Posts Tagged supply
I (Dave) am excited to tell you that Unapologetically Right is having another growth spurt. Today, I introduce you to our newest friend and contributor, Mike. Mike has a passion for finance, economics, and the like. Being that I’m usually an idiot when it comes to numbers, I wanted someone that believes in Biblical, conservative principles and the American way (capitalism) and can articulate these matters better than I. While I’m a numbers idiot, it seems our government, labor unions, and many others in our country are complete idiots when it comes to the simple math in economics (at least I can figure out the most basic addition and subtraction!). Therefore, we hope to use this blog as an educational tool, as well – or at least a reminder of some fundamentals. We will eventually be remembering our great founders and all the things that made America great from the beginning. However, Mike is ready to go by starting us off with the most basic of Economics 101 information. We’ll be introducing Mike on the podcast soon, too, so stay tuned for that! Without further ado, here is the inaugural Econ 101 blog entry:
Supply and Demand
Let’s begin by the simple concept of supply and demand. Let’s take lemons for example. In the chart above price for lemons will be along the Y axis and demand will be along the X axis. The line thru the middle of the chart is the amount of supply needed at any given time. Let’s say a grocery store sells lemons to its customers for $1 each. At this price there are 20 people in the market for lemons. However, as you can see in the chart, there are not enough lemons to supply everyone. In this sense, the low price for lemons causes a shortage of supply of them. So the grocery store restocks on lemons and raises its price to $2 for lemons. Now at this price only 10 people want to buy them, which causes some of your supply to be left at the end of the day. Here, the higher price causes an overage in supply. The red line in the chart denotes the price point in which the exact amount of lemons can serve exactly the right amount of people who want to buy lemons. This point is known as the equilibrium for the market. In the real world equilibrium is a mere fantasy. There is no possible way a grocery store will be able to predict the exact price and the exact supply to satisfy the exact right amount of customers wanting lemons. Markets will always gravitate towards equilibrium and hover around that point until some major cause happens. Let’s say for lemons a freeze happens and kills most of the supply for lemons. This causes that supply line in the graph to move upwards, which inadvertently causes the prices to go up. Farmers have to make back what it costs to produce the lemons plus some kind of profit so those costs and profit have to be factored into the sellable supply of lemons. The concept here is that price drives demand, which in turn drives supply. The cheaper something is more people want or has the ability to buy it. The more expensive something is less people want or can afford to buy it.