Demand, supply, goods and services
...esource in the preparation of Hot Momma Fudge Bananarama Ice Cream Sundaes, increases. A determinant change ALWAYS starts the market adjustment process. • Second, the determinant change causes a curve to shift. The higher hot fudge price decreases the supply of Hot Momma Fudge Bananarama Ice Cream Sundae and causes a leftward shift of the Hot Momma Fudge Bananarama Ice Cream Sundae supply curve. Click the "Supply Decrease" button to illustrate this shift. • Third, the shifted curve disrupts the market equilibrium, causing either a shortage or a shortage. In this example, the decrease in supply creates a shortage. While sellers are now willing and able to sell fewer Hot Momma Fudge Bananarama Ice Cream Sundaes, buyers want to buy the original quantity at the original price. Up to this point, they have no reason to change. Click the "Shortage" button to highlight this imbalance. • Fourth, the market imbalance causes the price to change. In this case, the buyers are not able to buy all of the Hot Momma Fudge Bananarama Ice Cream Sundaes that they would like, which is the original quantity. As such, they are willing and able to pay a higher price for Hot Momma Fudge Bananarama Ice Cream Sundaes. Click the "Price Increase" button to illustrate this result. • Fifth, the change in price causes changes in both quantities demanded and supplied. In this Hot Momma Fudge Bananarama Ice Cream Sundae market, the higher price has the intended effect of increasing the quantity supplied--which is the law of supply. It also has the unintended effect of decreasing the quantity demanded--which is the law of demand. Note that while the change in the resource prices supply determinant induces sellers to supply fewer at all prices, including the original equilibrium price, the price increase causes the quantity supplied to subsequently increase. • Sixth, changes in the quantities demanded and supplied both act to eliminate the market disequilibrium. In this example, the decrease in the quantity demanded and the increase in the quantity supplied eliminate the shortage. The price will continue to change as long as the market is out of balance with a shortage. The new equilibrium price at Pe is higher and the new equilibrium quantity at Qe is smaller. Click the "New Equilibrium" button to highlight this result. One of Eight A supply decrease is one of eight market disruptions--four involving a change in either demand or supply and four involving changes in both demand and supply. The other three single shift disruptions are demand increase, demand decrease, and supply increase. The four double shifts are demand and supply increase, demand and supply decrease, demand increase and supply decrease, and demand decrease and supply increase. SUPPLY INCREASE: An increase in the willingness and ability of sellers to sell a good at the existing price, illustrated by a rightward shift of the supply curve. An increase in supply is caused by a change in a supply determinant and results in an increase in equilibrium quantity and a decrease in equilibrium price. A supply increase is one of two supply shocks to the market. The other is a supply decrease. A supply increase results from a change in one of the supply determinants. The rightward shift of the supply curve disrupts the market equilibrium and creates a temporary surplus. The surplus is eliminated with a lower price. The comparative static analysis of the supply increase is that equilibrium quantity increases and equilibrium price decreases. Supply Determinants An increase in supply can result from a change in any of the five supply determinants. • A decrease in resource prices. • An increase in production technology. • A decrease in the price of a substitute-in-production. • An increase in the price of a complement-in-production. • Expectations by sellers of a decrease in the price in the future. • An increase in the number of sellers in the market. Old to New Comparative Statics First, consider the simple comparative static analysis of the supply increase. The diagram at the right presents the Shady Valley market for Hot Momma Fudge Bananarama Ice Cream Sundaes. The equilibrium price is Po and the equilibrium quantity is Qo. This market equilibrium will, of course, persist until and unless a determinant changes, which is the nature of equilibrium. The particular change under scrutiny is an increase in supply caused by a change in any of the five supply determinants noted above. Suppose, for example, that Professor Magnaminious, the leading expert on hot fudge sundae preparation, develops a breakthrough hot fudge sundae preparation process utilizing the Professor Magnaminious Triple-Dip Hot Fudge Wonder Machine. It is the sort of technological advance that will increase the supply of Hot Momma Fudge Bananarama Ice Cream Sundaes. And when supply increases, the original market equilibrium is disrupted. How is the Hot Momma Fudge Bananarama Ice Cream Sundae market affected? An advance in technology works through the production technology supply determinant to shift the supply curve rightward. Click the "Supply Increase" button to illustrate the rightward shift of the supply curve. The OLD market equilibrium is no longer equilibrium. A NEW market equilibrium is found at the intersection of the original demand curve and the new supply curve. Click the "New Equilibrium" button to highlight this result. The new equilibrium price is Pe and the new equilibrium quantity is Qe. Note that the price is lower and the quantity exchanged is greater. Step by Step Six Steps Now, consider how this supply shock to the Hot Momma Fudge Bananarama Ice Cream Sundae market can be divided into six steps. While the directions of the changes may differ, these six steps apply to the comparative static analysis of other demand and supply shocks. • First, a determinant changes. In this case, the Professor Magnaminious Triple-Dip Hot Fudge Wonder Machine induces a technological advancement in hot fudge sundae preparation. A determinant change ALWAYS starts the market adjustment process. • Second, the determinant change causes a curve to shift. The technological advance increases the supply of Hot Momma Fudge Bananarama Ice Cream Sundae and causes a rightward shift of the Hot Momma Fudge Bananarama Ice Cream Sundae supply curve. Click the "Supply Increase" button to illustrate this shift. • Third, the shifted curve disrupts the market equilibrium, causing either a shortage or a surplus. In this example, the increase in supply creates a surplus. While sellers are now willing and able to sell more Hot Momma Fudge Bananarama Ice Cream Sundaes, buyers continue buying the original quantity at the original price. Up to this point, they have no reason to change. Click the "Surplus" button to highlight this imbalance. • Fourth, the market imbalance causes the price to change. In this case, the sellers are not able to sell all of the Hot Momma Fudge Bananarama Ice Cream Sundaes that they would like. As such, they are willing and able to sell Hot Momma Fudge Bananarama Ice Cream Sundaes at a lower price. Click the "Price Decrease" button to illustrate this result. • Fifth, the change in price causes changes in both quantities demanded and supplied. In this Hot Momma Fudge Bananarama Ice Cream Sundae market, the lower price has the intended effect of increasing the quantity demanded--which is the law of demand. It also has the unintended effect of decreasing the quantity supplied--which is the law of supply. Note that while the change in the production technology supply determinant induces sellers to supply more at all prices, including the original equilibrium price, the price decrease causes the quantity supplied to subsequently decrease. • Sixth, changes in the quantities demanded and supplied both act to eliminate the market disequilibrium. In this example, the increase in the quantity demanded and the decrease in the quantity supplied eliminate the surplus. The price will continue to change as long as the market is out of balance with a surplus. The new equilibrium price at Pe is lower and the new equilibrium quantity at Qe is larger. Click the "New Equilibrium" button to highlight this result. One of Eight A supply increase is one of eight market disruptions--four involving a change in either demand or supply and four involving changes in both demand and supply. The other three single shift disruptions are demand increase, demand decrease, and supply decrease. The four double shifts are demand and supply increase, demand and supply decrease, demand increase and supply decrease, and