Did you know?
-If a Google employee passes away, “their surviving spouse or domestic partner will receive a check for 50% of their salary every year for the next decade.”
When you buy a computer, you will also need to buy software. Computer hardware and software are therefore complementary goods: According to Oxford Reference (2021) two products, for which an increase (or fall) in demand for one leads to an increase (fall) in demand for the other. Complements are the opposite of substitute goods. For instance, Microsoft Windows-based personal computers and Apple Macs are substitutes.
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One of the two words economists use most; the other supply. These are the twin driving forces of the market economy. According to the Enciclopaedia Britannica (2021) demand is not just about measuring what people want; for economists, it refers to the amount of a good or service that people are both willing and able to buy. The demand curve measures the relationship between the price of a good and the amount of it demanded. Usually, as the price rises, fewer people are willing and able to buy it; in other words, demand falls. When demand changes, economists explain this in one of two ways. A movement along the demand curve occurs when a price change alters the quantity demanded; but if the price were to go back to where it was before, so would the amount demanded. A shift in the demand curve occurs when the amount demanded would be different from what it was previously at any chosen price, for example, if there is no change in the market price, but demand rises or falls. The slope of the demand curve indicates the elasticity of demand.
Policymakers seek to manipulate aggregate demand to keep the economy growing as fast as is possible without pushing up INFLATION. Keynesians try to manage demand through fiscal policy; monetarists prefer to use the money supply. Neither approach hasbeen especially successful in practice, particularly when attempting to manage short-term demand through fine tuning.
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Economics
The “dismal science”, according to Thomas Carlyle, a 19th-century Scottish writer. It has been described in many ways, few of them flattering. The most concise, non-abusive, definition According to Oxford Reference (2021) is the study of how society uses its scarce resources.
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Elasticity
A measure of the responsiveness of one variable to changes in another. economists have identified four main types. (Cambridge Advanced Learner's Dictionary & Thesaurus, 2021)
Price elasticity measures how much the quantity of supply of a good, or demand for it, changes if its price changes. if the percentage change in quantity is more than the percentage change in price, the good is price elastic; if it is less, the good is inelastic.
Income elasticity of demand measures how the quantity demanded changes when income increases.
Cross-elasticity shows how the demand for one good (say, coffee) changes when the price of another good (say, tea) changes. if they are substitute goods (tea and coffee) the cross-elasticity will be positive: an increase in the price of tea will increase demand for coffee. if they are complementary goods (tea and teapots) the cross-elasticity will be negative. if they are unrelated (tea and oil) the cross-elasticity will be zero.
Elasticity of substitution describes how easily one input in the production process, such as labour, can be substituted for another, such as machinery.
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Equilibrium
When supply and demand are in balance. at the equilibrium price, the quantity that buyers are willing to buy exactly matches the quantity that sellers are willing to sell. so everybody is satisfied, unlike when there is disequilibrium. According to the Enciclopaedia Britannica (2021), in classical economics, it is assumed that markets always tend towards equilibrium and return to it in the event that something causes a temporary disequilibrium. general equilibrium is when supply and demand are balanced simultaneously in all the markets in an economy. Keynes questioned whether the economy always moved to equilibrium, for instance, to ensure full employment.
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GDP
Gross domestic product, a measure of economic activity in a country (Cambridge Advanced Learner's Dictionary & Thesaurus, 2021). It is calculated by adding the total value of a country's annual output of goods and services. GDP = private consumption + investment + public spending + the change in inventories + (exports - imports). It is usually valued at market prices; by subtracting indirect tax and adding any government subsidy, however, GDP can be calculated at factor cost. This measure more accurately reveals the income paid to factors of production. Adding income earned by domestic residents from their investments abroad, and subtracting income paid from the country to investors abroad, gives the country's gross national product (GNP).
