A Few Microeconomics Basics
One starting point for understanding economics is that everybody wants stuff. Economists study consumption, or noming.
Our first character, Gustav von Om Nom, loves noms. If you do not love cookies as much as Gustav, there must be something you really want. *iPhonomnomnom*
Gustav loves cookies, but first few cookies are really good and after too many cookies they become a bit less appealing. See Decreasing Marginal Utility Graph.
Gustav can buy more cookies if the price of cookies is lower. If the price of a cookie is too high, it’s not worth it. He could use his limited amount of lunch money to buy other things (ex. cheesecake).
At any moment in time, there is a limited amount of cookies in existence. Economists study what to do given the fact that there is a finite amount of noms to go around. Many of the problems humans face can be explained in terms of “scarce resources.”
There will always be a finite amount of stuff, but in the last 150 years the total size of the human economy has grown. Pretty incredible ->
GDP per capita is a rough measure of how much stuff the average person is producing (and therefore consuming) in a year.
The “economic pie” is a term for how much stuff there is to go around in a society. The economic pie has grown significantly in the past few centuries. So a lot of people have more healthcare, shoes, and most importantly cookies.
Chef Kitteh bakes cookies, but she can’t do it for free. She has to buy inputs like flour and sugar and invest in capital like ovens and baking pans.
Gustav can communicate to Chef Kitteh how many cookies to make using price signals. When we overlay the supply and demand curves, they cross at a certain point. The price at the point where they cross is important because consumers will demand the same amount that producers will supply at that price.
If Chef Kitteh can sell a cookie for $1 but it only cost her 50 cents to make, she makes a profit of 50 cents. If Gustav values a cookie at $2 but only has to pay $1, he benefits by a dollar. Surplus was generated and now everyone is better off.
The surplus in the graph to the right is the triangle space above the supply curve and below the demand curve.
Stay tuned for more economnomnomics. Contact us to let us know what you think and what you might want to see more of.
When I recently brought home donuts, my roommates decided we should fry them. Yes, donuts have already been fried. Double-fried donuts. Om Nom Nom.
(You can click on these pics to enlarge them.) In the first picture: donuts going into the deep frier. In the third picture, you can see a healthy dinner of baked salmon and sweet potato with sauteed asparagus.
This illustrates our “convex preferences.”
Our household prefers more food to less food. So, we would rather have 20 pounds of food in the fridge than 15, because 20 > 15.
However, our happiness is not just a function of the pounds of food in our house. We would not want ONLY donuts, even though we like them. We prefer to consume food in combinations. For example, a salmon dinner followed by a double-fried donut.
So, we would chose 15 lbs of a mix of foods instead of 20 lbs of just donuts.
The principle of convex preferences is an important part of the theory of consumer behavior. The math is explained nicely by wikipedia.
If Chef Kitteh has no competitors, then no one can get cookies without coming to her. She can set any price, although a higher price will mean that less people will buy cookies because the market demand curve for cookies slopes down. Gustav would give up anything for cookies, but even he is constrained by his budget.
For any supplier who has the recipe, the marginal cost of producing each cookie might be as low as 50 cents. In a competitive market, no producer could charge much more than 50 cents because customers can choose to buy cookies somewhere else at a lower price. If Chef Kitteh has a monopoly on cookies, she will pick a price that maximizes her profit, which may be well above 50 cents.
The result will be less noms for everyone and higher prices. Chef Kitteh makes profits as a monomnomopolist… probably going to be eating tuna every night.
(credit student Luke Markham for “monomnomopoly”)