Principle Economics Essay

In your view, what is economics? Economics has been defined as the allocation of scarce resources among many different players.   Simply understood as mere supply and demand, Economics can also be made to apply to more complex systems such as production frontiers and economies of scale.   Put simply, economics can be understood as the study of how different market systems interact with each other in order to provide each with the resources that they desire. The law of diminishing returns is short run analysis. True or false? The law of diminishing returns is a long run analysis.   It basically postulates that for every additional input that is added to the production scale, the resulting output per unit will increase up to a certain point then start to increase.   This is a long run analysis because it factors in the effect of additional units of input vis-à  -vis output on the production scale over a long period of time.   Such effects cannot be tracked in a short term scale and if done would most probably be inaccurate. Demand and Supply are operating forces in the market. How then can the equilibrium achieved? The supply-demand model is one of the fundamental concepts of economics. The price level of a good essentially is determined by the point at which quantity supplied equals quantity demanded. To illustrate, consider the following case in which the supply and demand curves are plotted on the same graph. Supply and Demand On this graph, there is only one price level at which quantity demanded is in balance with the quantity supplied, and that price is the point at which the supply and demand curves cross. The law of supply and demand predicts that the price level will move toward the point that equalizes quantities supplied and demanded. To understand why this must be the equilibrium point, consider the situation in which the price is higher than the price at which the curves cross. In such a case, the quantity supplied would be greater than the quantity demanded and there would be a surplus of the good on the market. Specifically, from the graph we see that if the unit price is $3 (assuming relative pricing in dollars), the quantities supplied and demanded would be: Quantity Supplied = 42 units Quantity Demanded = 26 units Therefore there would be a surplus of 42 – 26 = 16 units. The sellers then would lower their price in order to sell the surplus. Suppose the sellers lowered their prices below the equilibrium point. In this case, the quantity demanded would increase beyond what was supplied, and there would be a shortage. If the price is held at $2, the quantity supplied then would be: Quantity Supplied = 28 units Quantity Demanded = 38 units Therefore, there would be a shortage of 38 – 28 = 10 units. The sellers then would increase their prices to earn more money. The equilibrium point must be the point at which quantity supplied and quantity demanded are in balance, which is where the supply and demand curves cross. From the graph above, one sees that this is at a price of approximately $2.40 and a quantity of 34 units.