Shifts vs. Movement

 1.       For economics, the "movements" and "shifts" in relation to the supply and demand curves represent very different market phenomena:

1. Movements

A movement refers to a change along a curve. On the demand curve, a movement denotes a change in both price and quantity demanded from one point to another on the curve. The movement implies that the demand relationship remains consistent. Therefore, a movement along the demand curve will occur when the price of the good changes and the quantity demanded changes in accordance to the original demand relationship. In other words, a movement occurs when a change in the quantity demanded is caused only by a change in price, and vice versa.

2.      

Like a movement along the demand curve, a movement along the supply curve means that the supply relationship remains consistent. Therefore, a movement along the supply curve will occur when the price of the good changes and the quantity supplied changes in accordance to the original supply relationship. In other words, a movement occurs when a change in quantity supplied is caused only by a change in price, and vice versa.

3.       2. Shifts

A shift in a demand or supply curve occurs when a good's quantity demanded or supplied changes even though price remains the same. For instance, if the price for a bottle of beer was $2 and the quantity of beer demanded increased from Q1 to Q2, then there would be a shift in the demand for beer. Shifts in the demand curve imply that the original demand relationship has changed, meaning that quantity demand is affected by a factor other than price. A shift in the demand relationship would occur if, for instance, beer suddenly became the only type of alcohol available for consumption.

4.      

Conversely, if the price for a bottle of beer was $2 and the quantity supplied decreased from Q1 to Q2, then there would be a shift in the supply of beer. Like a shift in the demand curve, a shift in the supply curve implies that the original supply curve has changed, meaning that the quantity supplied is effected by a factor other than price. A shift in the supply curve would occur if, for instance, a natural disaster caused a mass shortage of hops; beer manufacturers would be forced to supply less beer for the same price.

Disequilibrium

1.       Disequilibrium occurs whenever the  price or quantity is not equal to P* or Q*.

1. Excess Supply
If the price is set too high, excess supply will be created within the economy and there will be allocative inefficiency.

2.      
At price P1 the quantity of goods that the producers wish to supply is indicated by Q2. At P1, however, the quantity that the consumers want to consume is at Q1, a quantity much less than Q2. Because Q2 is greater than Q1, too much is being produced and too little is being consumed. The suppliers are trying to produce more goods, which they hope to sell to increase profits, but those consuming the goods will find the product less attractive and purchase less because the price is too high.

2. Excess Demand
Excess demand is created when price is set below the equilibrium price. Because the price is so low, too many consumers want the good while producers are not making enough of it.

In this situation, at price P1, the quantity of goods demanded by consumers at this price is Q2. Conversely, the quantity of goods that producers are willing to produce at this price is Q1. Thus, there are too few goods being produced to satisfy the wants (demand) of the consumers. However, as consumers have to compete with one other to buy the good at this price, the demand will push the price up, making suppliers want to supply more and bringing the price closer to its equilibrium.

Equilibrium

 1.      When supply and demand are equal (i.e. when the supply function and demand function intersect) the economy is said to be at equilibrium. At this point, the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded. Thus, everyone (individuals, firms, or countries) is satisfied with the current economic condition. At the given price, suppliers are selling all the goods that they have produced and consumers are getting all the goods that they are demanding.

As you can see on the chart, equilibrium occurs at the intersection of the demand and supply curve, which indicates no allocative inefficiency. At this point, the price of the goods will be P* and the quantity will be Q*. These figures are referred to as equilibrium price and quantity.

In the real market place equilibrium can only ever be reached in theory, so the prices of goods and services are constantly changing in relation to fluctuations in demand and supply.

Supply and Demand Relationship

 Now that we know the laws of supply and demand, let's turn to an example to show how supply and demand affect price.

Imagine that a special edition CD of your favorite band is released for $20. Because the record company's previous analysis showed that consumers will not demand CDs at a price higher than $20, only ten CDs were released because the opportunity cost is too high for suppliers to produce more. If, however, the ten CDs are demanded by 20 people, the price will subsequently rise because, according to the demand relationship, as demand increases, so does the price. Consequently, the rise in price should prompt more CDs to be supplied as the supply relationship shows that the higher the price, the higher the quantity supplied.

