Supply

What is supply?

Supply is the trusty and almost inseparable companion to demand. Supply is the amount of something that people will be willing and able to supply at any one price or time. Just as with demand you have goods, services, consumers, and producers.

How do you measure supply?

Supply is measured by Price Elasticity of Supply (PES) which is also a value between 0 and infinity (PES is only ever positive). This measures how producers will respond to changes in prices of a good or service and can be: perfectly elastic, relatively elastic, perfectly inelastic, relatively inelastic, and unitary. Elasticity means the same thing as it does for demand, so if you want to recap on the meaning, just check the last post.

Calculation

You take the percentage change in the quantity supplied and then divide it by the percentage change in price that caused it. This is your PES value.

Elastic goods

The more elastic something is, the bigger the change in supply will be in relation to supply. So a producer will always increase the quantity that they supply if the price of it increases (we'll ignore the demand side of this for now). Elastic goods' supply will increase much more with just a small change in price: this is because if you can increase your production of chocolate bars very quickly, because they are selling at double the price, you will! Goods are often elastic if they can be mass produced in factories that are no working at 'full capacity', this means that maybe not all of the workers or machines are being used to their full potential.

If a good is perfectly elastic, producers will only ever produce at a certain price, and only that price. Imagine McDonald's would only ever sell Big Macs at £2.59, and nothing else!

Inelastic goods

These basically means that the increase in supply will be will be relatively smaller to any change in price, this would often be because there is a time lag involved in production (IE you have to wait for a long time to actually make something: crops for example because to increase the number of crops you produce you can sometimes have to wait for a year.

If it is perfectly inelastic this means that suppliers are completely unable to produce anything other than the specific amount that they already produce.

Unitary goods

This is when supply and price are directly proportional (Imagine an x=y curve).

Why do we care?

You can use PES diagrams to figure out how a company will react to changes in price or inflation. What's even more interesting is when you combine PED and PES, but that comes later.

Discussion Point

What do you think would make demand more elastic or inelastic?

Demand

What is demand?

Demand is the amount of something that people will want to and be able to buy at a certain price or time. The things that people demand are classified as either goods or services. Producers are the people and companies that sell those goods or services, and the consumers are the people and companies that buy them. 

How do you measure demand?

Demand is measured by a value called it's Price Elasticity of Demand (PED) which is somewhere between 0 and infinity (it goes in both ways- negative and positive). This is basically a measure of how much the demand of a good will change if the price changes. A good can have one of five main types of PED: perfectly elastic, relatively elastic, perfectly inelastic, relatively inelastic, and unitary. All of these new terms may seem a little scary, but they're nothing to be worried about! Elasticity is just how the demand of a good/service will change with price. 

Calculation

You take a percentage change in the quantity demanded and then divide it by the percentage change in price that caused it. This is your PED value.

Elastic goods

The more elastic something is, the bigger the change in demand will be in relation to demand. These are generally luxury goods like fizzy drinks or cinema tickets because if the price goes up, you can easily miss out on them (it works the other way though, too- if the price of cinema tickets was reduced to £3 you'd go a lot more often). 

If a good is perfectly elastic any change in price will mean that demand goes straight to nothing. It seems weird, imagine having a game that people will only buy at £45.97 exactly, and nothing else!

Inelastic goods

These are basically the opposite of elastic goods: the change in demand will be smaller in relation the change in price. These are things that are seen as necessities are like this because people will still buy them even if they are expensive. Petrol is the best example that there is of an inelastic good as people have become almost completely reliant on the stuff. 

A perfectly inelastic good is one that will always have the same demand, regardless of price. Because there is a finite amount of money in existence, it's possible to say that something has the same demand all the time!

Unitary Demand

This is when demand changes are directly proportional to prices changes.

Why do we care?

Well, you don't really have to care but it can help you better understand how far more complex economic functions really work. Also, firms use PED diagrams all the time to work out what will happen when they make decisions. 

Discussion Point

If you were the CEO of a firm, what elasticity would you want your goods to have and why?

What is an economy?

What is an economy?

The Oxford English dictionary defines it as: the state of a country or region in terms of the production and consumption of goods and services and the supply of money. At first glance, this may seem a little frightening, but let's just take a step back. Firstly, let's take 'production and consumption': all this means is the collection of things that people make and buy. Goods and services are just the types of things that we can buy and sell, and money is how we do that. So know that we know what all of that means we can fully understand that all an economy is, is the collection of all of the buyers, sellers, and money within a country or region.

Types of economy.

There are three main types of economy that are discussed in today's world: Command, Free Market, and Mixed. You may not know exactly what I'm talking about but it'll all become clear soon. These different names of economy types basically describe how they are organised which helps us understand how best to think about them.

Command Economies

A Command Economy is an economy in which the government owns and controls ALL assets and distributes them how they see fit. One thing to keep in mind when studying economics is that we always have to find the most extreme or ideal version of something before we can really define the other versions. There are NO command economies in existence, nor have there ever been; the closest that the world has ever had was probably the USSR (even then, it wasn't a 'pure' command economy). If you ever hear people talking about socialism, communism, or just being 'left winged' what they mean is that they would prefer a MORE command based economy.

Free Market Economies

A Free Market Economy (sometimes just a 'Market Economy') is an economy in which there is NO government whatsoever: anyone can buy anything, at any time, in any place as long as they have money. Once again, we've got to remember that this is a very extreme example of Capitalism and doesn't exist in the real world. The closest examples that we have are places like the USA and Hong Kong where there are very few regulations. If people say they are a capitalist or right winged, they mean that they prefer a MORE free market based economy

Mixed Economies

A Mixed Economy is one in which the government control some things, but other things are controlled by the general populous: EVERY economy worldwide is mixed- bar none. This is the case because governments are always needed for things like policing and infrastructure (roads , schools, and other stuff like that) without which we could not function really. Don't get tricked though! A mixed economy is not a perfect 50/50 split, as I said earlier, some countries can be more command based or more free market based.

Left or Right?

Well, I am in no position to tell you whether to be left or right winged- neither is anyone else for that matter! All that I, and anyone else, should tell you is the facts and arguments for and against each side. As a right winged economy, large companies and individuals will face less tax, but this also means that they will have to pay for more things, and there will be less support and regulation: in a perfectly free market economy, a 6 year old could go and buy a gun. On the other hand, in a perfectly command economy, you would get no choice in whether you get breakfast that day or not. So instead of me telling you, why don't you tell yourself; as we progress, you'll probably get a better idea of where you lie on the sliding scale of left and right.

Discussion Point

From what you know, what would you want if you had the chance to change your country? Market, command, or mixed?