Econ 101
Econ 101
Economics is a subject that is often overlooked in our educational system. While most high school curriculums include subjects such as advanced math or physics, often only college students and those at elite prep schools have the “joy” of experiencing an education in this critical subject.
A great resource for learning more about basis econ is Wikipedia.com. I have borrowed the below graphs from: http://en.wikipedia.org/wiki/Supply_and_demand. For the purposes of this illustration I’ll assume the reader either has a basic grounding in economic theory or has taken a few minutes to review the information contained at the above link.
Simple supply and demand curves
The basic concept of supply and demand is actually not all that complex for most people once they spend a little time getting their hands around it. In a nutshell the relationship or intersection between the demand curve (what consumers are able and willing to acquire) and the supply curve (what business is able and willing to produce) determines the quantity of product that will be produced (x axis) and the price that will be charge for the product or group of products (y axis).
Understanding the above is critical to understanding how our entire economy operates and more importantly the impact of various decisions and activities of consumers, businesses and the role of government.
Once you can embrace the above concept the next critical thing to understand is what happens to price and quantity when one of the above curves shifts.
Demand curve shifts
Below I have provided direct information from Wikipedia. In layperson terms the impact of a shift is demand is as follows (keep in mind that the below assumes the basic concept of “all else being equal” i.e., we assume that the supply curve does not change):
Demand curve shifts up (increase): Prices go up and Quantity produced goes up.
Demand curve shifts down (decrease): Prices go down and Quantity produced goes down.
Per Wikipedia: “When more people want something, the quantity demanded at all prices will tend to increase. This can be referred to as an increase in demand. The increase in demand could also come from changing tastes, where the same consumers desire more of the same good than they previously did. Increased demand can be represented on the graph as the curve being shifted right, because at each price point, a greater quantity is demanded. An example of this would be more people suddenly wanting more coffee. This will cause the demand curve to shift from the initial curve D0 to the new curve D1. This raises the equilibrium price from P0 to the higher P1. This raises the equilibrium quantity from Q0 to the higher Q1. In this situation, we say that there has been an increase in demand which has caused an extension in supply.
Conversely, if the demand decreases, the opposite happens. If the demand starts at D1 and then decreases to D0, the price will decrease and the quantity supplied will decrease—a contraction in supply. Notice that this is purely an effect of demand changing. The quantity supplied at each price is the same as before the demand shift (at both Q0 and Q1). The reason that the equilibrium quantity and price are different is the demand is different.”
Supply curve shifts
To follow the same assumptions from our previous review of shifts in the demand curve the impact of a supply curve shift is:
Supply curve shifts down (increase): Prices go up and Quantity produced goes down.
Supply curve shifts up (decrease): Prices go down and Quantity produced goes up.
Per Wikipedia: “When the suppliers' costs change the supply curve will shift. For example, assume that someone invents a better way of growing wheat so that the amount of wheat that can be grown for a given cost will increase. Producers will be willing to supply more wheat at every price and this shifts the supply curve S0 to the right, to S1—an increase in supply. This causes the equilibrium price to decrease from P0 to P1. The equilibrium quantity increases from Q0 to Q1 as the quantity demanded increases at the new lower prices. Notice that in the case of a supply curve shift, the price and the quantity move in opposite directions.
Conversely, if the quantity supplied decreases, the opposite happens. If the supply curve starts at S1 and then shifts to S0, the equilibrium price will increase and the quantity will decrease. Notice that this is purely an effect of supply changing. The quantity demanded at each price is the same as before the supply shift (at both Q0 and Q1). The reason that the equilibrium quantity and price are different is the supply is different.
There are only 4 possible movements to a demand/supply curve diagram. The demand curve can move to the left and right, and the supply curve can also move only to the left or right. If they do not move at all then they will stay in the middle where they already are.”
Bringing it all together
Most people would agree that as far as consumers are concerned the following holds true:
Prices go up: BAD for consumers
Prices go down: GOOD for consumers
Quantity goes up: GOOD for consumers
Quantity goes down: BAD for consumers
You can apply the above to most products; take gasoline for example. Every consumer would rather pay $1.65 a gallon for gas than $3.30. Likewise, if anyone remembers the gas crisis in the late 1970’s, no one wants to go to the local station and find that gas has been rationed or there is not any available.
If you are still with me the below table illustrates the impact of shifts on the two curves on price and quantity and whether this is a GOOD or BAD thing for consumers:
Action Impact on P Good / Bad Impact on Q Good / Bad
Demand increase UP BAD UP GOOD
Demand decrease DOWN GOOD DOWN BAD
Supply increase DOWN GOOD UP GOOD
Supply decrease UP BAD DOWN BAD
Once the above table makes sense economic theory really isn’t all that complex. Clearly consumers are generally rational beings and prefer GOOD over BAD outcomes. Given that assumption we find:
Action Impact Net Result
Demand increase BAD / GOOD Mixed
Demand decrease GOOD / BAD Mixed
Supply increase GOOD / GOOD GOOD
Supply decrease BAD / BAD BAD
In summary shifts in the demand curve may be good or bad on consumers; however shifts in the supply curve have clear consequences: if the supply curve shifts up and to the left (a decrease) this is BAD; alternatively if the supply curve shifts down and to the right (an increase) this is GOOD.
Every rational person I’ve ever met in life wants to maximize the GOOD and minimize the BAD. Since we have proven that by definition a decrease in supply is BAD and an increase in supply is GOOD; I advocate protecting the supply curve from interference that causes BAD outcomes and I promote ideas that result in an increase in supply, or GOOD ideas.
