Economics Explained: IX Introduction to microeconomics

This is extremely basic stuff, so probably not worth reading. More for reference for other articles.

What is economics? For many people it is a subjective matter, but according to the dictionary it is this:

The branch of knowledge concerned with the production, consumption, and transfer of wealth.

Hi, I’m Swift Economist and you may remember me from such blog posts as the EU & I and NUS now upsetting students. Today’s post is about discussing what microeconomics is and explaining the very basics of supply and demand.

Micro economics is essentially considering the spending choices of the individual and the firm. It is incredibly important and while you see less of it in the news than macro economics, you see it more often in your day to day life.

Essentially, the buying of products and pricing can be put down to demand and supply.

Demand

Demand is the amount that a person/people want a good and how much they are prepared to pay for it. Obviously, there is an inverse relationship between the price of a good and the amount that a person would be willing to pay for it. This can be shown graphically in a demand curve

D1
p = price, q = quantity

So this curve shows that at £1.50, 75 packets of biscuits would be bought. Should the price fall to £0.65, there would be an extension of demand to 200 packets of biscuits.

A demand curve can shift, leading to an increase or decrease in demand (from red to blue).

D2
Red = Demand, Blue = New Demand, p = price, q = quantity

There could be many reasons for an increase in demand, such as

  1. They are seen as the fashionable biscuit to eat (thanks to advertising) or Doctors have claimed they count as one of your five a day (Branding)
  2. The cost of a cup of tea has gone down (Decrease in price of complimentary goods)
  3. The cost of rich teas has increased (Increase in the price of substitutes/competition)
  4. The public have had an increase in their incomes.

The opposite of all of these can lead to a decrease in demand, where the demand curve shits to the left.

Supply

The supply curve is the opposite. Firms will be prepared to sell more for more money

S1.png

They would be prepared to sell 75 packets of biscuits for £0.65 and sell 200 packets at £1.50. Again there can be an increase in supply (Green curve to orange curve).

S2.png

This could be for many reasons.

  1. Cheaper labour becomes available
  2. Machinery (Capital) becomes cheaper
  3. Land is cheaper
  4. Natural resources such as wheat and sugar become cheaper

Again, supply can decrease for the opposite of the reasons just listed.

Equilibrium

The market will always eventually clear where supply = demand.

SD1.pngLets use the examples we were considering earlier to see how this will work. Imagine that as a supplier I decide to sell 75 units, as demand is greater than supply, there is a shortage. I say ok, I will supply 200 units at £1.50 (as is my supply curve),  but only 75 units are demanded at that price, therefore there is a surplus of 125 packets of biscuits. So this process will keep repeating as I try to find the equillibrium until I sell 130 units at £1.10. This will remain the equilibrium until there is a change in supply or demand.

The following changes in equillibrium can be shown graphically and if your a keen bee you can try to show these graphically, but you can take my word for it and use common sense.

Increase in supply: Price down, Quantity up

Increase in demand: Price up, Quantity up

Decrease in supply: Price up, Quantity down

Decrease in demand: Price down, Quantity down

 

 

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