Monday, June 23, 2014

Supply, Damand, and their effects on prices

Chapter 15, How the Price System Works, begins by explaining the importance of looking to the long run consequences and results in opposition to simply seeing what is a primary or secondary consequence, but a third one in which effects all member of society, not just one individual. The fallacy of isolation exists as problematic when individuals look at personal short term outcomes as opposed to the effect on all other parties involved. When thinking about production we know that innovation comes from engineers and scientists amongst many other fields of specialization. Although these fields create production, it has to be at a profit for the business an to fiance and approve projects or product productions. The business is said i the book as being important as they give orders to the others on what to produce and at which quantities. opportunity costs are noted in the chapter as "One occupation can expand only at the expense of all other occupations." Demand for products is created by consumers and although some believe it is based on the cost of production this is not true. Supply and demand meet in equilibrium due to market forces and will rise or decline with a return to equilibrium in the long run. Below is a simple graph of supply and demand and how the price level is determined at the equilibrium point.

At the point in which the supply and demand curves intersect is the price and quantity of the product being examined and it's production level. 
Because labor is scarce, it is important to allocate it towards the mot urgent of needs first. It is encouraged by the author to look at the whole forrest as opposed to just the tree. This means to us that we must consider the effects of every decision not only on our selves, but many others in he economy effect as well. The article concludes that is is "essential for the health of a dynamic economy that dying industries should be allowed to die as that growing industries should be allowed to grow"(108).

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