If, however, there are 30 CDs produced and demand is still at 20, the price will not be pushed up because the supply more than accommodates demand. In fact after the 20 consumers have been satisfied with their CD purchases, the price of the leftover CDs may drop as CD producers attempt to sell the remaining ten CDs. The lower price will then make the CD more available to people who had previously decided that the opportunity cost of buying the CD at $20 was too high.

Time and Supply

 Unlike the demand relationship, however, the supply relationship is a factor of time. Time is important to supply because suppliers must, but cannot always, react quickly to a change in demand or price. So it is important to try and determine whether a price change that is caused by demand will be temporary or permanent.

Let's say there's a sudden increase in the demand and price for umbrellas in an unexpected rainy season; suppliers may simply accommodate demand by using their production equipment more intensively. If, however, there is a climate change, and the population will need umbrellas year-round, the change in demand and price will be expected to be long term; suppliers will have to change their equipment and production facilities in order to meet the long-term levels of demand.

The Law of Supply

 Like the law of demand, the law of supply demonstrates the quantities that will be sold at a certain price. But unlike the law of demand, the supply relationship shows an upward slope. This means that the higher the price, the higher the quantity supplied. Producers supply more at a higher price because selling a higher quantity at a higher price increases revenue.

A, B and C are points on the supply curve. Each point on the curve reflects a direct correlation between quantity supplied (Q) and price (P). At point B, the quantity supplied will be Q2 and the price will be P2, and so on. (To learn how economic factors are used in currency trading, read Forex Walkthrough: Economics.)

The Law of Demand

The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded. The amount of a good that buyers purchase at a higher price is less because as the price of a good goes up, so does the opportunity cost of buying that good. As a result, people will naturally avoid buying a product that will force them to forgo the consumption of something else they value more. The chart below shows that the curve is a downward slope.

1.      

A, B and C are points on the demand curve. Each point on the curve reflects a direct correlation between quantity demanded (Q) and price (P). So, at point A, the quantity demanded will be Q1 and the price will be P1, and so on. The demand relationship curve illustrates the negative relationship between price and quantity demanded. The higher the price of a good the lower the quantity demanded (A), and the lower the price, the more the good will be in demand (C).

Increasing Opportunity Cost

 The production possibilities schedule indicates that the opportunity cost of shed production increases as more sheds are produced. At the top of the schedule, the opportunity cost of the first shed is 5 dozen crab puffs. At the bottom of the schedule the opportunity cost of the tenth shed is 200 dozen crab puffs.

The reason for this pattern rests with the law of increasing opportunity cost, one of the more important principles studied in economics. The law of increasing opportunity cost states that the opportunity cost of producing a good increases as more of the good is produced.

The law of increasing opportunity cost results due to the third rule of inequality, which in this case means that all resources are not created equal.

 Increasing Cost:The production of the first shed, moving from bundle A to bundle B, uses resources best suited for shed production and least suited for crab puffs production. As such, very few crab puffs are given up to produce one shed.

1. However, as more sheds are produced, resources that are removed from crab puffs production are more suited for crab puffs production and less suited for shed production.
2. With production of the tenth shed, going from bundle J to bundle K, the resources switched are those least suited for sheds and best suited for crab puffs. As such, a relatively large number of crab puffs are given up to produce one shed.
3. As more sheds are produced, the opportunity cost of production increases.

67. Slope and Cost

 Opportunity cost is measured by the slope of the production possibilities curve. In particular, the slope of the production possibilities curve is the opportunity cost of the good measured on the horizontal axis, which in this example is storage sheds. This production possibilities curve presents opportunity cost values for segments between each pair of points. The opportunity cost of producing the first shed, moving from point A to point B is the schedule is 5 dozen crab puffs (or -5). The slope of the production possibilities curve between points A and B is also -5.

Economics is the study of mankind in the ordinary business of life, Economics is a science of wealth

 Alfred Marshall provides a still widely-cited definition in his textbook Principles of Economics (1890) that extends analysis beyond wealth and from the societal to the macroeconomic level:

"Economics is a study of man's action in the ordinary business of life it inquires how he gets his income and how he uses it. It examines that part of individual and social actions which is mostly closely connected with the attainment and with the use of material requisites of well being. Thus economics is on one side a study of wealth and on the other and important side a part of the study of man ".

