Demand and Supply

Week 1 notes

Smith’s 3 reasons why specialisation is better

1. Specialist workers present the opportunity to concentrate workers/enterprises in areas for which they have an advantage. People have different skills, talents and interests, so they will be better at some jobs than others. For some goods, geography affects specialisation.

2. Workers or businesses that specialise in certain tasks often learn how to produce faster and of higher quality. They know their jobs well enough to suggest innovative ways to do their jobs faster and better.

3. Specialisation allows firms to take advantage of economics of scale - the average cost of producing each individual units falls for many goods as the level of production rises.

Scarcity vs Abundance

Scarcity: Human needs for goods, services and resources are greater than what is available. The value of these resources increases.

Abundance: Ample availability of goods and services, potentially resulting in lower prices and higher consumer surplus.

Microeconomics general definition that includes supply and demand

Economics studies human behaviour regarding unlimited needs and scarce resources that have alternative uses.

Human needs/desires creates demands for goods.

Resources are transformed into the supply of goods.

Demand: quantity of goods or services that consumers are willing to buy at each price. Based on needs and wants, as well as on the ability to pay for it.

Quantity demanded

The total number of units that consumers would buy at the price a buyer pays for a unit of a specific good or service.

Increase in price of a product/service (almost) always decreases the quantity demanded of the product/service.

Economic efficiency

When it is impossible to improve the situation of one party without imposing a cost on another. Conversely, if a situation is inefficient, it becomes possible to benefit at least one party without imposing costs on others.

The economy is getting as much benefit as possible from its scarce resources and all the possible gains from trade have been achieved. In other words, the optimal amount of each good and service is produced and consumed.

Production theory

The study of production or the process of converting inputs into outputs link. Producers choose the combination of inputs and methods to maximize their profits.

Utility theory

According to the production theory, consumers will choose to buy and consume a combination of goods that maximizes their happiness or 'utility', subject to the limit of how much income they can spend.

Price theory

Production theory and utility theory work together to produce the theory of supply and demand, which determines prices in a competitive market. In a perfectly competitive market, this causes the price willing to be paid by consumers to be the same as that charged by producers. This leads to economic equilibrium.

Incentives

1. Rewards that encourage specific behaviours and actions

General incentive: Price - low price encourages sales (sales are high)

2. Penalties that discourage specific behaviours and actions

General incentive: Benefits encourage sales, while competitors suffer

Extrinsic incentives: external to us (e.g. price)

Intrinsic incentives: internal to each person (e.g. health)

Motivation

This results in us being motivated to perform specific actions (such as

buying goods).

Extrinsic motivation (price, quality, brand)

Intrinsic motivation:

• Curiosity: you explore and learn for pleasure and enjoyment.

• Expanding knowledge: knowledge builds confidence and self-esteem. People want to be knowledgeable, so they can talk about a topic in an informed way and have conversations or actions regarding multiple topics.

• Challenges: working towards your goals while maintaining optimal work performance.

• Control: the desire to control outcomes and make decisions that affect outcomes.

• Recognition: we all want to be appreciated and recognized for our efforts.

• Cooperation: we like to belong and feel socially accepted.

• Competition: we try to win or be the best.

• Fantasy: imagination and vision are used to stimulate our behavior.

General journal vs. general ledger

Journal: raw accounting entries that record business transactions in sequential order by date (who paid who an amount).

Ledger: more formalized; five key accounting items via t-accounts: assets. liabilities, owner’s capital, revenue, and expenses. Can be automated from journal.

3 main types of businesses

• Manufacturing: normally most complex as it involves more types of transactions

• Retail

• Service

Business may encompass more than one type of business model.

Describes an abstract set of diagrams, concepts and connections to help visualise the flow of cost, information, services, revenue and products.

The Basic Business Model shows how most companies focus on profits.

5 types of company legal structures

(excl. co-operatives and close corporation)

• Sole ownership in sole proprietorship (cheap but stops with owner's death)

• Partnership (dissolve upon the death of any one of the partners)

• Companies; Private Company, Personal Liability Company, Public Company, State Controlled Company (continuity of company after death of owner)

• Business trust (trustee assets are separate from the person)

• Non-Profit Companies

3 business activities

• Financial: raising money

• Investing: buy assets

• Operating: use assets to make money

The market demand curve shows:

the quantity of a good that consumers would like to purchase at different prices.

If the demand curve moves to the right it will cause

an increase in equilibrium price and quantity.

If the price of a good decreases while the quantity of the good exchanged on markets decreases, then

a decrease in demand quantities due to replacement goods.

The market supply curve shows:

the quantity of a good that firms would offer for sale at different prices.

During a recession, economies experience increased unemployment and a reduced level of activity. How would a recession be likely to affect the market demand for new cars?

Demand will shift to the left.

If a computer software company introduces a new program and finds that orders from wholesalers far exceed the number of units that are being produced,

there is an excess demand and price can be expected to increase.

We observe a rise in the equilibrium price accompanied by a decline in the equilibrium quantity when:

Supply quantities declines while demand quantities increases, and the decline in supply exceeds the increase in demand.

Unionized workers may be able to negotiate with management for higher wages during periods of economic prosperity. Suppose that workers at automobile assembly plants successfully negotiate a significant increase in their wage package. How would the new wage contract be likely to affect the market supply of new cars?

Supply will shift to the left.

If a rise in supply quantities exceeds a rise in demand quantities, then

The equilibrium price will fall while the equilibrium quantity will rise.

If the supply curve moves to the right it will cause

a decrease in equilibrium price and an increase in equilibrium quantity.

If the price of a good increases while the quantity of the good exchanged on markets decreases, then there has been

a decrease in demand quantities.

Market equilibrium refers to a situation in which market price

is at a level where there is neither a shortage nor a surplus.

If automobile manufacturers are producing cars faster than people want to buy them,

there is an excess supply and price can be expected to decrease.

If the price of a good decreases while the quantity of the good exchanged on markets increases, then there has been

a shift to the right in the supply curve due to innovation.

Both the equilibrium price and quantity rise:

When demand quantities and supply quantities increase, but the rise in demand exceeds the rise in supply.

If the price of a good increases while the quantity of the good exchanged on markets increases, then there has been

an increase in demand quantities due to advertising.