demand decrease and supply increase. DEMAND: The willingness and ability to buy a range of quantities of a good at a range of prices, during a given time period. Demand is one half of the market exchange process--the other is supply. This demand side of the market draws inspiration from the unlimited wants and needs dimension of the scarcity problem. Demand is a fundamental aspect of market exchanges and economic activity. Even more, it is an essential feature of human existence. People demand goods and services to satisfy their unlimited wants and needs. A Closer Look Three aspects of demand are worthy of further consideration: • Willingness and Ability: Demand requires both willingness and ability. To demand a good, a buyer must have a WILLINGNESS to buy it. Willingness generally arises because the good satisfies a want or need. But while wants and needs are essentially unlimited, everyone does NOT necessarily want or need every good. Duncan Thurly, for example, does not like asparagus. He considers asparagus vile, nasty stuff. As such, he has NO demand for asparagus because he has NO willingness. Demand, however, also requires ABILITY. While demand can be constrained by the physical ability to purchase a good, income is often more important. Wants and needs may be unlimited, but income is not. A buyer must have enough income to make a purchase. Lisa Quirkenstone, for example, loves asparagus. Unfortunately, she is between jobs and deeply in debt. She lacks the income needed to buy asparagus. As such, she has NO demand for asparagus because he has NO ability to buy. • Range of Prices and Quantities: Demand is a range of prices and quantities. It includes not just the quantity purchased at the current price, but any and all quantities that would be purchased at other prices--higher and lower. Gerald Johnson, for example, is NOT willing and able to purchase asparagus if the price is $1 a pound. However, if the price is to 50 cents a pound, he is inclined to purchase a few stalks. If the prices is even lower, say 25 cents a pound, Gerald will purchase an even larger quantity. Practicing the fine art of economic analysis--market style--involves a lot of "What if?" questions, such as: "What would happen in the asparagus market if the price is $1 a pound, or 25 cents a pound, or $0 a pound, or...?" Limiting analysis ONLY to the current price, ignores a vast range of alternatives that might occur. And this would eliminate a lot, in fact almost all, of the really important analyses of markets. • Given Time Period: Demand is identified for a specified time period. The analysis of asparagus demand needs information on the time period. Is the demand for an hour, a day, a week, a month, a year, or a decade? Presumably, people buy a larger quantity of asparagus, at a given price, over a decade than over a week. When economists work with demand they need a specific time period. Like adding apples and oranges, it makes no sense to combine Gerald Johnson's daily asparagus demand with Lisa Quirkenstone's annual asparagus demand. Price and Quantity Demand is a range of prices and quantities. The price part of this relation is termed demand price and the quantity part is termed quantity demanded. • Demand Price: This is the maximum price that buyers are willing and able to pay for a given quantity of a good. They would be willing to pay less than this price, but not more. Demand price is based on the satisfaction derived from the good. • Quantity Demanded: This is the specific amount of a good that buyers would be willing and able to purchase at a given demand price. The quantity demanded is the maximum amount of the good that buyers are willing and able to buy at the given price. Demand price and quantity demanded come together as matched pairs. One demand price, one quantity demanded. Demand is then the combination of these matched price-quantity pairs. The Law of Demand The specific demand relation between price and quantity is termed the law of demand. The law of demand is the inverse relation between demand price and quantity demanded. If, in other words, the demand price increases, then the quantity demanded decreases. The law of demand is one of the most important and most fundamental economic principles identified in the study of markets and economics. The law of demand is attributable to two effects. • Income Effect: This is a change in the purchasing power of income caused by a change in the price of a good, which then affects how much of the good is purchased. If the price increases, for example, buyers cannot purchase as much of the good with existing income. • Substitution Effect: This is a change in the relative price of substitute goods caused by a change in the price of a good, which then affects how much of the good is purchased. If the price increases, for example, buyers tend to purchase less of the good because they are purchasing more of other goods. A Demand Curve The demand relation between demand price and quantity demanded is commonly represented by a demand curve. A demand curve is nothing more than a graphical representation of the law of demand. The demand curve presented in this exhibit shows the relation between the demand price, measured on the vertical axis, and quantity demanded measured on the horizontal axis. The negative slope of the demand curve graphically illustrates the inverse law of demand relation between demand price and quantity demanded. As the demand price declines from 50 to 5, the quantity demanded increases from 0 to 90. Buyers are willing and able to buy more at lower prices. Five Determinants While demand price is the most important factor that affects the purchase of a good, it is not the only factor. Five other factors, termed demand determinants, are also important. These determinants cause a change in the demand for a good, that is, more or less of the good is purchased at existing prices. • Buyers' Income: The amount of income that buyers have available to spend affects the ability to purchase a good. In general, if buyers have more income, then they buy more of a good. However, in some circumstances, extra income actually induces buyers to buy less of a good. A normal good exists if demand increases with an increase in income and an inferior good exists if demand decreases with an increase in income. • Buyers' Preferences: The satisfaction derived affects the willingness to purchase a good. If buyers like a good more, then they buy more of a good. • Prices of Other Goods: The demand for one good is interrelated with the purchase of other goods, and the prices of those goods. Some goods are substitutes, purchased in place of, others are complements, purchased together with. If the price of a substitute good increases, then buyers switch from that good and buy more of this good. If the price of a complement good increases, then buyers buy less of both goods. • Buyers' Expectations: Buyers decide how much to purchase based on a comparison of current and expected future prices. If buyers expect a higher price in the future, then they buy more of a good today. • Number of Buyers: The total number of buyers participating in a market affects how much of a good is demanded. If there is an increase in the number of buyers, then there is a greater demand for the good. Two Changes The study of demand highlights two related, but distinct, changes. To understand these changes, first considered to related, but distinct, notions of demand. • Quantity Demanded: This is the specific amount that buyers are willing and able to purchase at a specific price. It is indicated as a single point on the demand curve. • Demand: This, in contrast, is the entire set of price-quantity pairs that reflect buyers willingness and ability to purchase a good. It is the entire demand curve. Two interrelated changes are implied directly from the two notions. • A Change in Quantity Demanded: This is a change in the specific amount of the good that buyers are willing and able to purchase. It is caused by a change in the demand price and is indicated by a movement along the demand curve from one point to another. • A Change in Demand: This a change in the overall demand relation, a change in all price-quantity pairs. It is caused by a change in one of the five demand determinants and is indicated by a shift of the demand curve. The difference between a change in demand and a change in quantity demand is essential for understanding how the market adjusts to external shocks. DEMAND DETERMINANTS: Five ceteris paribus factors that affect demand, but which are assumed constant when a demand curve is constructed. They