People and organizations make decisions in a rational way, based on the information that they have. It is upon them to seek all relevant information so that they make right decisions. Organizations and people are faced with various alternatives and they evaluate the alternatives rationally, before selecting the best alternative that suits them. They consider the costs and benefits that they face whenever they choose a particular alternative, and this leads to the choice of the best alternative.
How do people interact
People interact because they need each other in their daily lives. No one can produce all that they need in their live, hence are compelled to interact with others so that there is a mutual benefit. Individuals produce what they can, given the resources they have, and on the other hand, they can sell what they produce and buy what they do not. This keeps the people together since there is a mutual benefit (Mankiw, 2015). In organizations also, people work as a team to achieve a common goal because people are talented in a different way and may have skills which others do not have.
How the economy as a whole work
The economy works because there is a way of allocating resources to various sectors of the economy. The forces of demand and supply determine areas where people can allocate resources and benefit from the same. While there are planned economies where the government determines how resources are allocated, capitalist economies allow natural forces of demand and supply to allocate resources. The government, on the other hand, prints money and control its supply, and this means that people can exchange what they produce with this medium of exchange. The government has to balance the supply of the money because this influences the inflation rates and unemployment rate. The economy has to accept a reasonable level of inflation and a certain level of unemployment so that the economy runs well.
How society manages its scarce resources and benefits from economic interdependence
In a planned economy, the government determines how resources are to be allocated for the maximum benefits. The government determines who produces, where and what is produced using the scarce resources. On the other hand, a market economy is influenced by demand and supply and the households and organizations decide what to produce using the scarce resources they have. What is produced is sold in the market in exchange for what the organization or household does not produce. This forms the basis of interaction in the market and benefits every household that is involved in the exchange (Mankiw, 2015). In some cases, the government has to intervene to ensure that the most important needs are met. This includes allocating resources to public goods such as education, healthcare, and roads.
Why the demand curve slopes downward
The downward slope is because as the price of a good or service reduces, individuals can afford more of such items. The negative relationship between price and products sold is what leads to the downward slope.
Upward slope of a supply curve
The upward slope shows are the price of products increase; more is supplied by suppliers because of the benefits from the higher prices. The positive relationship between what the suppliers are willing to avail to the market and the price is what yields the upward supply curve.
Equilibrium is a point where the demand and supply curve meet, meaning that the quantity demanded by the market is the quantity that is supplied in the market. This means that the market is stable, and there is no tendency to change. The equilibrium mainly determines the price in the market (Mankiw, 2015).
Impact on price controls
Price controls changes demand and supply, hence the equilibrium in the market. An example is setting a price that is above the price that is determined by the market. Such a price control would increase supply in the market while demand would decrease. There is always pressure to lower the prices towards equilibrium, and this is why the black market would grow to sell the same products at the equilibrium price. The opposite would happen if the price was set lower than that which is determined by the market.
Taxes have the effect of raising prices and also increase the costs of production when raw materials are taxed. This means that the taxes lower the supply in the market as the costs rise and the demand also reduces as price increase and this means that the demand in the market reduces. The effects on equilibrium are that a new equilibrium is formed at a point where the new demand and supply curves meet. At such a point, the equilibrium price is higher, and the equilibrium quantity is lower than the previous equilibrium price and quantity.
Elasticity on the other hand influences demand, supply and equilibrium. The type of elasticity determines how equilibrium price and quantity is achieved. If a product has perfectly inelastic demand, then a change in supply does not change the equilibrium quantity, but the equilibrium price changes. If the supply is perfectly inelastic, change in demand also changes the equilibrium price but not equilibrium quantity (Mankiw, 2015). Generally, the type of elasticity is what influences the impact of changes in demand and supply and the final equilibrium.
Mankiw, N. G. (2015). Principles of Microeconomics (7th ed.). Stamford, CT: Cengage Learning.
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