A Bit of Economics — Part 4

{Read part 3 here.}

People produce and consume stuff. Division of labor and specialization require that they consume what they haven’t produced and produce what they don’t intend to consume. The bridge between production and consumption is the opportunity to exchange or trade. Trades happen in markets.

People are constantly being guided in their production and consumption decisions by prices. Prices convey information to all market participants. The price of a good — be it cars or carrots — tells us something about the world. The amount we buy depends on the price, and our willingness and our ability to pay for it. Continue reading “A Bit of Economics — Part 4”

A Bit of Economics — Part 3

{Read part 2 here.}

In ordinary speech we do not distinguish between “demand” and “quantity demanded.” We just say something like, “The demand for apples has gone up” to mean that more apples are being bought by people. But in economics, there is a clear and important distinction. When we say “demand has increased” we mean the relationship between prices and quantities has changed, and that people are willing to buy more than before at various prices.

In economics, demand and supply simply designates the relationship between quantities and prices. We demand specific quantities, not abstract relationships. So when we say “the quantity demanded” we are talking not about some abstract function but quantity of stuff.

If someone were to say, “the quantity demanded has gone up”, we could conclude that the price has fallen because we know that quantity demanded increases when the price falls. But that’s only true in case the demand — the relationship between prices and quantities — has not changed. Continue reading “A Bit of Economics — Part 3”

A Bit of Economics — Part 2

{Read part 1 here.}

The basics of price theory (microeconomics) are simple. First the law of demand. We know without being instructed that when the price of something falls, we tend to buy more of that.

At the grocery store, I may buy donuts at $5 a dozen but may not buy if they were $6 a dozen. At some price, I would not buy donuts, if the price drops, I will buy more and more up to some point. That’s my individual demand for donuts. But other people may buy at $6 and some others may not buy even at $5.

If you aggregate all those individual buying decisions, you notice a pattern: the store sells more when the price is low than when it is high. That’s the aggregate demand function which emerges out of the sum of various individual demand functions. Continue reading “A Bit of Economics — Part 2”

A Bit of Economics — Part 1

This week we will discuss some basic economics. What is economics? It’s the discipline that investigates how we humans go about making a living. Principally the three activities we engage in while making a living are production, consumption and exchange.

We have to produce stuff because we want to consume stuff. Want satisfaction motivates us to produce. Since we all differ in many respects — natural abilities, preferences, training, opportunities, etc. — we select different occupations and produce a variety of goods and services. We specialize to some extent and divide up various tasks. Specialization is a cause and consequence of the division of labor.  Continue reading “A Bit of Economics — Part 1”