The effect of inflation can be eliminated by measuring GDP growth in constant real prices. However, some economists argue that hitting a nominal gdp target should be the main goal of macroeconomic policy. This is because it would remind policymakers to take into account the effect of their decisions on inflation, as well as on growth. GDP can be calculated in three ways. The income method adds the income of residents (individuals and firms) derived from the production of goods and services. The output method adds the value of output from the different sectors of the economy. The expenditure method totals spending on goods and services produced by residents, before allowing for depreciation and capital consumption. As one person's output is another person's income, which in turn becomes expenditure, these three measures ought to be identical. They rarely are because of statistical imperfections. Furthermore, the output and income measures exclude unreported economic activity that takes place in the black economy but that may be captured by the expenditure measure.
GDP is disliked as an objective of economic policy by some because it is not a perfect measure of welfare. It does not include aspects of the good life such as some leisure activities. Nor does it include economically valuable activities that are not paid for, such as parents teaching their children to read. But it does include some things that lower the quality of life, such as activities that damage the environment.
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Price
In EQUILIBRIUM, what balances SUPPLY and DEMAND. According to Oxford Reference (2021) the price charged for something depends on the tastes, INCOME and ELASTICITY of demand of customers. It depends on the amount of COMPETITION in the market. Under PERFECT COMPETITION, all FIRMS are price takers. Where there is a MONOPOLY, or firms have some MARKET POWER, the seller has some control over the price, which will probably be higher than in a perfectly competitive market. By how much more will depend on how much market power there is, and on whether the firm(s) with the market power are committed to PROFIT MAXIMISATION. In some cases, firms may charge less than the profit-maximising price for strategic or other reasons.
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Rent
Confusingly, rent has two different meanings for economists. The first is the commonplace definition: the INCOME from hiring out LAND or other durable goods. The second, According to Oxford Reference (2021), also known as economic rent, is a measure of MARKET POWER: the difference between what a FACTOR OF PRODUCTION is paid and how much it would need to be paid to remain in its current use. A soccer star may be paid $50,000 a week to play for his team when he would be willing to turn out for only $10,000, so his economic rent is $40,000 a week. In PERFECT COMPETITION, there are no economic rents, as new FIRMS enter a market and compete until PRICES fall and all rent is eliminated. Reducing rent does not change production decisions, so economic rent can be taxed without any adverse impact on the real economy, assuming that it really is rent.
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Supply
One of the two words economists use most, along with DEMAND. These are the twin driving forces of the market economy. According to the Enciclopaedia Britannica (2021), supply is the amount of a good or service available at any particular PRICE. The law of supply is that, other things remaining the same, the quantity supplied will increase as the price increases. The actual amount supplied will be determined, ultimately, by what the market price is, which depends on the amount demanded as well as what suppliers are willing to produce. What suppliers are willing to supply depends on several things:
the cost of the FACTORS OF PRODUCTION;
technology;
the price of other goods and SERVICES (which, if high enough, might tempt the supplier to switch production to those products); and
the ability of the supplier accurately to forecast demand and plan production to make the most of the opportunity.
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Utility
Economist-speak for a good thing; a measure of satisfaction (Cambridge Advanced Learner's Dictionary & Thesaurus, 2021). Underlying most economic theory is the assumption that people do things because doing so gives them utility. People want as much utility as they can get. However, the more they have, the less difference an additional unit of utility will make - there is diminishing MARGINAL utility. Utility is not the same as utilitarianism, a political philosophy based on achieving the greatest happiness of the greatest number.
A tricky question is how to measure utility. MONEY does not (entirely) capture it. You can get richer without becoming more satisfied. So some economists have tried to calculate broader measures of happiness. They have found that people with jobs are much happier than unemployed people. Low INFLATION also makes people happier. Extra INCOME increases happiness a bit, but not much. In many countries incomes have risen sharply in recent years, but national surveys of subjective well being have stayed flat. Within countries, comparing people across the income distribution, richer does mean happier, but the effect is not large. Married people are often happier than single people; couples without children happier than couples with; women happier than men; white people happier than black people; well-educated people happier than uneducated people; the self-employed happier than employees; and retired people happier than economically active people. Happiness generally decreases until you are in your 30s, and then starts rising again. Other economists are dismissive of such studies. They argue that people are rational maximisers of their own utility, so, by definition, whatever they do maximises their utility.
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From MIDI we hope you have loved this note! We wait for you at noon for more talked microeconomics.
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