10 Principles of Economics
10 Principles of Economics
Supply and Demand
Supply and demand are inversely proportional: When supply rises, demand falls. For instance, when the housing market in a certain region is flooded with homes for sale, sellers drop the price to attract a buyer. However, single homes for sale in exclusive neighborhoods might have more potential buyers than sellers. In these instances, the price of the home rises.
Inflation and Unemployment
Gregory Mankiw, Harvard Economics professor and author of "Principles of Economics" explains that society experiences a short-run trade-off with rising prices and unemployment: As the monetary supply expands and inflation occurs, unemployment rises. However, the Phillips curve indicates that in the long-run, inflation has no bearing on levels of unemployment.
Effects of Price Controls
Price controls, like setting food prices in the former Soviet Union or rent control in New York, have negative effects for both buyers and sellers. Price ceilings create shortages and rationing of goods, and price floors create disincentives to improve on the quality of a good when it cannot be sold at the equilibrium price.
Elasticity
Elasticity measures price responsiveness of a good or service. If the demand for a product changes significantly when the price changes, it is considered elastic. Examples of elastic goods include makeup and concert tickets. Inelastic goods show little or no change in demand when the price changes. Examples include electricity and gas.
Firm Behavior
The goal of a firm is to maximize profit. William McEachern explains in the book, "Microeconomics: A Contemporary Introduction" that perfectly-competitive firms maximize profit when the marginal cost equals the marginal revenue. When this equilibrium is reached, the firm can stay competitive and profitable. When marginal cost exceeds the marginal revenue, the firm exits the market.
Consumer Behavior
Consumers wish to maximize their utility within their budget constraint.
Supply and Demand
Supply and demand are inversely proportional: When supply rises, demand falls. For instance, when the housing market in a certain region is flooded with homes for sale, sellers drop the price to attract a buyer. However, single homes for sale in exclusive neighborhoods might have more potential buyers than sellers. In these instances, the price of the home rises.
Inflation and Unemployment
Gregory Mankiw, Harvard Economics professor and author of "Principles of Economics" explains that society experiences a short-run trade-off with rising prices and unemployment: As the monetary supply expands and inflation occurs, unemployment rises. However, the Phillips curve indicates that in the long-run, inflation has no bearing on levels of unemployment.
Effects of Price Controls
Price controls, like setting food prices in the former Soviet Union or rent control in New York, have negative effects for both buyers and sellers. Price ceilings create shortages and rationing of goods, and price floors create disincentives to improve on the quality of a good when it cannot be sold at the equilibrium price.
Elasticity
Elasticity measures price responsiveness of a good or service. If the demand for a product changes significantly when the price changes, it is considered elastic. Examples of elastic goods include makeup and concert tickets. Inelastic goods show little or no change in demand when the price changes. Examples include electricity and gas.
Firm Behavior
The goal of a firm is to maximize profit. William McEachern explains in the book, "Microeconomics: A Contemporary Introduction" that perfectly-competitive firms maximize profit when the marginal cost equals the marginal revenue. When this equilibrium is reached, the firm can stay competitive and profitable. When marginal cost exceeds the marginal revenue, the firm exits the market.
Consumer Behavior
Consumers wish to maximize their utility within their budget constraint.