Economics Decoded 101: 2012

Thursday, December 13, 2012

Business Cycles

A business cycle is a period of time in which an economy expands and contracts. A business cycle consists of four parts:

Peak - A high point in the business cycle.
Recession - A period of contraction.
Trough - A low point in the business cycle.
Recovery - A period of expansion.

Other Business Cycle Terms

Depression - A very low and long recession.
Boom - An extremely high peak.

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Market Equilibrium and Price Controls

Equilibrium

Equilibrium occurs where the supply curve and the demand curve intersect. The resulting price is called the Equilibrium Price (Pe). At the equilibrium price the seller and the buyer are both willing to do business.

Market Equilibrium

Consumer and Producer Surplus

When market equilibrium occurs, benefits from trade for both the buyer and seller (consumer and producer) are maximized. The benefit for the buyer is called Consumer Surplus. The consumer surplus is the difference between the maximum amount a buyer is willing to pay for a good, and the amount that they actually paid for the good. The benefit for the seller is called Producer Surplus. The producer surplus is the different between the lowest amount that a seller will sell for, and the amount that they actually paid for it.

Price Controls

Price Controls are minimum and maximum prices set by a government. Example: If a maximum price is set for steak, more buyers will have the money required to buy it. This maximum set price is called a price ceiling. However, if this price ceiling is below the market equilibrium, whats known as a shortage will occur.

Price ceiling set at Pc and resulting shortage.

A Price Floor is the opposite of a price ceiling. A price floor is a set minimum price at which a buyer may purchase a good. If the price floor is above the equilibrium price a surplus will result.

Price floor set at Pf and the resulting Surplus.

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Wednesday, December 12, 2012

Home Page

Welcome to Economics Decoded 101!

The follow are links to all my posts.

The Meaning of Economics
The Production Possibility Frontier
Supply and Demand: The Bread and Butter of Economics
Market Equilibrium and Price Controls
Business Cycles

Unemployment

Tuesday, December 11, 2012

Supply and Demand: The Bread and Butter of Economics

Demand

Demand is the buyer's eagerness to buy a product. Demand varies depending on the price of a product. This concept is represented by what is known as a demand schedule.

Demand Schedule for Soda

Price per Can	Quantity of Cans Demanded
10 ₵	5
20	4
30	3
40	2
50	1

The inverse relationship between the price of a product and the demand of the product is known as the Law of Demand. The law of demand can be illustrated graphically by what is known as a Demand Curve.

Basic Demand Curve

What Can Happen with Demand?

1. Change in quantity demanded. This occurs when there is a change in the price of the good. This results in movements up or down the demand curve.

An increase in price results in movement up the demand curve.
If price decreased, movement done the curve would occur.

2. Change in demand. This can result from a number of factors such as more consumers interested in buying the good, higher income in the population, the cost of comparable goods, etc.

An increase in demand causes the whole demand curve to shift to the right.
If demand decreased, the demand curve would shift to the left.

Supply

Supply is the amount of a product that the seller is willing to sell. Unlike the law of demand, the Law of Supply doesn't follow an inverse relationship. As the price increases, the quantity supplied increases.

Supply Schedule for Soda

Price per Can	Quantity of Cans Supplied
10 ₵	2
20	3
30	4
40	5
50	6

The supply schedule can be graphically represented by the Supply Curve.

Basic Supply Curve

What can happen with supply?

1. Change in quantity supplied. This occurs when there is a change in the price of a good. This results in a movement up or down the supply curve.

An increase in price results in movement up the supply curve.
If price decreased, movement done the curve would occur.

2. Change in supply. This can result from a number of factors such as the number of producers, improvements in technology, government regulations, etc.

An increase in supply causes the whole supply curve to shift to the right.
If supply decreased, the supply curve would shift to the left.

In this post Market Equilibrium and Price Controls we will be examining what you can do by combining the supply and demand curves.

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Thursday, December 6, 2012

Production Possibility Frontier

Let's begin with a simple concept from macro economics called the Production Possibility Frontier. The Production Possibility Frontier shows the maximum amount of any two products that an economy can produce. Yes, real life economies produce more than just two products; however, the the PPF example uses only two products for the sake of simplicity.

In the example below, the economy can either produce only cell phones, only computers, or some combination of the two.

The points located on the curve (A,B,C,D,E) are called Efficient Production Points. At efficient production points the economy is producing the maximum number of goods possible.

Points that lie underneath the PPF curve, such as point F, are called inefficient production points. This means the economy is not using its resources and technology to its fullest; there for, it is not producing the most goods possible.

Point D on the other hand is impossible. The economy currently does not have the resources and/or technology to produce at this level.

If the technology and/or resources increase in the economy, the PPF curve shifts outward.

Along with illustrating efficient production points, the PPF is also a good example of Opportunity Cost. Opportunity cost is the benefit of an action one gives up by taking another course of action. In our PPF example the opportunity cost of producing more computers would be the lower production of cell phones. A page fully devoted to opportunity cost will come very shorty.

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Wednesday, December 5, 2012

The Meaning of Economics

What on earth is economics?

Economics is the study of how people choose to use their resources. Resources are things used to produce goods. Capital, labor, and natural resources are examples of resources. Goods are products such as cars or ice cream. Services like those provided by teachers and doctors are also considered goods.

Economics exits because of a thing called scarcity. Scarcity results when people want more of a good than what is available. Without scarcity economics would not exist, and toy would not be reading this blog!

How do people make these choices?

There are three economic atmospheres that determine how people make economic choices. The first is the market system. In a Market Economy factors such as the supply of a good and the demand of that good determine the price of the good. Individuals then make choices which will bring them the greatest monetary gain. For more on supply and demand, see my post Supply and Demand: The Bread and Butter of Economics.

The second economic atmosphere is called a Command Economy. In a Command Economy an authority figure controls prices and how resources are used. Therefore, the authority figure has direct control over price.

The final economic atmosphere is considered to be Mixed. This occurs when an economy has elements from both command and market economies.

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