Economics: Supply, Demand, and Market Analysis
Summary of Mochón and Becker
Unit 1: Economics as Science
Chapter 1: The Objective of Economics
Economics studies how societies manage scarce resources to produce and distribute goods and services among individuals, fulfilling human needs and desires.
Types of Goods
- Free goods: Unlimited and not owned.
- Economic goods: Scarce in relation to desires.
Depending on their nature:
- Capital goods: Used to produce other goods.
- Consumer goods: For direct satisfaction of needs.
- Durable: Extended use.
- Non-durable: Affected by time.
According to their function:
- Intermediate goods: Require further processing.
- Final goods: Ready for use or consumption.
Goods are also classified as excludable (preventing use), rival (use reduces availability), public (non-excludable and non-rival), and private (excludable and rival).
Microeconomics: Studies individual behaviors.
Macroeconomics: Analyzes global aggregates like employment, inflation, and output.
Chapter 1.2: Factors and Products
Inputs are resources used by companies to produce goods and services. Productive factors combine to create products for consumption or further production.
- Land (natural resources): Renewable and non-renewable.
- Labor: Time and intellectual ability.
- Capital: Durable goods used for production. Capitalism is named for the private ownership of capital.
Economic Problems of Any Society
- What to produce?
- How to produce?
- For whom to produce?
Chapter 1.3: Rules of the Economy
Rule 1: Unlimited Wants, Limited Resources
Demand is unlimited, but resources are finite. The production possibility frontier (PPF) represents the maximum combination of goods and services an economy can produce with available resources. The PPF’s concavity and increasing opportunity cost are explained by the law of diminishing returns.
Rule 2: Opportunity Cost
Opportunity cost is the value of the next best alternative forgone. Rational decisions compare marginal benefit and marginal cost.
Rule 3: Specialization and Trade
Specialization and exchange allow for efficient production and consumption. Specialization reduces costs and offers lower prices. Barter has limitations, while money facilitates multilateral transactions and mass production. Economies of scale reduce average costs with increased production.
Rule 4: Free Markets
Market economies allocate resources through decentralized decisions. Central planning involves decisions by an authority. Real economies combine markets and government intervention.
Rule 5: Government Intervention
Markets self-regulate through price signals. However, limitations include inequitable income distribution and market failures like imperfect competition, externalities, public goods, and instability.
Rule 6: Incentives
Prices ration scarce goods. Profits reward efficient behavior and guide resource allocation. Centrally planned economies often lack incentives.
Rule 7: Economic Analysis
Economic theories explain observed phenomena. Economic variables influence decisions. Assumptions are propositions taken as given.
Rule 8: Positive vs. Normative Economics
Positive statements objectively explain economic phenomena. Normative statements offer subjective prescriptions.
Rule 9: Economic Models
Models simplify reality through assumptions. Rationality implies consistent choices. Simpler models provide general answers. The PPF model illustrates economic efficiency and growth.
Unit 2: Market
Chapter 2: Supply, Demand, and the Market
Exchange is indirect due to money. Supply and demand determine prices. Markets are institutions for trading goods, services, and factors of production. Market price is the exchange ratio for money. Exogenous changes can lead to black markets or misallocation.
Demand
Quantity demanded is the amount buyers are willing and able to purchase. The demand function depends on price, income, tastes, and relative prices. The law of demand describes the inverse relationship between price and quantity demanded.
Supply
The supply schedule relates price to quantity supplied. The supply curve graphically represents this relationship. Factors shifting the supply curve include production factor costs, related goods prices, technology, and the number of suppliers.
Market Equilibrium
Equilibrium price balances supply and demand. Excess demand creates shortages, while excess supply creates surpluses. The law of supply and demand states that price adjusts to balance the market.
Chapter 3: Elasticity and Its Applications
Microeconomic Analysis
Microeconomics analyzes commodity markets, factor markets, and market failures. Relative price is the ratio of two prices. Partial equilibrium analysis focuses on specific markets. Elasticity measures responsiveness to changes.
Determinants of Price Elasticity of Demand
- Nature of needs
- Availability of substitutes
- Proportion of income spent
- Time period
Cross-Price and Income Elasticity
Cross-price elasticity indicates substitutes (positive), complements (negative), or independent goods (zero). Income elasticity classifies goods as normal (positive), necessary (less than 1), luxury (greater than 1), or inferior (negative).
Elasticity and Total Revenue
Total revenue (price times quantity) changes with price depending on elasticity. Total revenue is maximized at unitary elasticity.
Elasticity of Supply
Elasticity of supply measures producer responsiveness to price changes, influenced by the production process and time frame.
Unit 3: The State and National Accounts
Chapter 13: State Functions
The state promotes economic efficiency, equity, and stability. It addresses market failures, redistributes income, and uses monetary and fiscal policy for stability.
The State and Economic Activity
The state uses taxes, spending, and regulation to influence economic activity. Taxes fund public spending and can disincentivize certain activities. Public spending includes goods, services, transfers, and debt interest. Regulation guides individual and company behavior.
Tax System Principles
- Equity: Fair burden sharing based on benefit principle or ability to pay.
- Neutrality: Minimal market distortion.
- Simplicity: Ease of application.
Taxes and the Environment
Natural resources are classified as appropriated (private), inappropriate (free), renewable, and non-renewable. Externalities impose uncompensated costs or benefits. The state uses regulations, taxes, and permits to address externalities. Private solutions include negotiations and liability rules.
Chapter 14: Overview of Macroeconomics
Macroeconomics examines aggregate economic variables. Key concepts include GNP, CPI, inflation, net exports, exchange rate, public expenditure, and taxes. Aggregate supply and demand analysis helps understand macroeconomic forces and policy responses.
GNP: Market value of all goods and services produced in a country for a year.
Real GNP: GNP adjusted for inflation.
GDP: Total output produced within a country in a given year.