are buyers' income, buyers' preferences, other prices, buyers' expectations, and number of buyers. Changes in the demand determinants cause shifts of the demand curve and disruptions of the market. Demand determinants are five ceteris paribus factors that are held constant when a demand curve is constructed. They are held constant to isolate the law of demand relation between demand price and quantity demanded. When the determinants change they cause a change in the location of the demand curve. In effect, demand determinants can be said to "determine" the position of the demand curve. What They Are The five ceteris paribus demand determinants are buyers' income, buyers' preferences, other prices, buyers' expectations, and number of buyers. • Buyers' Income: The amount of income that buyers have available to spend on a good affects the ability to purchase a good. In general, income has a direct affect on the ability to buy a good, that is, more income means more buying. However, income can actually affect demand in two ways. For normal goods, more income means more demand. For inferior goods, however, more income means less demand. • Buyers' Preferences: The satisfaction buyers obtain from a good, based on buyers' preferences, wants, needs, likes, and dislikes, affects the willingness to purchase a good. If a good provides greater satisfaction, then buyers are inclined to purchase more. • Other Prices: The demand for one good is based on the prices paid for other goods purchased by buyers. A change in the price of a substitute good (or substitute-in-consumption) induces buyers to alter the mix of goods purchased. An increase in the price of a substitute motivates buyers to buy more of this good and less of the substitute good. A change in the price of a complement good (or complement-in-consumption) induces buyers to demand more or less of both goods. An increase in the price of a complement motivates buyers to buy less of this good as they buy less of the complement good. • Buyers' Expectations: The decision to purchase a good today depends on expectations of future prices. Buyers seek to purchase the good at the lowest possible price. If buyers expect the price to decline in the future, they are inclined to buy less now. If they expect the price to rise in the future, they are inclined to buy more now. • Number of Buyers: The number of buyers willing and able to buy a good affects the overall demand. With more buyers, there is more demand. With fewer buyers, there is less demand. How They Work These five demand determinants cause the demand curve to shift. This can be illustrated using the negatively-sloped demand curve for Wacky Willy Stuffed Amigos presented in this exhibit. This demand curve captures the specific one-to-one, law of demand relation between demand price and quantity demanded. The demand determinants are assumed to remain constant with the construction of this demand curve. The demand determinants are assumed constant for two reasons: • One: To isolate the law of demand relation between demand price and quantity demanded • Two: To systematically analyze what happens to demand when each determinant changes. Reason number two provides a powerful analytical tool. By turning demand determinants off and on, allowing each to change one at a time, a more thorough understanding of the demand side of the market can be had. Demand Determinants Now, consider how changes in the demand determinants shift the demand curve. A change in any of the five determinants can cause either an increase in demand or a decrease in demand. • Increase in Demand: An increase in demand is a rightward shift of the demand curve. An increase in demand means that for any price, for every price, buyers are willing and able to buy more of the good. Click the "Increase" button to demonstrate. • Decrease in Demand: A decrease in demand is a leftward shift of the demand curve. A decrease in demand means that for any price, for every price, buyers are willing and able to buy less of the good. Click the "Decrease" button to demonstrate. Two Changes Shifts of the demand curve caused by changes in the demand determinants suggests two related notions--a change in demand and a change in quantity demanded. • A Change in Demand: This a change in the overall demand relation, a change in all price-quantity pairs. It is caused by a change in one of the five demand determinants and is indicated by a shift of the demand curve. A Change in Quantity Demanded: This is a change in the specific amount of the good that buyers are willing and able to purchase. It is caused by a change in the demand price and is indicated by a movement along the demand curve from one point to another. DEMAND DECREASE: A decrease in the willingness and ability of buyers to purchase a good at the existing price, illustrated by a leftward shift of the demand curve. A decrease in demand is caused by a change in a demand determinant and results in a decrease in equilibrium quantity and a decrease in equilibrium price. A demand decrease is one of two demand shocks to the market. The other is a demand increase. A demand decrease results from a change in one of the demand determinants. The leftward shift of the demand curve disrupts the market equilibrium and creates a temporary surplus. The surplus is eliminated with a lower price. The comparative static analysis of the demand decrease is that equilibrium quantity decreases and equilibrium price decreases. Demand Determinants A decrease in demand can result from a change in any of the five demand determinants. • A decrease in buyers' income for a normal good. • An increase in buyers' income for an inferior good. • A decrease in buyers' preferences for the good. • A decrease in the price of a substitute-in-consumption. • An increase in the price of a complement-in-consumption. • Expectations by buyers of a decrease in the price in the future. • A decrease in the number of buyers in the market. Old to New Comparative Statics First, consider the simple comparative static analysis of the demand decrease. The diagram at the right presents the Shady Valley market for Hot Momma Fudge Bananarama Ice Cream Sundaes. The equilibrium price is Po and the equilibrium quantity is Qo. This market equilibrium will, of course, persist until and unless a determinant changes, which is the nature of equilibrium. The particular change under scrutiny is a decrease in demand caused by a change in any of the five demand determinants noted above. Suppose, for example, that the price of Double-Dot Carmel Fudge Pecan Pie declines. Double-Dot Carmel Fudge Pecan Pie is a prime, number one substitute for Hot Momma Fudge Bananarama Ice Cream Sundaes. To top off a tasty meal, buyers could buy a freshly prepared Hot Momma Fudge Bananarama Ice Cream Sundae or they could go for a piping hot Double-Dot Carmel Fudge Pecan Pie. They buy one or they buy the other. That is how substitutes-in-consumption work. If the price of one substitute-in-consumption (Double-Dot Carmel Fudge Pecan Pie) declines, the quantity demanded (of Double-Dot Carmel Fudge Pecan) increases. But with more Double-Dot Carmel Fudge Pecan satisfying after dinner dessert cravings, there is less demand Hot Momma Fudge Bananarama Ice Cream Sundaes. As such, the demand for Hot Momma Fudge Bananarama Ice Cream Sundaes decreases. And when demand decreases, the original market equilibrium is disrupted. How is the Hot Momma Fudge Bananarama Ice Cream Sundae market affected? A decrease in the price of a substitute-in-consumption works through the other prices demand determinant to shift the demand curve leftward. Click the "Demand Decrease" button to illustrate the leftward shift of the demand curve. The OLD market equilibrium is no longer equilibrium. A NEW market equilibrium is found at the intersection of the original supply curve and the new demand curve. Click the "New Equilibrium" button to highlight this result. The new equilibrium price is Pe and the new equilibrium quantity is Qe. Note that the price is lower and the quantity exchanged is less. Step by Step Six Steps Now, consider how this demand shock to the Hot Momma Fudge Bananarama Ice Cream Sundae market can be divided into six steps. While the directions of the changes may differ, these six steps apply to the comparative static analysis of other demand and supply shocks. • First, a determinant changes. In this case, a decrease in the price of Double-Dot Carmel Fudge Pecan activates a change in the other prices demand determinant. A determinant change ALWAYS starts the market adjustment process. • Second, the determinant change