Microeconomics #01: Scarcity & Allocation
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This chapter discusses the economic concepts of scarcity, allocation mechanisms, opportunity cost, demand and supply curves, and equilibrium. It explains that scarcity means resources are limited and not enough to satisfy everyone, so allocation mechanisms like prices are needed. Demand curves show the relationship between price and quantity demanded, and usually slope downward, while supply curves show the positive relationship between price and quantity supplied. The intersection of the supply and demand curves indicates the equilibrium price and quantity in the market.
Microeconomics #01: Scarcity & Allocation
- 1. Microeconomics for Business Chapter 01: Scarcity, Allocation & Markets Scarcity & Allocations ● Scarcity: We don’t have enough of anything to give to everyone. Therefore, we need some form of resource allocation mechanism ● These days its Markets that make these decisions where Prices act as rationing devices. To an economist prices move up and down depending on scarcity. ● Price is not the only allocation mechanism. e.g. giving away concert tickets through lottery is another allocation mechanism. ● Opportunity Cost : It means something has been sacrificed when a choice is made (value of next best forgone opportunity). There is always going to be next best alternative, therefore opportunity cost. ● Prices are formed by interaction of 2 parties i.e. buyers and seller (ignoring government). ● The graph that concerns buyers is called a Demand curve and the one for sellers is Supply curve. Demand Curve ● The graph depicting the relationship between the price of a commodity and amount of it consumers are willing to purchase (at any given price) is demand curve. ● Demand curve usually slopes downwards from left to right. ● The slope is also referred to as “ Law of Demand ” which means, if all other factors remain equal, people will buy more of a product or service if prices fall. Shift vs Movement Along A Demand Curve ● There is a movement along a demand curve when a change in price causes the quantity demanded to change. ● Movement along a demand curve happens only when the price changes. ● Shift of a demand curve takes place when a nonprice determinant results in shifting the curve (right or left). ● Factors affecting shift in demand curve may include change in income, preference, population size etc. www.AllThingsMBA.com 1
- 2. Microeconomics for Business Supply Curve ● Supply curve is the relationship between the price of a good or service and the quantity sellers are willing to supply. ● The slope is also referred to as “ Law of Supply ” which means as the supply of a given commodity increases, the quantity supplied increases, all else being equal. ● This formulation implies that price is independent variable and supply is dependent. Shift vs Movement Along A Supply Curve ● Movements along the curve occur only if there is a change in quantity supplied caused by a change in the good's own price ● A shift in the supply curve, referred to as a change in supply, occurs only if a nonprice determinant of supply changes. ● For example, if the price of an ingredient used to produce the good, a related good, were to increase, the supply curve would shift left. Market Supply Curve The market supply curve is derived by summing the quantity all suppliers are willing to produce when the product can be sold for a given price. www.AllThingsMBA.com 2
- 3. Microeconomics for Business Equilibrium ● When supply and demand are equal (i.e. when the supply function and demand function intersect) the economy is said to be at equilibrium . ● At this point, the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded. ● Thus, everyone (individuals, firms, or countries) is satisfied with the equilibrium. At the given price, suppliers are selling all the goods that they have produced and consumers are getting all the goods that they are demanding. References: Lectures by Prof. Larry DeBrock http://www.investopedia.com/examguide/cfalevel1/microeconomics/priceceilingsfloors.asp http://www.alevelhelp.com/2011/02/scarcityopportunitycostandresourceallocation/ http://www.econport.org/content/handbook/Equilibrium/PriceControls.html Notes by Fraz Tajammul www.AllThingsMBA.com 3