kinda simplified, but fairly accurate).
If the price is below equilibrium, there is a shortage. Consumers will outbid each other for the goods. Prices will rise, and producers will make more goods, and the market will find equilibrium.
This gets a lot more bells and whistles, and just about all of economic theory is built on it, but at least you now know the basics.