causes a curve to shift. The decrease in the price of Double-Dot Carmel Fudge Pecan decreases the demand for Hot Momma Fudge Bananarama Ice Cream Sundae and causes a leftward shift of the Hot Momma Fudge Bananarama Ice Cream Sundae demand curve. Click the "Demand Decrease" button to illustrate this shift. • Third, the shifted curve disrupts the market equilibrium, causing either a shortage or a surplus. In this example, the decrease in demand creates a surplus. While buyers are now willing and able to buy fewer Hot Momma Fudge Bananarama Ice Cream Sundaes, sellers continue supplying the original quantity at the original price. Up to this point, they have no reason to change. Click the "Surplus" button to highlight this imbalance. • Fourth, the market imbalance causes the price to change. In this case, the sellers are not able to sell all of the Hot Momma Fudge Bananarama Ice Cream Sundaes that they would like. As such, they are willing and able to sell Hot Momma Fudge Bananarama Ice Cream Sundaes at a lower price. Click the "Price Decrease" button to illustrate this result. • Fifth, the change in price causes changes in both quantities demanded and supplied. In this Hot Momma Fudge Bananarama Ice Cream Sundae market, the lower price has the intended effect of increasing the quantity demanded--which is the law of demand. It also has the unintended effect of decreasing the quantity supplied--which is the law of supply. Note that while the other prices determinant induces buyers to demand less at all prices, including the original equilibrium price, the price decrease causes the quantity demanded to subsequently rise. • Sixth, changes in the quantities demanded and supplied both act to eliminate the market disequilibrium. In this example, the increase in the quantity demanded and the decrease in the quantity supplied eliminate the surplus. The price will continue to change as long as the market is out of balance with a surplus. The new equilibrium price at Pe is lower and the new equilibrium quantity at Qe is smaller. Click the "New Equilibrium" button to highlight this result. One of Eight A demand decrease is one of eight market disruptions--four involving a change in either demand or supply and four involving changes in both demand and supply. The other three single shift disruptions are demand increase, supply increase, and supply decrease. The four double shifts are demand and supply increase, demand and supply decrease, demand increase and supply decrease, and demand decrease and supply increase. DEMAND INCREASE: An increase in the willingness and ability of buyers to purchase a good at the existing price, illustrated by a rightward shift of the demand curve. An increase in demand is caused by a change in a demand determinant and results in an increase in equilibrium quantity and an increase in equilibrium price. A demand increase is one of two demand shocks to the market. The other is a demand decrease. A demand increase results from a change in one of the demand determinants. The rightward shift of the demand curve disrupts the market equilibrium and creates a temporary shortage. The shortage is eliminated with a higher price. The comparative static analysis of the demand increase is that equilibrium quantity increases and equilibrium price increases. Demand Determinants An increase in demand can result from a change in any of the five demand determinants. • An increase in buyers' income for a normal good. • A decrease in buyers' income for an inferior good. • An increase in buyers' preferences for the good. • An increase in the price of a substitute-in-consumption. • A decrease in the price of a complement-in-consumption. • Expectations by buyers of an increase in the price in the future. • An increase in the number of buyers in the market. Old to New Comparative Statics First, consider the simple comparative static analysis of the demand increase. The diagram at the right presents the Shady Valley market for Hot Momma Fudge Bananarama Ice Cream Sundaes. The equilibrium price is Po and the equilibrium quantity is Qo. This market equilibrium will, of course, persist until and unless a determinant changes, which is the nature of equilibrium. The particular change under scrutiny is an increase in demand caused by a change in any of the five demand determinants noted above. Suppose, for example, that buyers acquire a sudden craving for Hot Momma Fudge Bananarama Ice Cream Sundaes, a change in buyers' preferences. Perhaps a newly released government study proves conclusively that daily consumption of Hot Momma Fudge Bananarama Ice Cream Sundaes increases a person's IQ by 50 points and makes that person more attractive to the opposite sex. This is just the sort of thing that is bound to increase buyers' preferences and the demand for Hot Momma Fudge Bananarama Ice Cream Sundaes. And when demand increases, the original market equilibrium is disrupted. How is the Hot Momma Fudge Bananarama Ice Cream Sundae market affected? A change in buyers' preferences shifts the demand curve rightward. Click the "Demand Increase" button to illustrate the rightward shift of the demand curve. The OLD market equilibrium is no longer equilibrium. A NEW market equilibrium is found at the intersection of the original supply curve and the new demand curve. Click the "New Equilibrium" button to highlight this result. The new equilibrium price is Pe and the new equilibrium quantity is Qe. Note that the price is higher and the quantity exchanged is more. Step by Step Six Steps Now, consider how this demand shock to the Hot Momma Fudge Bananarama Ice Cream Sundae market can be divided into six steps. While the directions of the changes may differ, these six steps apply to the comparative static analysis of other demand and supply shocks. • First, a determinant changes. In this case, evidence that IQs are boosted by eating Hot Momma Fudge Bananarama Ice Cream Sundaes induces a change in buyers' preferences. A determinant change ALWAYS starts the market adjustment process. • Second, the determinant change causes a curve to shift. The change in preferences increases demand and causes a rightward shift of the Hot Momma Fudge Bananarama Ice Cream Sundae demand curve. Click the "Demand Increase" button to illustrate this shift. • Third, the shifted curve disrupts the market equilibrium, causing either a shortage or a surplus. In this example, the increase in demand creates a shortage. While buyers are now willing and able to buy more Hot Momma Fudge Bananarama Ice Cream Sundaes, sellers continue supplying the original quantity at the original price. Up to this point, they have no reason to change. Click the "Shortage" button to highlight this imbalance. • Fourth, the market imbalance causes the price to change. In this case, the buyers are not able to buy all of the Hot Momma Fudge Bananarama Ice Cream Sundaes that they would like. As such, they are willing and able to buy more than is offered. So they bid up the price. Click the "Price Increase" button to illustrate this result. • Fifth, the change in price causes changes in both quantities demanded and supplied. In this Hot Momma Fudge Bananarama Ice Cream Sundae market, the higher price has the intended effect of increasing the quantity supplied--which is the law of supply. It also has the unintended effect of decreasing the quantity demanded--which is the law of demand. Note that while the change in preferences induces buyers to demand more at all prices, including the original equilibrium price, the price increase causes the quantity demanded to subsequently decline. • Sixth, changes in the quantities demanded and supplied both act to eliminate the market disequilibrium. In this example, the increase in the quantity supplied and the decrease in the quantity demanded eliminate the shortage. The price will continue to change as long as the market is out of balance with a shortage. The new equilibrium price at Pe is higher and the new equilibrium quantity at Qe is greater. Click the "New Equilibrium" button to highlight this result. One of Eight A demand increase is one of eight market disruptions--four involving a change in either demand or supply and four involving changes in both demand and supply. The other three single shift disruptions are demand decrease, supply increase, and supply decrease. The four double shifts are demand and supply increase, demand and supply decrease, demand increase and supply decrease, and demand decrease and supply increase. Demand and supply DEMAND AND SUPPLY DECREASE: A simultaneous decrease in the willingness and ability of buyers to purchase a good