Thursday, 22 October 2009

Demand and Supply

Supply and demand is perhaps one of the most fundamental concepts of economics and it is the backbone of a market economy.

Demand refers to how much (quantity) of a product or service is desired by buyers.

Supply represents how much the market can offer.

The Law of Demand

If all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded. The amount of a good that buyers purchase at a higher price is less because as the price of a good goes up...

The Law of Supply

Like the law of demand, the law of supply demonstrates the quantities that will be sold at a certain price. But unlike the law of demand, the supply relationship shows an upward slope. This means that the higher the price, the higher the quantity supplied. Producers supply more at a higher price because selling a higher quantity at a higher price increases revenue...


When supply and demand are equal the economy is said to be at equilibrium. At this point, the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded.


Disequilibrium occurs whenever the price or quantity is not equal to P or Q.

1. Excess Supply: If the price is set too high, excess supply will be created within the economy and there will be allocative inefficiency. 2. Excess Demand: Excess demand is created when price is set below the equilibrium price. Because the price is so low, too many consumers want the good while producers are not making enough of it.
Shifts vs. Movement

The “movements” and “shifts” in relation to the supply and demand curves represent very different market phenomena:


A movement refers to a change along a curve. On the demand curve, a movement denotes a change in both price and quantity demanded from one point to another on the curve. The movement implies that the demand relationship remains consistent. A movement along the demand curve will occur when the price of the good changes and the quantity demanded changes in accordance to the original demand relationship.

A movement along the supply curve means that the supply relationship remains consistent. a movement along the supply curve will occur when the price of the good changes and the quantity supplied changes in accordance to the original supply relationship.

2. Shifts

A shift in a demand or supply curve occurs when a good's quantity demanded or supplied changes even though price remains the same.

Shifts in the demand curve imply that the original demand relationship has changed, meaning that quantity demand is affected by a factor other than price.

Like a shift in the demand curve, a shift in the supply curve implies that the original supply curve has changed, meaning that the quantity supplied is effected by a factor other than price.

Tuesday, 20 October 2009

Opportunity cost…

Definition: The cost of the next best alternative, which is forgone
when the choice is made
i) Since a Canadian worker can make either two cars a year or 30 bushels of wheat, the opportunity cost of a car is 15 bushels of wheat

ii) Hawaii is the largest producer of coffee in the U.S. However the opportunity cost of growing more coffee is too high (tourism, vacation resorts, environmental issues) to grow more coffee in Hawaii


Economics - "The science which studies human behaviour as the relationship between ends (wants) and scare means(resources)"

Positive statement - can be verified by the facts...
Negative statement - a statemnent of opinion...

Factors of Production

1. Land: Any natural resources
2. Labour: People who are available to work
3. Capital: Something made in order to make something else
4. Enterprise: The skills of combing, the factors of prodaction

Division of Labour[Specialisation]

Output is increased when production is divided into a series of tasks each done by a different worker.
Specialisation causes an increase in PRODUCTIVITY.
Output per worker per hour
Specialisation leads to exchange
A market is any place where buyers and sellers exchange goods and services at an agreed PRICE.