Economics 101

After my last (unbelievably long) blog post, admittedly not that interesting, I almost regret posting a mini lesson on economics this time. But I'll be making a lot of assumptions concerning your knowledge of the economy in future posts, so I might as well establish a few basics before going on.

Ok, so I'll start with prices. Being a business student, I'm reminded every day of Supply and Demand. That is, that the price of a product is dictated by supply and demand.

First, I need to define "price." This isn't the idea that you would normally think when you hear the word. All of these key terms: price, supply, and demand are in "aggregate," so we measure them in large amounts everywhere. So we couldn't go to either Wal-Mart or the Armani Exchange and expect the exact prices we would see on the supply and demand graph. That being said, the price of a certain product, as we will define it, is the average amount ($) of money that all the sellers can charge for the product.

Now, supply. Supply is defined as the amount (#) of products that the sellers are willing to sell at a given price. Obviously, the people that sell stuff (Wal-Mart, Armani) need to get money to pay their expenses like paying their employees and paying for their rent/building. They also want to make a profit (usually 4-6% profit in a recession and 8-10% in a boom, the opposite of a recession) to reward them for their work and risks they take with their money.

Finally, demand. We can say that demand is the amount (#) of products that the buyers are willing to buy at a given price.

Now, price is dictated by supply and demand. In fact, if we drew a rudimentary graph (in MS Paint), it would look something like this:
In this graph, the letter "p" represents price and the letter "n" represents the number sold. So, if suddenly the product became rare or harder to make, the price would rise. Similarly, if more people want the product, the price would go up. If the product gets easier to make or fewer people want it, the price would go down.

Real life example: before TVs became flat-panel plasma or LCD, there were only tube (box-style) TVs. Whenever plasma/LCDs came out, the demand (# of them wanted) for old tube TVs dropped, making their prices go down.

Let me wrap this lesson up. The market (the aggregate one; not one specific store but all the buyers and sellers in America and around the world) has a mechanism that many refer to as self correction. What this means is that the price of a product isn't always exactly where it should be according to the graph. But, because buyers are (usually) smart, they will not pay more than they should for a product. Similarly, because sellers are usually smart, they will not charge less than they should for a product.

And that's the basics of economics and how the market works. I'll be assuming that you know this stuff for my next post. Later!