From the definition of economics by Alfred Marshall, we see that he lays emphasizes on the below points.

 1. Study of an ordinary man: According to Alfred Marshall, economics is that study of an ordinary man who lives in society. It is not concerned with the lives of only rich persons or who is cut away from the society. Its subject matter is a particular aspect of human behaviour i.e. earning and spending of incomes for the normal material needs of human beings.

2. Economics is not a useless study of wealth: Economics does not regard wealth as the be-all and end-all of economics activities wealth is not of primary importance. It is earned only for promoting human welfare economics is studied to analyze the causes of material prosperity of individuals and nations.

3. Economics is a social science: It does not study the behaviour of isolated individuals but the actions of persons living in society. When people live together they interact and cooperate to work at firms, factories, shop and offices to produce and exchange goods or services. The problems about these activities are studied in economics.

4. Study of material welfare: According to Alfred Marshall, economics studies only material requisites of well being or causes of material welfare. It is cleared from this definition that it is materialistic aspect and ignores non-material aspects. Alfred Marshall stressed that the man’s behaviour and activities to produce and consume maximum number of goods and services are the main object of study wealth is not an end or final aim, but only a means to achieve a higher objective of welfare.

Differences between Perfectly Competitive market & monopoly Market

 The Difference between Perfectly Competitive market & monopoly Market are given Below:

Perfectly Competitive market	Monopoly Market
1. Perfectly Competitive market is the market in which there is a large number of buyers and sellers. The goods sold in this market are identical. A single price prevails in the market	1.  Monopoly is a type of imperfect market. The number of sellers is one but the number of buyers is many. A monopolist is a price-maker. In fact monopoly is the opposite of perfect competition.
2. The average revenue (price) curve under perfect competition is a horizontal straight line parallel to OX-axis	2. The average revenue curve under monopoly slopes downward and its corresponding marginal revenue curve lie below the average revenue curve
3.under perfect competition price equals marginal cost at the equilibrium output	3. under monopoly equilibrium price is greater than marginal cost
4. Under perfect competition marginal revenue is the same as average revenue at all levels of output	4. Under monopoly both the AR and MR curve slope downward and MR curve lies below AR curve. Thus average revenue is greater than marginal revenue at all levels of output
5. A competitive firm makes only normal profit in the long run	5. monopolist can make super normal profits even in the long run
6. a competitive firm earns only normal profit	6. monopoly firm continues earning supernormal profits
7. A perfectly competitive Market Cannot discriminate prices for his product.	7.  A monopolist can discriminate prices for his product.
8.  a competitive firm cannot change different prices from different buyers .	8. Elastic ties of demand are different in different markets.

Trade, Comparative Advantage and Absolute Advantage

 An economy can focus on producing all of the goods and services it needs to function, but this may lead to an inefficient allocation of resources and hinder future growth. By using specialization, a country can concentrate on the production of one thing that it can do best, rather than dividing up its resources.

For example, let's look at a hypothetical world that has only two countries (Country A and Country B) and two products (cars and cotton). Each country can make cars and/or cotton. Now suppose that Country A has very little fertile land and an abundance of steel for car production. Country B, on the other hand, has an abundance of fertile land but very little steel. If Country A were to try to produce both cars and cotton, it would need to divide up its resources. Because it requires a lot of effort to produce cotton by irrigating the land, Country A would have to sacrifice producing cars. The opportunity cost of producing both cars and cotton is high for Country A, which will have to give up a lot of capital in order to produce both. Similarly, for Country B, the opportunity cost of producing both products is high because the effort required to produce cars is greater than that of producing cotton.

Each country can produce one of the products more efficiently (at a lower cost) than the other. Country A, which has an abundance of steel, would need to give up more cars than Country B would to produce the same amount of cotton. Country B would need to give up more cotton than Country A to produce the same amount of cars. Therefore, County A has a comparative advantage over Country B in the production of cars, and Country B has a comparative advantage over Country A in the production of cotton.

