"Economics is the study of how society decides what, how and for whom to produce."

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“Economics is the study of how society decides what, how and for whom to produce.”[1] A market place is where buyers and sellers come together and reconcile their decisions on consumption and production by the adjustment of prices. Demand is the quantity that the buyers in a market place will purchase given a particular price. Supply is the quantity that sellers in a market place will produce given a particular price.

Ceteris paribus (all other things being equal) the demand will rise as the price falls. (figure 1) How much the price affects the demand is known as the elasticity. The more elastic a product is the more affect price change has on the demand.

Unfortunately, the world is not that simple and there has to be a willingness to demand. This can be influenced in a number of ways. Firstly, there is the price and availability of substitute products. For example, during the CJD scare the demand for beef fell and the demand for pork rose. Then there is the price and availability of complementary products. For example, if compact disc players halved in price but compact discs quadrupled in price then demand for compact disc players would fall, not rise. There is also the consumer’s income to consider. As incomes rise the demand for certain goods will fall, (inferior goods) and the demand for other goods will rise, (superior goods). The price of those goods is not what influences the change in demand, the increase in income is. Finally there are the tastes and preferences of the consumers. Dropping the price of out of date technology, however drastic, will not increase demand. (i.e. the demand is inelastic for the duration of the trend or generation of technology.)

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There also has to be a willingness to supply and as it is assumed that companies exist to make maximum profits the nature of costs play an important part. The costs a company incurs can be split into two basic categories, fixed and variable. Fixed costs being those that do not vary with output and variable costs being those that do. Fixed costs are therefore things like debts or rents that must be met regardless of production level. Whereas a variable cost would be labour or raw materials. The total cost is the sum of these two.

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