ECONOMICS

Economics

Economics

a. Define economics

Economics is the social science that studies the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek, hence "rules of the house (hold)".Current economic models developed out of the broader field of political economy in the late 19th century, owing to a desire to use an empirical approach more akin to the physical sciences.

b. Define microeconomics

Microeconomics is a branch of economics that studies how households and firms make decisions to allocate limited resources, (Barr, 2004) typically in markets where goods or services are being bought and sold. Microeconomics examines how these decisions and behaviours affect the supply and demand for goods and services, which determines prices; and how prices, in turn, determine the supply and demand of goods and services.

c. Define the Law of supply

The Law of Supply states that at higher prices, producers are willing to offer more products for sale than at lower prices states that the supply increases as prices increase and decreases as prices decrease. The law of supply states that those already in business will try to increase productions as a way of increasing profits. (Barr, 2004)

d. Define the Law of demand

The Law of Demand states that people will buy more of a product at a lower price than at a higher price, if nothing changes. The law of demand states that at a lower price, more people can afford to buy more goods and more of an item more frequently, than they can at a higher price. The law of demand states that at lower prices, people tend to buy some goods as a substitute for others more expensive. (Stiglitz, 2000)

e. Identify the factors that lead to a change in supply and a change in demand

Factors that Change the Slope of a Demand Curve

1. Availability of Substitutes. A demand curve for a good becomes flatter as the number of substitutes for the good increases. For example, there were few substitutes for White-Out when it was first introduced so its demand curve was steep. As other liquid correcting fluids were introduced, the demand curve for White-Out became flatter. While a change in the price of White-Out had a small affect on the quantity demanded of White-Out when it was first introduced, it has a much larger affect on the quantity demanded today because of the flatter demand curve. The availability of substitutes is the main factor that affects the slope of a demand curve. (Stiglitz, 2000)

2. Length of the Adjustment Period. A demand curve becomes flatter as the adjustment period increases. For example, a demand curve for water is likely to be very steep in the short run. As the adjustment period increases, people become adjusted to using less water (e.g. wash the car less) so the demand curve becomes flatter. While a change in the price of water will have a small affect on the quantity demanded of water in the short run, it will have a larger effect on the quantity demanded in the long ...