Now let's say that both countries (A and B) specialize in producing the goods with which they have a comparative advantage. If they trade the goods that they produce for other goods in which they don't have a comparative advantage, both countries will be able to enjoy both products at a lower opportunity cost. Furthermore, each country will be exchanging the best product it can make for another good or service that is the best that the other country can produce. Specialization and trade also works when several different countries are involved. For example, if Country C specializes in the production of corn, it can trade its corn for cars from Country A and cotton from Country B.

Determining how countries exchange goods produced by a comparative advantage ("the best for the best") is the backbone of international trade theory. This method of exchange is considered an optimal allocation of resources, whereby economies, in theory, will no longer be lacking anything that they need. Like opportunity cost, specialization and comparative advantage also apply to the way in which individuals interact within an economy.

Absolute Advantage  

Sometimes a country or an individual can produce more than another country, even though countries both have the same amount of inputs. For example, Country A may have a technological advantage that, with the same amount of inputs (arable land, steel, labor), enables the country to manufacture more of both cars and cotton than Country B. A country that can produce more of both goods is said to have an absolute advantage. Better quality resources can give a country an absolute advantage as can a higher level of education and overall technological advancement. It is not possible, however, for a country to have a comparative advantage in everything that it produces, so it will always be able to benefit from trade.

Opportunity Cost

 Opportunity cost is the value of what is foregone in order to have something else. This value is unique for each individual. You may, for instance, forgo ice cream in order to have an extra helping of mashed potatoes. For you, the mashed potatoes have a greater value than dessert. But you can always change your mind in the future because there may be some instances when the mashed potatoes are just not as attractive as the ice cream. The opportunity cost of an individual's decisions, therefore, is determined by his or her needs, wants, time and resources (income).

This is important to the PPF because a country will decide how to best allocate its resources according to its opportunity cost. Therefore, the previous wine/cotton example shows that if the country chooses to produce more wine than cotton, the opportunity cost is equivalent to the cost of giving up the required cotton production.

Let's look at another example to demonstrate how opportunity cost ensures that an individual will buy the least expensive of two similar goods when given the choice. For example, assume that an individual has a choice between two telephone services. If he or she were to buy the most expensive service, that individual may have to reduce the number of times he or she goes to the movies each month. Giving up these opportunities to go to the movies may be a cost that is too high for this person, leading him or her to choose the less expensive service.

Remember that opportunity cost is different for each individual and nation. Thus, what is valued more than something else will vary among people and countries when decisions are made about how to allocate resources. 

Opportunity cost refers to the value forgone in order to make one particular investment instead of another.For example, let's assume you have $15,000 that you could either invest in Company XYZ stock or put toward a graduate degree. You choose the stock. The opportunity cost in this situation is the increased lifetime earnings that may have resulted from getting the graduate degree -- that is, you choose to forgo the increase in earnings when you use the money to buy stock instead.

Here's another example. Let's say you have $15,000 and your choice is to either buy shares of Company XYZ or leave the money in a CD that earns only 5% per year. If the Company XYZ stock returns 10%, you've benefited from your decision because the alternative would have been less profitable. However, if Company XYZ returns 2% when you could have had 5% from the CD, then your opportunity cost is (5% - 2% = 3%).

Opportunity cost is all about the most basic of economic concepts: trade-offs. It's a notion inherent in almost every decision of daily life and of investing: if you make a choice, you forgo the other options for now. And what's been given up can sometimes turn out to have been the wiser choice, which is why opportunity cost is best measured in hindsight -- after all, it is impossible to know the end outcome of any investment. Opportunity costs are a factor not only in consumer decisions, but in production decisions, capital allocation, time management, and lifestyle choices. 

Production Possibility Frontier (PPF)

 Under the field of macroeconomics, the production possibility frontier (PPF) represents the point at which an economy is most efficiently producing its goods and services and, therefore, allocating its resources in the best way possible. If the economy is not producing the quantities indicated by the PPF, resources are being managed inefficiently and the production of society will dwindle. The production possibility frontier shows there are limits to production, so an economy, to achieve efficiency, must decide what combination of goods and services can be produced.

