Basic Economics

Below are some basic economics notes.

Market analysis

Demand = the quantity of goods and services consumers wish and are able to buy.

• price increases means demand falls
• Demand factors are price, income, advertisement, tastes, substitutes and complementary goods prices.

Supply = the quantity of goods and services consumers wish and are able to supply.

• price rises means supply rises.
• Supply factors are price, cost of supply, number of competitors, size of the harvest (agricultural industry)

Market price or equilibrium price = price which a free market will establish automatically:

• if supply is greater than demand (price falls)
• if supply is less than demand (price rises)

Production and costs

A firm = a combination of economic factors of production (proprietors, capital, natural resources and human resources.)

Production in the short run

• period a firm produces goods with only variable factors
• increase variable (all) input and the output will increase
• Economies of scale (benefits through increase in the scale of operations)
• 1. internal (arise from growth of the firm)
  2. • size,
     • specialization
     • techniques
     • discounts
     • advertisement
     • raise capital
     • management
     • welfare
  3. external (arise from growth of the industry)
• Diseconomy of scale (failure of organizational structure, management style) resulting in increase costs, loss of control, communication & coordination problems and morale problems.

Accounting profit (normal profit) = total revenue - historical costs

Economic profit (supernormal profit) = total revenue - economic costs (incremental costs including opportunity costs)

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