at the existing price, illustrated by a leftward shift of the demand curve, and a decrease in the willingness and ability of sellers to sell a good at the existing price, illustrated by a leftward shift of the supply curve. When combined, both shifts result is a decrease in equilibrium quantity and an indeterminant change in equilibrium price. A demand decrease results from a change in any of the five demand determinants. A supply decrease results from a change in any of the five supply determinants. By itself, a demand decrease results in a decrease in equilibrium quantity and a decrease in equilibrium price. By itself a supply decrease results in a decrease in equilibrium quantity and an increase in equilibrium price. A simultaneous decrease in demand and decrease in supply unquestionably generates a decrease in the quantity exchanged. However, the change in the price is indeterminant. It might rise or fall depending on the magnitude of the demand and supply changes. Simultaneous Shocks To see how a decrease in demand and a decrease in supply affects market equilibrium, consider the Shady Valley market for Hot Momma Fudge Bananarama Ice Cream Sundaes. • First, on the demand side, suppose that a horrific plague kills half of the residents of the Shady Valley. This is clearly a devastating event if for no other reason than it reduces the number of buyers in the market for Hot Momma Fudge Bananarama Ice Cream Sundaes. This activates the number of buyers demand determinant, decreases demand, and shifts the demand curve leftward. • Second, on the supply side, suppose that sellers anticipate a likely increase in the price of Hot Momma Fudge Bananarama Ice Cream Sundaes in the weeks and months ahead. Hot Momma Fudge Bananarama Ice Cream Sundaes suppliers, seeking to sell their wares at the highest possible price, reduce their current sundae offerings, opting to wait for higher future price. This activates the sellers' expectations supply determinant, decreases supply, and shifts the supply curve leftward. One Shift at a Time Demand and Supply What do these shifts do to the hot fudge sundae market? Consider the shift of each curve separately. The diagram at the right presents the Shady Valley market for Hot Momma Fudge Bananarama Ice Cream Sundaes. The equilibrium price is Po and the equilibrium quantity is Qo. This market equilibrium will, of course, persist until and unless a determinant changes, which is the nature of equilibrium. • A decrease in the number of buyers causes a decrease in demand and a leftward shift of the demand curve. This creates a temporary surplus. The surplus causes the price to decrease. The lower price eliminates the surplus and the resulting equilibrium quantity decreases. By itself, a decrease in demand leads to a lower price and a smaller quantity. Click the "Demand Decrease" button to illustrate. • An increase in the expected price causes a decrease in supply and a leftward shift of the supply curve. This creates a temporary shortage. This shortage causes the price to increase. The higher price eliminates the shortage, but the resulting equilibrium quantity decreases. By itself, a decrease in supply leads to a higher price and a smaller quantity. Click the "Supply Decrease" button to illustrate. Both at Once Now consider simultaneous shifts of both curves. Combining both shifts generates an obvious change in quantity, but a questionable change in price. If a decrease in demand decreases equilibrium quantity and a decrease in supply decreases equilibrium quantity, then a decrease in both MUST decrease equilibrium quantity. Fewer Hot Momma Fudge Bananarama Ice Cream Sundaes will be exchanged in Shady Valley. But what about price? The demand shift results in a lower price, and the supply shift leads to a higher price. Will price end up higher or lower? Who knows? No one does, not with the available information. The price is indeterminant. Doing Both Consider both shifts using the diagram to the right. Once again the equilibrium price is Po and the equilibrium quantity is Qo. Click the "Both Curves" to see how the market is affected by a decrease in both demand and supply. Both curves shift to the left. The resulting equilibrium can be identified by clicking the "New Equilibrium" button. The equilibrium quantity is now Qe, which as expected is a decrease over the original equilibrium quantity. Buyers want to buy less and sellers want to sell less. The quantity decreases. What about price? In this little illustration, the new equilibrium price happens to be unchanged at Po, the original equilibrium price. Maintaining the same equilibrium price, however, is merely coincidence, happenstance, the luck of the draw. In particular, the new demand and supply curves are drawn in such a way that they shift by the same amount. These two curves could have been drawn such that they shifted by different amounts. And if so, the price would have ended up higher or lower than the original. Price is indeterminant. The reason for the indeterminant price is that the relative shifts of each curve is unknown. If demand shifts relatively more than supply, then the demand-induced lower price outweighs the supply-induced higher price, and the price is lower. A higher price results if the supply shift is relatively more than the demand shift. Because the extent of each shift is not known, price is indeterminant. Whenever the demand and supply curves both shift, either quantity or price is indeterminant. One of Eight A demand and supply decrease is one of eight market disruptions--four involving a change in either demand or supply and four involving changes in both demand and supply. The four single shift disruptions are demand increase, demand decrease, supply increase, and supply decrease. The other three double shifts are demand and supply increase, demand increase and supply decrease, and demand decrease and supply increase. DEMAND AND SUPPLY INCREASE: A simultaneous increase in the willingness and ability of buyers to purchase a good at the existing price, illustrated by a rightward shift of the demand curve, and an increase in the willingness and ability of sellers to sell a good at the existing price, illustrated by a rightward shift of the supply curve. When combined, both shifts result is an increase in equilibrium quantity and an indeterminant change in equilibrium price. A demand increase results from a change in any of the five demand determinants. A supply increases results from a change in any of the five supply determinants. By itself, an demand increase results in an increase in equilibrium quantity and an increase in equilibrium price. By itself an supply increase results in an increase in equilibrium quantity and a decrease in equilibrium price. A simultaneous increase in demand and increase in supply unquestionably generates an increase in the quantity exchanged. However, the change in the price is indeterminant. It might rise or fall depending on the magnitude of the demand and supply changes. Simultaneous Shocks To see how an increase in demand and an increase in supply affects market equilibrium, consider the Shady Valley market for Hot Momma Fudge Bananarama Ice Cream Sundaes. • First, on the demand side, the Shady Valley economy begins to boom, meaning more people have more jobs and higher incomes. Without question, Hot Momma Fudge Bananarama Ice Cream Sundaes are a normal good. As such people demand more Hot Momma Fudge Bananarama Ice Cream Sundaes. The buyers' income demand determinant increases demand and shifts the demand curve rightward. • Second, on the supply side, not one, but three new Hot Momma Fudge Bananarama Ice Cream Shoppes begin operation in Shady Valley. A such the number of Hot Momma Fudge Bananarama Ice Cream Shoppes willing and able to sell Hot Momma Fudge Bananarama Ice Cream Sundaes is more. The number of sellers supply determinant increases supply and shifts the supply curve rightward. One Shift at a Time Demand and Supply What do these shifts do to the hot fudge sundae market? Consider the shift of each curve separately. The diagram at the right presents the Shady Valley market for Hot Momma Fudge Bananarama Ice Cream Sundaes. The equilibrium price is Po and the equilibrium quantity is Qo. This market equilibrium will, of course, persist until and unless a determinant changes, which is the nature of equilibrium. • An increase in buyers' income causes an increase in demand and a rightward shift of the demand curve. This creates a temporary shortage. The shortage causes the price to increase. The higher price eliminates the shortage and the resulting equilibrium