Let's turn to the chart below. Imagine an economy that can produce only wine and cotton. According to the PPF, points A, B and C - all appearing on the curve - represent the most efficient use of resources by the economy. Point X represents an inefficient use of resources, while point Y represents the goals that the economy cannot attain with its present levels of resources.

As we can see, in order for this economy to produce more wine, it must give up some of the resources it uses to produce cotton (point A). If the economy starts producing more cotton (represented by points B and C), it would have to divert resources from making wine and, consequently, it will produce less wine than it is producing at point A. As the chart shows, by moving production from point A to B, the economy must decrease wine production by a small amount in comparison to the increase in cotton output. However, if the economy moves from point B to C, wine output will be significantly reduced while the increase in cotton will be quite small. Keep in mind that A, B, and C all represent the most efficient allocation of resources for the economy; the nation must decide how to achieve the PPF and which combination to use. If more wine is in demand, the cost of increasing its output is proportional to the cost of decreasing cotton production.

Point X means that the country's resources are not being used efficiently or, more specifically, that the country is not producing enough cotton or wine given the potential of its resources. Point Y, as we mentioned above, represents an output level that is currently unreachable by this economy. However, if there was a change in technology while the level of land, labor and capital remained the same, the time required to pick cotton and grapes would be reduced. Output would increase, and the PPF would be pushed outwards. A new curve, on which Y would appear, would represent the new efficient allocation of resources.

When the PPF shifts outwards, we know there is growth in an economy. Alternatively, when the PPF shifts inwards it indicates that the economy is shrinking as a result of a decline in its most efficient allocation of resources and optimal production capability. A shrinking economy could be a result of a decrease in supplies or a deficiency in technology.

An economy can be producing on the PPF curve only in theory. In reality, economies constantly struggle to reach an optimal production capacity. And because scarcity forces an economy to forgo one choice for another, the slope of the PPF will always be negative; if production of product A increases then production of product B will have to decrease accordingly.

Net National Product - NNP

 The monetary value of finished goods and services produced by a country's citizens, whether overseas or resident, in the time period being measured (i.e., the gross national product, or GNP) minus the amount of GNP required to purchase new goods to maintain existing stock (i.e., depreciation).

Alternatively, net national product (NNP) can be calculated as total payroll compensation + net indirect tax on current production + operating surpluses.

In other words, NNP is the amount of goods that can be consumed within a nation each year without reducing the amount that can be consumed in following years.

Gross national income

 The Gross national income (GNI) consists of: the personal consumption expenditure, the gross private investment, the government consumption expenditures, the net income from assets abroad (net income receipts), and the gross exports of goods and services, after deducting two components: the gross imports of goods and services, and the indirect business taxes. The GNI is similar to the gross national product (GNP), except that in measuring the GNP one does not deduct the indirect business taxes.

A measure of the wealth earned by nations through economic activites all around the world.

Gross National Income comprises the total value of goods and services produced within a country (i.e. its Gross Domestic Product), together with its income received from other countries (notably interest and dividends), less similar payments made to other countries. Also known as GNP.

It can be calculated as follows :

GNI = Gross Domestic Product + Net property income from abroad.

GDP vs GNP

 

	GDP	GNP
Stands for:	Gross Domestic Product	Gross National Product
Definition:	An estimated value of the total worth of a country’s production and services, on its land, by its nationals and foreigners, calculated over the course on one year	An estimated value of the total worth of production and services, by citizens of a country, on its land or on foreign land, calculated over the course on one year
Formula for Calculation:	GDP = consumption + investment + (government spending) + (exports − imports)	GNP = GDP + NR (Net income inflow from assets abroad or Net Income Receipts) - NP (Net payment outflow to foreign assets)
Uses:	Business, Economic Forecasting	Business, Economic Forecasting
Application (Context in which these terms are used):	To see the strength of a country’s local economy	To see how the nationals of a country are doing economically
Layman Usage:	Total value of products & Services produced within the territorial boundary of a country	Total value of Goods and Services produced by all nationals of a country (whether within or outside the country)
Country with Highest Per Capita (US$):	Luxembourg ($87,400)	Luxembourg ($45,360)
Country with Lowest Per Capita (US$):	Liberia ($16)	Mozambique ($80)
Country with Highest (Cumulative):	USA ($13.06 Trillion in 2006)	USA (~ $11.5 Trillion in 2005)

