What are the basic decision-making units in the economy? What are the relationsh
ID: 1247602 • Letter: W
Question
What are the basic decision-making units in the economy?What are the relationships between these basic units? How does a circular flow diagram illustrate these relationships?
What do we mean by "quantity demanded?" What influences quantity demanded on the part of households?
What is the demand schedule for a product? What are the main features of a demand curve? What is the law of demand and how is it illustrated by demand curves?
What can change the demand for a product? How does the demand curve react to changes in demand? What do we mean by normal goods? Inferior goods? Complementary goods? Substitute goods?
What is the law of supply? What influences the quantity supplied of a good? What are the features of a supply curve? How do supply curves illustrate the law of supply? What factors can cause the supply of a product to change and how are these changes reflected in the supply curve?
What is the equilibrium price for a product? What do we mean by a shortage? A surplus?
How do changes in the supply or demand for a product affect its equilibrium price and quantity?
Explanation / Answer
The basic decision-making units are the producers and consumers. The simplest form shows that producers sell goods to consumers. The consumers give money to producer. The more complex one shows that in addition to the above, consumers supply labor to the producer and the producer pays them for it. These two relationships result in two circles going in opposite directions on the circular flow diagram. The picture on the following website makes it more clear: http://ingrimayne.com/econ/TheFirm/CircularFlow.html The demand schedule is a list. It tells you which quantities (q) will be demanded at each price (p). You can think of the combinations of p and q as coordinates and as points on a graph. The demand curve is downward sloping. The law of demand states that as price increases, quantity demanded decreases. This is illustrated by the negative slope of the demand curve. Factors that can change demand for a good: income, tastes & preferences, population changes, expectations of the future. Changes in demand are illustrated by shifts in the demand curve. If demand increases, the curve shifts to the right and up, if it decreases, it shifts to the left and down. The demand for a normal good increases as income increases (i.e. luxury goods). The demand for an inferior good decreases as income increases (i.e. processed meat) Complementary goods are goods that are consumed together (i.e. baseballs and bats). If the demand for one good increases, the demand for its complement increases as well. Substitutes are goods that can replace one another (i.e. pizza and pasta). If the demand for one good increases, the demand for its substitute decreases. The law of supply states that as price increases, quantity supplied increases. Quantity supplied depends on the price of the good. The supply curve is upward sloping, which illustrates the law of demand. Supply is effected by changes in the price of inputs, changes in technology, subsidies and taxes, size of market (# of firms), expected future prices, other related goods prices. Anything that increases supply will shift supply to the right and down. Anything that decreases supply will shift supply to the left and up. At equilibrium, suppliers and demanders agree on a price and a quantity. Therefore, quantity supplied and demanded are equal. Equilibrium is the intersection of the demand and supply curve. A shortage is if quantity demanded is greater than quantity supplied. A surplus is if quantity supplied is greater than quantity demanded. Holding supply constant, an increase in demand increases equilibrium price and quantity. A decrease in demand decreases equilibrium price and quantity. Holding demand constant, an increase in supply increases equilibrium quantity and decreases equilibrium price. A decrease in supply decreases equilibrium quantity and increases equilibrium price.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.