Graphs are the bread and butter of economics. The reason is that economics is a social science that attempts to understand the overall functioning of whole economies, and within them the behavior of firms and individuals engaged in producing and purchasing millions of different goods and services, ranging from iPhone to house cleaning. To make matters worse, economies, individuals and firms are dynamic and constantly changing over time. Since it would be impossible and cumbersome to describe all these features of an economy in such minute details, economists put information on graphs and summarize the world within the confines of two axes. They make complicated points easy to understand. ...view middle of the document...
The downward sloping demand curve shows that as price goes down (up), the quantity demanded increases (decreases), while the supply curve shows that as price goes down (up), the quantity supplied decreases (increases). The equilibrium price and quantity of the commodity in the market are q1 and p1, determined by the intersection of the two curves, S1 and D1.
Marshall then proceeded to examine how changes in technology, tastes, prices of complementary and substitute goods, as well as the weather impact equilibrium market price and quantity. For example, the impact of a drought on the supply of wheat is depicted by a shift of the supply curve from S1 to S2, meaning that a lesser amount would be supplied at each possible price. The intersection of S2 and D1 result in a new equilibrium price and quantity, between p3 and p1 and q3 and q1. Demand could also shift as a result of a change in tastes or the price of substitute goods or income. Suppose that income in the market under analysis goes up (down), the demand curve would shift to the right (left), implying that consumers demand a larger (smaller) amount at each price.
Marshall´s analysis has been extended to many areas, among them the impact of government mandated rent control on housing supply; the effects of taxes and subsidies on the quantity demanded of a commodity; the supply of crime by criminals, and the demand for crime protection by society ; to ethics and freedom as goods to be valued for themselves; and, to family decisions such as choosing a spouse, having children , marriage in...
