Market Dynamics and Economic Theory Fundamentals
Market Fundamentals and Supply and Demand
Market: The location where demand and supply meet and where goods and services are exchanged.
Supply (Bid): The amount of goods offered by sellers and suppliers in the market today. This is visualized in the supply curve.
- Supply Curve: Supply is directly proportional to the price.
- Variable Supply: Factors include the cost of production, market organization, prices of factors of production, and prices of competing products.
Demand (Ask): The relationship between goods and services that consumers want and are willing to buy, depending on their purchasing power.
- Demand Curve: Characterized by a decreasing relationship; as price increases (+), the number of consumers decreases (-).
- Variable Demand: Factors include end-product prices, population size, and exogenous variables.
Balancing Supply and Demand
Equilibrium happens in the market at the exact point where supply and demand meet on the graph. This indicates that the supply is pairing with the population to meet existing needs. When the graph varies for either supply or demand, there might be a leave of absence (shortage) or poor performance (surplus).
Understanding Market Structures
Monopoly: A single producer of a good or service that has no substitute, such as an electricity provider.
Oligopoly: A market where there are few sellers; most modern markets are oligopolies where firms face few rivals.
Monopsony and Oligopsony: These are known from the point of view of the buyers. For example, a single buyer (Monopsony) like INLACSA, or a few buyers (Oligopsony) such as when San Jose sells milk to Conaprole.
Evolution of Economic Thought
Mercantilism
An economic policy and practice of nation-states characterized by state intervention. The goal was to establish state policy where the state becomes rich and powerful.
- Concern: The accumulation of precious metals.
- Collection: Extracting resources from colonies through export averages and import bans, often influenced by wars and piracy.
Physiocracy
Arose in 18th-century France. They were the first to define the economy as a discipline subject to certain laws and relations. They believed the land was the basis of wealth; therefore, more land equaled more power.
Classical Economics
Adam Smith: Focused on the division of labor and the role of the market in exchanging goods to satisfy needs (the Invisible Hand).
David Ricardo: Defined economy as a science concerned with the income distribution of social classes. He defended the industrial bourgeoisie and divided society into three classes: workers, employers, and landlords.
- Merchandise: Viewed as the accumulation of goods.
- Money: The value of coins representing submitted goods.
- Gain (Profit): The labor time staked on the ability to create and produce more than what is consumed.
Classical vs. Neoclassical Perspectives
Neoclassical: Places man as the center of the economy, focusing on the relationship between the individual and property. The individual feels the need to satisfy their needs through property.
Classical: Goods arrive with an output value, and price changes are made based on the variation of supply and demand.
The Law of Gossen
- Satisfaction: Satisfaction decreases as it is tested repeatedly without interruptions.
- Value: The value of a good will be higher if the satisfaction it provides is greater.