Supply & Demand
The most fundamental model in economics describes how prices emerge from the interaction of buyers and sellers in competitive markets.
When supply equals demand, the market reaches equilibrium. At this point, the quantity buyers want to purchase exactly matches what sellers want to produce. Any deviation creates pressure that pushes the market back toward equilibrium.
Qd(P*) = Qs(P*)
The law of demand states that as price increases, quantity demanded decreases (ceteris paribus). Conversely, the law of supply states that as price increases, quantity supplied increases. These opposing forces create the characteristic X-shape of the supply-demand diagram.
Elasticity
Elasticity measures how responsive one economic variable is to changes in another. Price elasticity of demand is the most commonly studied form.
Ed = (%ΔQd) / (%ΔP)
When |Ed| > 1, demand is elastic: consumers are highly sensitive to price changes. Luxury goods typically exhibit elastic demand. When |Ed| < 1, demand is inelastic: consumers continue purchasing despite price increases. Necessities like insulin or gasoline tend to be inelastic.
Market Equilibrium
Equilibrium is the state where market supply and demand balance each other, and prices stabilize. Shifts in either curve create new equilibrium points.
When external factors change, curves shift. An increase in production technology shifts supply right (S1 to S2), resulting in lower prices and higher quantities. Understanding these shifts is key to predicting market outcomes.
Opportunity Cost
Every choice has a cost: the value of the next best alternative foregone. This fundamental concept underpins all economic decision-making.
OC = Value of Best Alternative Foregone
Points on the PPF curve (A and B) represent efficient production. Point C, inside the curve, indicates underutilization of resources. Moving along the frontier reveals the opportunity cost: producing more of one good necessarily means producing less of another.
GDP & Growth
Gross Domestic Product measures the total monetary value of all finished goods and services produced within a country's borders in a specific time period.
GDP = C + I + G + (X - M)
GDP can be calculated using the expenditure approach, summing consumer spending (C), investment (I), government spending (G), and net exports (X - M). Growth in real GDP indicates expanding economic output, while contractions signal recessions.