quantity increases. By itself, an increase in demand leads to a higher price and a larger quantity. Click the "Demand Increase" button to illustrate. • An increase in the number of sellers causes an increase in supply and a rightward shift of the supply curve. This creates a temporary surplus. This surplus causes the price to decrease. The lower price eliminates the surplus, but the resulting equilibrium quantity increases. By itself, an increase in supply leads to a lower price and a larger quantity. Click the "Supply Increase" button to illustrate. Both at Once Now consider simultaneous shifts of both curves. Combining both shifts generates an obvious change in quantity, but a questionable change in price. If an increase in demand increases equilibrium quantity and an increase in supply increases equilibrium quantity, then an increase in both MUST increase equilibrium quantity. More Hot Momma Fudge Bananarama Ice Cream Sundaes will be exchanged in Shady Valley. But what about price? The demand shift results in a higher price, and the supply shift leads to a lower price. Will price end up higher or lower? Who knows? No one does, not with the available information. The price is indeterminant. Doing Both Consider both shifts using the diagram to the right. Once again the equilibrium price is Po and the equilibrium quantity is Qo. Click the "Both Curves" to see how the market is affected by an increase in both demand and supply. Both curves shift to the right. The resulting equilibrium can be identified by clicking the "New Equilibrium" button. The equilibrium quantity is now Qe, which as expected is an increase over the original equilibrium quantity. Buyers want to buy more and sellers want to sell more. The quantity increases. What about price? In this little illustration, the new equilibrium price happens to be unchanged at Po, the original equilibrium price. Maintaining the same equilibrium price, however, is merely coincidence, happenstance, the luck of the draw. In particular, the new demand and supply curves are drawn in such a way that they shift by the same amount. These two curves could have been drawn such that they shifted by different amounts. And if so, the price would have ended up higher or lower than the original. Price is indeterminant. The reason for the indeterminant price is that the relative shifts of each curve is unknown. If demand shifts relatively more than supply, then the demand-induced higher price outweighs the supply-induced lower price, and the price is higher. A lower price results if the supply shift is relatively more than the demand shift. Because the extent of each shift is not known, price is indeterminant. Whenever the demand and supply curves both shift, either quantity or price is indeterminant. One of Eight A demand and supply increase is one of eight market disruptions--four involving a change in either demand or supply and four involving changes in both demand and supply. The four single shift disruptions are demand increase, demand decrease, supply increase, and supply decrease. The other three double shifts are demand and supply decrease, demand increase and supply decrease, and demand decrease and supply increase. DEMAND DECREASE AND SUPPLY INCREASE: A simultaneous decrease in the willingness and ability of buyers to purchase a good at the existing price, illustrated by a leftward shift of the demand curve, and an increase in the willingness and ability of sellers to sell a good at the existing price, illustrated by a rightward shift of the supply curve. When combined, both shifts result is an indeterminant change in equilibrium quantity and a decrease in equilibrium price. A demand decrease results from a change in any of the five demand determinants. A supply increase results from a change in any of the five supply determinants. By itself, a demand decrease results in a decrease in equilibrium quantity and a decrease in equilibrium price. By itself a supply increase results in An increase in equilibrium quantity and a decrease in equilibrium price. A simultaneous decrease in demand and increase in supply unquestionably generates a decrease in the price. However, the change in the quantity is indeterminant. It might decrease or increase depending on the magnitude of the demand and supply changes. Simultaneous Shocks To see how a decrease in demand and an increase in supply affects market equilibrium, consider the Shady Valley market for Hot Momma Fudge Bananarama Ice Cream Sundaes. • First, on the demand side, suppose that a horrific plague kills half of the residents of the Shady Valley. This is clearly a devastating event if for no other reason than it reduces the number of buyers in the market for Hot Momma Fudge Bananarama Ice Cream Sundaes. This activates the number of buyers demand determinant, decreases demand, and shifts the demand curve leftward. • Second, on the supply side, suppose Suppose, for example, that Professor Magnaminious, the leading expert on hot fudge sundae preparation, develops a breakthrough hot fudge sundae preparation process utilizing the Professor Magnaminious Triple-Dip Hot Fudge Wonder Machine. It is the sort of technological advance that will increase the supply of Hot Momma Fudge Bananarama Ice Cream Sundaes. This activates the production technology supply determinant, increases supply, and shifts the supply curve rightward. One Shift at a Time Demand and Supply What do these shifts do to the hot fudge sundae market? Consider the shift of each curve separately. The diagram at the right presents the Shady Valley market for Hot Momma Fudge Bananarama Ice Cream Sundaes. The equilibrium price is Po and the equilibrium quantity is Qo. This market equilibrium will, of course, persist until and unless a determinant changes, which is the nature of equilibrium. • A decrease in the number of buyers causes a decrease in demand and a leftward shift of the demand curve. This creates a temporary surplus. The surplus causes the price to decrease. The lower price eliminates the surplus and the resulting equilibrium quantity decreases. By itself, a decrease in demand leads to a lower price and a smaller quantity. Click the "Demand Decrease" button to illustrate. • An advance in production technology causes an increase in supply and a rightward shift of the supply curve. This creates a temporary surplus. This surplus causes the price to decrease. The lower price eliminates the surplus and the resulting equilibrium quantity increases. By itself, an increase in supply leads to a lower price and a larger quantity. Click the "Supply Increase" button to illustrate. Both at Once Now consider simultaneous shifts of both curves. Combining both shifts generates an obvious change in price, but a questionable change in quantity. If a decrease in demand decreases equilibrium price and an increase in supply decreases equilibrium price, then both together MUST decrease equilibrium price. The market price of Hot Momma Fudge Bananarama Ice Cream Sundaes in Shady Valley will be lower. But what about quantity? The demand shift results in a smaller quantity, and the supply shift leads to a larger quantity. Will quantity end up more or less? Who knows? No one does, not with the available information. The quantity is indeterminant. Doing Both Consider both shifts using the diagram to the right. Once again the equilibrium price is Po and the equilibrium quantity is Qo. Click the "Both Curves" to see how the market is affected by a decrease in demand and an increase in supply. The demand curve shifts to the left and the supply curve shifts to the right. The resulting equilibrium can be identified by clicking the "New Equilibrium" button. The equilibrium price is now Pe, which as expected is a decrease over the original equilibrium price. Buyers are willing to pay less and sellers charge less. The price decreases. What about quantity? In this little illustration, the new equilibrium quantity happens to be unchanged at Qo, the original equilibrium quantity. Maintaining the same equilibrium quantity, however, is merely coincidence, happenstance, the luck of the draw. In particular, the new demand and supply curves are drawn in such a way that they shift by the same amount. These two curves could have been drawn such that they shifted by different amounts. And if so, the quantity would have ended up greater or less than the original. Quantity is indeterminant. The reason for the indeterminant quantity is that the relative shifts of each curve is unknown. If demand shifts relatively more than supply, then the demand-induced smaller quantity outweighs the supply-induced larger