An indifference curve shows combination of goods between which a person is indifferent

 The main attributes or properties or characteristics of indifference curves are as follows:

(1) Indifference Curves are Negatively Sloped:

The indifference curves must slope down from left to right. This means that an indifference curve is negatively sloped. It slopes downward because as the consumer increases the consumption of X commodity, he has to give up certain units of Y commodity in order to maintain the same level of satisfaction.

In fig. 3.4 the two combinations of commodity cooking oil and commodity wheat is shown by the points a and b on the same indifference curve. The consumer is indifferent towards points a and b as they represent equal level of satisfaction.

At point (a) on the indifference curve, the consumer is satisfied with OE units of ghee and OD units of wheat. He is equally satisfied with OF units of ghee and OK units of wheat shown by point b on the indifference curve. It is only on the negatively sloped curve that different points representing different combinations of goods X and Y give the same level of satisfaction to make the consumer indifferent.

(2) Higher Indifference Curve Represents Higher Level:

A higher indifference curve that lies above and to the right of another indifference curve represents a higher level of satisfaction and combination on a lower indifference curve yields a lower satisfaction.

In other words, we can say that the combination of goods which lies on a higher indifference curve will be preferred by a consumer to the combination which lies on a lower indifference curve.

In this diagram (3.5) there are three indifference curves, IC¹, IC² and IC³ which represents different levels of satisfaction. The indifference curve IC³ shows greater amount of satisfaction and it contains more of both goods than IC² and IC¹ (IC³ > IC² > IC¹).

(3) Indifference Curve are Convex to the Origin:

This is an important property of indifference curves. They are convex to the origin (bowed inward). This is equivalent to saying that as the consumer substitutes commodity X for commodity Y, the marginal rate of substitution diminishes of X for Y along an indifference curve.

In this figure (3.6) as the consumer moves from A to B to C to D, the willingness to substitute good X for good Y diminishes. This means that as the amount of good X is increased by equal amounts, that of good Y diminishes by smaller amounts. The marginal rate of substitution of X for Y is the quantity of Y good that the consumer is willing to give up to gain a marginal unit of good X. The slope of IC is negative. It is convex to the origin.

(4) Indifference Curve Cannot Intersect Each Other:

Given the definition of indifference curve and the assumptions behind it, the indifference curves cannot intersect each other. It is because at the point of tangency, the higher curve will give as much as of the two commodities as is given by the lower indifference curve. This is absurd and impossible.

In fig 3.7, two indifference curves are showing cutting each other at point B. The combinations represented by points B and F given equal satisfaction to the consumer because both lie on the same indifference curve IC₂. Similarly the combinations shows by points B and E on indifference curve IC₁ give equal satisfaction top the consumer.

If combination F is equal to combination B in terms of satisfaction and combination E is equal to combination B in satisfaction. It follows that the combination F will be equivalent to E in terms of satisfaction. This conclusion looks quite funny because combination F on IC₂ contains more of good Y (wheat) than combination which gives more satisfaction to the consumer. We, therefore, conclude that indifference curves cannot cut each other.

(5) Indifference Curves do not Touch the Horizontal or Vertical Axis:

One of the basic assumptions of indifference curves is that the consumer purchases combinations of different commodities. He is not supposed to purchase only one commodity. In that case indifference curve will touch one axis. This violates the basic assumption of indifference curves.

In fig. 3.8, it is shown that the in difference IC touches Y axis at point C and X axis at point E. At point C, the consumer purchase only OC commodity of rice and no commodity of wheat, similarly at point E, he buys OE quantity of wheat and no amount of rice. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.

What is supply

 Supply is the amount of commodity that is offered for sale. Supply schedule shows the amounts of a product that producers are willing and able to make available for sale at each of a series of possible prices during a specific period.

Supply depends on technology, the prices of the inputs necessary to produce the commodity, tax and subsidy, and for agricultural commodities, climate and weather conditions.