Economics is a subject that is often overlooked in our educational system. While most high school curriculums include subjects such as advanced math or physics, often only college students and those at elite prep schools have the “joy” of experiencing an education in this critical subject.
A great resource for learning more about basis econ is Wikipedia.com. I have borrowed the below graphs from: http://en.wikipedia.org/wiki/Supply_and_demand. For the purposes of this illustration I’ll assume the reader either has a basic grounding in economic theory or has taken a few minutes to review the information contained at the above link.
Simple supply and demand curves
The basic concept of supply and demand is actually not all that complex for most people once they spend a little time getting their hands around it. In a nutshell the relationship or intersection between the demand curve (what consumers are able and willing to acquire) and the supply curve (what business is able and willing to produce) determines the quantity of product that will be produced (x axis) and the price that will be charge for the product or group of products (y axis).
Understanding the above is critical to understanding how our entire economy operates and more importantly the impact of various decisions and activities of consumers, businesses and the role of government.
Once you can embrace the above concept the next critical thing to understand is what happens to price and quantity when one of the above curves shifts.
Demand curve shifts
Below I have provided direct information from Wikipedia. In layperson terms the impact of a shift is demand is as follows (keep in mind that the below assumes the basic concept of “all else being equal” i.e., we assume that the supply curve does not change):
Demand curve shifts up (increase): Prices go up and Quantity produced goes up.
Demand curve shifts down (decrease): Prices go down and Quantity produced goes down.
Per Wikipedia: “When more people want something, the quantity demanded at all prices will tend to increase. This can be referred to as an increase in demand. The increase in demand could also come from changing tastes, where the same consumers desire more of the same good than they previously did. Increased demand can be represented on the graph as the curve being shifted right, because at each price point, a greater quantity is demanded. An example of this would be more people suddenly wanting more coffee. This will cause the demand curve to shift from the initial curve D0 to the new curve D1. This raises the equilibrium price from P0 to the higher P1. This raises the equilibrium quantity from Q0 to the higher Q1. In this situation, we say that there has been an increase in demand which has caused an extension in supply.
Conversely, if the demand decreases, the opposite happens. If the demand starts at D1 and then decreases to D0, the price will decrease and the quantity supplied will decrease—a contraction in supply. Notice that this is purely an effect of demand changing. The quantity supplied at each price is the same as before the demand shift (at both Q0 and Q1). The reason that the equilibrium quantity and price are different is the demand is different.”
Supply curve shifts
To follow the same assumptions from our previous review of shifts in the demand curve the impact of a supply curve shift is:
Supply curve shifts down (increase): Prices go up and Quantity produced goes down.
Supply curve shifts up (decrease): Prices go down and Quantity produced goes up.
Per Wikipedia: “When the suppliers' costs change the supply curve will shift. For example, assume that someone invents a better way of growing wheat so that the amount of wheat that can be grown for a given cost will increase. Producers will be willing to supply more wheat at every price and this shifts the supply curve S0 to the right, to S1—an increase in supply. This causes the equilibrium price to decrease from P0 to P1. The equilibrium quantity increases from Q0 to Q1 as the quantity demanded increases at the new lower prices. Notice that in the case of a supply curve shift, the price and the quantity move in opposite directions.
Conversely, if the quantity supplied decreases, the opposite happens. If the supply curve starts at S1 and then shifts to S0, the equilibrium price will increase and the quantity will decrease. Notice that this is purely an effect of supply changing. The quantity demanded at each price is the same as before the supply shift (at both Q0 and Q1). The reason that the equilibrium quantity and price are different is the supply is different.
There are only 4 possible movements to a demand/supply curve diagram. The demand curve can move to the left and right, and the supply curve can also move only to the left or right. If they do not move at all then they will stay in the middle where they already are.”
Bringing it all together
Most people would agree that as far as consumers are concerned the following holds true:
Prices go up: BAD for consumers
Prices go down: GOOD for consumers
Quantity goes up: GOOD for consumers
Quantity goes down: BAD for consumers
You can apply the above to most products; take gasoline for example. Every consumer would rather pay $1.65 a gallon for gas than $3.30. Likewise, if anyone remembers the gas crisis in the late 1970’s, no one wants to go to the local station and find that gas has been rationed or there is not any available.
If you are still with me the below table illustrates the impact of shifts on the two curves on price and quantity and whether this is a GOOD or BAD thing for consumers:
Action Impact on P Good / Bad Impact on Q Good / Bad
Demand increase UP BAD UP GOOD
Demand decrease DOWN GOOD DOWN BAD
Supply increase DOWN GOOD UP GOOD
Supply decrease UP BAD DOWN BAD
Once the above table makes sense economic theory really isn’t all that complex. Clearly consumers are generally rational beings and prefer GOOD over BAD outcomes. Given that assumption we find:
Action Impact Net Result
Demand increase BAD / GOOD Mixed
Demand decrease GOOD / BAD Mixed
Supply increase GOOD / GOOD GOOD
Supply decrease BAD / BAD BAD
In summary shifts in the demand curve may be good or bad on consumers; however shifts in the supply curve have clear consequences: if the supply curve shifts up and to the left (a decrease) this is BAD; alternatively if the supply curve shifts down and to the right (an increase) this is GOOD.
Every rational person I’ve ever met in life wants to maximize the GOOD and minimize the BAD. Since we have proven that by definition a decrease in supply is BAD and an increase in supply is GOOD; I advocate protecting the supply curve from interference that causes BAD outcomes and I promote ideas that result in an increase in supply, or GOOD ideas.
posted by natenoy | 5:35 PM
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