quantity, and the quantity is less. A larger quantity results if the supply shift is relatively more than the demand shift. Because the extent of each shift is not known, quantity is indeterminant. Whenever the demand and supply curves both shift, either quantity or price is indeterminant. One of Eight A demand increase and supply decrease is one of eight market disruptions--four involving a change in either demand or supply and four involving changes in both demand and supply. The four single shift disruptions are demand increase, demand decrease, supply increase, and supply decrease. The other three double shifts are demand and supply increase, demand and supply decrease, and demand increase and supply decrease. HOUSEHOLD SECTOR: The basic macroeconomic sector that includes the entire, wants and-needs-satisfying population of the economy. The household sector is the eating, breathing, consuming population of the economy. In a word "everyone," all consumers, all people. This sector includes everyone seeking to satisfy unlimited wants and needs. While it's called "household" sector, this doesn't require that you own a house, live in a house, or even know someone has ever seen a house to be included. The term household sector is merely a short-cut used by economists to indicate the consuming, wants-and-needs-satisfying population. AUTONOMOUS EXPENDITURE: An aggregate expenditure (you know them as consumption, investment, government purchases, and net exports) that is unrelated to national income or gross domestic product. These four aggregate expenditures are conveniently separated into two types, autonomous, which is our current topic of expenditures unrelated to national income or GDP, and induced expenditures, expenditures which ARE related to national income or GDP. Autonomous expenditures cause shocks in the macroeconomy, which result in changes in income and production. These income/production changes then "induce" further changes in aggregate expenditures, our induced expenditures. DEMAND INCREASE AND SUPPLY DECREASE: A simultaneous increase in the willingness and ability of buyers to purchase a good at the existing price, illustrated by a rightward shift of the demand curve, and a decrease in the willingness and ability of sellers to sell a good at the existing price, illustrated by a leftward shift of the supply curve. When combined, both shifts result is an indeterminant change in equilibrium quantity and an increase in equilibrium price. A demand increase results from a change in any of the five demand determinants. A supply decrease results from a change in any of the five supply determinants. By itself, a demand increase results in an increase in equilibrium quantity and an increase in equilibrium price. By itself a supply decrease results in a decrease in equilibrium quantity and an increase in equilibrium price. A simultaneous increase in demand and decrease in supply unquestionably generates an increase in the price. However, the change in the quantity is indeterminant. It might increase or decrease depending on the magnitude of the demand and supply changes. Simultaneous Shocks To see how an increase in demand and a decrease in supply affects market equilibrium, consider the Shady Valley market for Hot Momma Fudge Bananarama Ice Cream Sundaes. • First, on the demand side, suppose that buyers have it on good authority that the price of Hot Momma Fudge Bananarama Ice Cream Sundaes will be going higher. Seeking to stock up on this delectable dessert, buyers buy more now. This triggers the buyers' expectations demand determinant, increases demand, and shifts the demand curve rightward. • Second, on the supply side, suppose that sellers have it on good authority that the price of Hot Momma Fudge Bananarama Ice Cream Sundaes will be going higher. Hot Momma Fudge Bananarama Ice Cream Sundaes suppliers, seeking to sell their wares at the highest possible price, reduce their current sundae offerings, opting to wait for higher future price. This activates the sellers' expectations supply determinant, decreases supply, and shifts the supply curve leftward. One Shift at a Time Demand and Supply What do these shifts do to the hot fudge sundae market? Consider the shift of each curve separately. The diagram at the right presents the Shady Valley market for Hot Momma Fudge Bananarama Ice Cream Sundaes. The equilibrium price is Po and the equilibrium quantity is Qo. This market equilibrium will, of course, persist until and unless a determinant changes, which is the nature of equilibrium. • An increase in the expected price causes an increase in demand and a rightward shift of the demand curve. This creates a temporary shortage. The shortage causes the price to increase. The higher price eliminates the shortage and the resulting equilibrium quantity increases. By itself, an increase in demand leads to a higher price and a larger quantity. Click the "Demand Increase" button to illustrate. • An increase in the expected price causes a decrease in supply and a leftward shift of the supply curve. This creates a temporary shortage. This shortage causes the price to increase. The higher price eliminates the shortage, but the resulting equilibrium quantity decreases. By itself, a decrease in supply leads to a higher price and a smaller quantity. Click the "Supply Decrease" button to illustrate. Both at Once Now consider simultaneous shifts of both curves. Combining both shifts generates an obvious change in price, but a questionable change in quantity. If an increase in demand increases equilibrium price and a decrease in supply increases equilibrium price, then both together MUST increase equilibrium price. The market price of Hot Momma Fudge Bananarama Ice Cream Sundaes in Shady Valley will be higher. But what about quantity? The demand shift results in a larger quantity, and the supply shift leads to a smaller quantity. Will quantity end up more or less? Who knows? No one does, not with the available information. The quantity is indeterminant. Doing Both Consider both shifts using the diagram to the right. Once again the equilibrium price is Po and the equilibrium quantity is Qo. Click the "Both Curves" to see how the market is affected by an increase in demand and a decrease in supply. The demand curve shifts to the right and the supply curve shifts to the left. The resulting equilibrium can be identified by clicking the "New Equilibrium" button. The equilibrium price is now Pe, which as expected is an increase over the original equilibrium price. Buyers are willing to pay more and sellers want to charge more. The price increases. What about quantity? In this little illustration, the new equilibrium quantity happens to be unchanged at Qo, the original equilibrium quantity. Maintaining the same equilibrium quantity, however, is merely coincidence, happenstance, the luck of the draw. In particular, the new demand and supply curves are drawn in such a way that they shift by the same amount. These two curves could have been drawn such that they shifted by different amounts. And if so, the quantity would have ended up greater or less than the original. Quantity is indeterminant. The reason for the indeterminant quantity is that the relative shifts of each curve is unknown. If demand shifts relatively more than supply, then the demand-induced larger quantity outweighs the supply-induced smaller quantity, and the quantity is greater. A smaller quantity results if the supply shift is relatively more than the demand shift. Because the extent of each shift is not known, quantity is indeterminant. Whenever the demand and supply curves both shift, either quantity or price is indeterminant. One of Eight A demand increase and supply decrease is one of eight market disruptions--four involving a change in either demand or supply and four involving changes in both demand and supply. The four single shift disruptions are demand increase, demand decrease, supply increase, and supply decrease. The other three double shifts are demand and supply increase, demand and supply decrease, and demand decrease and supply increase SCARCITY: A pervasive condition of human existence that results because society has unlimited wants and needs, but limited resources used for their satisfaction. This fundamental condition is the common thread that binds all of the topics studied in economics. Scarcity is a perpetual problem facing society because we have limited resources and unlimited wants and needs satisfied with these resources. Scarcity means that we don't have enough of everything (resources) for everyone (wants and needs). Two Components