economics first section overview

Economics is the study of how individuals and societies choose to use the scarce resources that nature and previous generations have provided.
There are many reasons to study economics, including
(a) to learn a way of thinking,
(b) to understand society,
(c) to understand global affairs, and
(d) to be an informed voter.

Economics attempts to understand behavior and the operation of economies, without making judgments about whether the outcomes are good or bad. It also looks at the results of economic behavior, and asks whether they are good or bad and whether they can be improved.

The Economic Problem: Scarcity and Choice
Every society has some system or mechanism for transforming into useful form what nature and previous generations have provided. Economics is the study of that process and its outcomes.
All societies must answer three basic questions:
What will be produced?
How will it be produced?
Who will get what is produced?
These three questions make up the economic problem.

Using resources to produce one good or service implies not using them to produce something else, because resources are scarce relative to human wants in all societies. This concept of opportunity cost is central to an understanding of economics.

Economic growth occurs when society produces more, either by acquiring more resources or by learning to produce more with existing resources. Improved productivity may come from additional capital, or from the discovery and application of new, more efficient techniques of production.

In some modern societies, government plays a significant role in answering the three basic questions. In pure command economies, a central authority directly or indirectly sets output targets, incomes, and prices. All economies are mixed. Individual enterprise, independent choice, and relatively free markets exist in centrally planned economies; and there is significant government involvement in market economies such as that of the U.S.
Demand, Supply, and Market Equilibrium

Households and firms interact in two basic kinds of markets: product or output markets and input or factor markets. Goods and services intended for use by households are exchanged in output markets. In output markets, competing firms supply and competing households demand. In input markets, competing firms demand and competing households supply.

Ultimately, firms determine the quantities and character of outputs produced, the types and quantities of inputs demanded, and the technologies used in production. Households determine the types and quantities of products demanded and the types and quantities of inputs supplied.

Market demand is simply the sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service. It is the sum of all the individual quantities demanded at each price.

Quantity supplied by a firm depends on
(1) the price of the good or service,
(2) the cost of producing the product, which includes the prices of required inputs and the technologies that can be used to produce the product, and
(3) the prices of related products.
Market supply is the sum of all that is supplied each period by all producers of a single product. It is the sum of all the individual quantities supplied at each price.

Excess demand (or a shortage) exists and the price tends to rise when quantity demanded exceeds quantity supplied at the current price. If prices in a market rise, then quantity demanded falls and quantity supplied rises until equilibrium is reached, at which point quantity supplied and quantity demanded are equal. At equilibrium, there is no further tendency for price to change.

Excess supply (or a surplus) exists and the price tends to fall when quantity supplied exceeds quantity demanded at the current price. Quantity supplied decreases and quantity demanded increases when price falls until an equilibrium price is reached, at which point quantity supplied and quantity demanded are equal.