Let's take a look at the two sides of the scarcity problem. • Unlimited Wants and Needs: This is a basic characteristic of humanity which means that people are never totally satisfied with the quantity and variety of goods and services. It means that people never get enough, that there's always something else that they would want or need. • Limited Resources: This is a basic condition of nature which means that the quantities of available resources used for production are finite. It means that the economy has only so many resources that can be used AT ANY GIVEN TIME time to produce other goods and services. So What? What does the combination of these two fundamental characteristics mean? This scarcity problem means: 1. that there's never enough resources to produce everything that everyone would like produced; 2. that some people will have to do without some of what that they want or need; 3. that doing one thing, producing one good, performing one activity, forces society to give up something else; and 4. that the same resources cannot be used to produce two different goods at the same time. We live in a world of scarcity. This world of scarcity is what the study of economics is all about. That's why we usually subtitle scarcity: THE ECONOMIC PROBLEM. Is Anyone Satiated? Is the problem of scarcity immutable? Is everyone always suffering from scarcity. It is, perhaps, possible to find someone who seems content, happy, or totally satisfied. This would seem to raise questions about the inevitability of scarcity. • Perhaps this is someone like Shady Valley's resident multi-gadzillionaire, Winston Smythe Kennsington III. He has oodles of wealth and the capability of buying anything a multi-gadzillionaire's heart might desire. • Or maybe it is someone like Uncle Ned, who has lived a full, satisfying life tilling the fields on his farm contently for decades and who always responds "Nothing" when asked what he wants for Christmas. But have Winston and Uncle Ned really overcome the scarcity problem? • If Winston decides he needs no more wealth and turns his attention to running for political office; doing charitable works; ballooning around the world; or divorcing his current wife for a new, improved model; then some of his wants and needs are clearly unsatisfied and scarcity prevails. • Uncle Ned's apparent contentment may be the result of lower aspirations brought on by decades of disappointment. He "says" that he is happy waking up at five in the morning to milk the chickens and rustle the cows, but he might actually prefer drinking a frozen daiquiri on a Caribbean beach...IF HE KNEW HE COULD AFFORD IT! Opportunity Cost One of the most important aspects of the scarcity problem is opportunity cost, the observation that pursuit of one activity means foregoing another activity. With unlimited wants and needs, every valuable, consumer-satisfying good or service that is produced with our limited resources precludes the production of hundreds, perhaps thousands, maybe even gadzillions of other consumer-satisfying goods or services. This concept of opportunity cost is actually so fundamental to economics that whenever economists use the term "cost" they really mean "opportunity cost", they mean foregone alternatives. Excessively Dismal? The apparent obsession that economists have with scarcity prompts many noneconomists to conclude that economics is a dismal science running rampant with pessimistic purveyors of negativity. Economists seem to be perpetually saying "You can't do that!" (usually raining on the parade of an election-seeking politician who optimistically promises everything to everyone). Economists would counter that this is not pessimism but realism. We just don't have enough resources to satisfy everyone. But does scarcity fail to consider the unbridled spirit of the human potential? What about motivational speakers who gallantly cry, "You can DO it, if only you BELIEVE you can!"? Does scarcity ignore the possibility of scientific advances, technological innovations, exploration? Scarcity doesn't preclude technological advances and other discoveries that "lessen" the scarcity problem with better ways of satisfying wants and needs. In fact, scarcity actually predicts such things. People are motivated to work, go to school, invent products, discover new continents because they don't have all that they want. Why invent, discover, or explore if you already have everything? Increasing limited resources doesn't make them unlimited only less limited. Scarcity persists. Solutions? Scarcity, so far as we know, has been a perpetual, pervasive problem of humanity. There's no reason to think the future will escape the wrath of scarcity either. But why not? Can we ever hope to solve solve the scarcity problem? Technological advances in recent centuries have certainly done a great deal to lessen the scarcity problem. A notable share of the world's population residing in industrialized nations, while not free of scarcity, has achieved a relatively comfortable living standard. Given continued technological advances over the next few hundred years, perhaps we can solve the scarcity problem once and for all? It might happen. Who knows what the future might bring. But such is unlikely, even with technological advances. The reason for this economic pessimism rests with the ONLY two possible ways to eliminate scarcity. • One, unlimited resources: Unfortunately, our planet is finite. Our solar system is finite. Our galaxy is finite. In all likelihood, our universe is finite. None of this bodes well for achieving unlimited resources as a means of solving the scarcity problem. • Second, limited wants and needs: If every human being had finite wants and needs that could be satisfied with a finite amount of resources, then scarcity would cease to exist. But what sort of genetic engineering would be needed for this? Would we still be human? Neither of these alternatives seems particular likely. SEVEN ECONOMIC RULES: A set of seven fundamental notions that reflect the study of economics and how the economy operates. They are: (1) scarcity, (2) subjectivity, (3) inequality, (4) competition, (5) imperfection, (6) ignorance, and (7) complexity. Like driving has an assortment of traffic laws, a journey through economics has a few rules of it's own. While breaking these seven economic rules won't result in a ticket or send your to jail, it could limit your understanding of the subject. Here's a brief look at these seven economic rules: 1. SCARCITY: Our economic pie is limited. We have limited resources and unlimited wants. Because there's only so much to go around and everyone wants more than they have, what one gets, another doesn't. That means virtually every good produced, every action taken has an opportunity cost. 2. SUBJECTIVITY: Prices depend on preferences. The value of goods and services is subjective. Buyers have personal likes and dislikes and are willing to pay different prices for goods. Sellers base prices on production costs which depend on the subjective value that resource owners place on their resources. 3. INEQUALITY: Life is not fair. Resources, goods, services, income, and wealth are not equally distributed. Some people have more than others. Inequality can be caused by differences in natural abilities, parental wealth, the luck of birth, and other factors beyond one's control. Inequality also results from effort, education, training, shrewd decision making, and just plain hard work. 4. COMPETITION: Competition is good. Competitive markets promote efficiency. Competition among buyers in search of products and competition among sellers in search of buyers brings out the best in both--and in the economy. Limited competition on either side is bad for the market and bad for the economy. Limited competition among sellers causes higher prices for buyers. Limited competition among buyers leads to lower prices for sellers. 5. IMPERFECTION: Nothing is perfect and never will be. We can fix some problems, but we can't fix every one. Seeking perfection from an imperfect world can be frustrating and even counter productive. Markets, a useful way to deal with scarcity in many circumstances, have deficiencies that can be corrected only by government action. Some deficiencies are minor, others are monumental. Governments, however, are also flawed. Government actions intended to fix market flaws are also imperfect. Invariably, the choice in a mixed economy is between the lesser of imperfections. 6. IGNORANCE: Nobody knows everything. Information is a scarce good. Acquiring information is governed by the same scarcity problem a...