2. Supply and demand

2.1. Read the text.

In microeconomic theory supply and demand attempts to describe, explain, and predict the price and quantity of goods sold in competitive markets. It is one of the most fundamental economic models, ubiquitously used as a basic building block in a wide range of more detailed economic models and theories.

To define, Demand is the utility maximizing choice of a consumer. It is a strong desire backed by purchasing power with the willingness to purchase within a given period of time. Supply on the other hand is the quantity of goods that a producer or a supplier is willing to bring into the market for the purpose of sale, at a given price in a given period of time.

In general, the theory claims that where goods are traded in a market at a price where consumers demand more goods than businesses are prepared to supply, this shortage will tend to increase the price of the goods. Those consumers that are prepared to pay more will lead to an increase in the market price. Conversely, prices will tend to fall when the quantity supplied exceeds the quantity demanded. This process continues until the market approaches an equilibrium point, a point at which there is no longer any impetus to change. When producers are willing to supply the same quantity as buyers are willing to buy, the market is at equilibrium point where both the buyers as well as the sellers are agreeable to the price level. At this point the market is said to "clear".

The theory of supply and demand is important in the functioning of a market economy in that it explains the mechanism by which many decisions about resource allocation are made.

The supply and demand model describes how prices vary as a result of a balance between product availability and demand. The graph depicts an increase in demand from D1 to D2 along with the consequent increase in price and quantity required to reach a new equilibrium point on the supply curve (S).

3. Scarcity

3.1. Read the text.

Scarcity is central to economic theory, known more commonly as the Economic Problem, or Basic Economic Problem. Economic analysis is fundamentally about the maximization of something (leisure time, wealth, health, happiness - all commonly reduced to the concept of utility) subject to constraints. These constraints - or scarcity - inevitably define a trade-off. For example, one can have more money by working harder, but less time (there are only so many hours in a day, so time is scarce). One can have more radishes only at the expense of, for example, fewer carrots (you only have so much land on which to grow food - land is scarce).

Scarcity is defined as: when the price is zero, the quantity demanded exceeds the quantity supplied. Price is a measure of relative scarcity. When the price is rising, the commodity is becoming relatively scarcer. When the price is falling, the commodity is becoming relatively less scarce.

4. Economics and other disciplines

4.1. Read the text.

There is some tension between economics and theories of ethics, historically a branch of philosophy, which emphasizes how people ought to conduct ourselves and balances of rights and duties. Modern economics deals with this tension explicitly: According to some thinkers such as Mr. John Syko, a theory of economics is also, or implies also, a theory of moral reasoning. One way economists deal with this is to qualify discussions of economic choice by noting the qualifier ceteris paribus ("all other things held constant...") referring to moral or social factors that are (for the sake of argument) held equivalent for all choices that one might make.

Another premise is that economics fits within a finite ecosystem where there are at least some abundant resources. For instance, when fuelling a fire, people are usually concerned with finding the wood, and not with finding the air to burn it with. Economics explicitly does not deal with free abundant inputs – one criticism is that it often conflicts with ecology's view of what affects what. Human beings are, according to ecologists, merely one species participating in a vast energy system on this planet – economy is a subset of ecology that deals with just one species' habits and wants.

See nature's services for the economic view of ecology and green economics for the view in which economics is a subset of ecology.

A third premise is that economics suggests market forms and other means of distribution of scarce goods that affect not just "desires and wants" but also "needs" and "habits". Much of so-called economic "choice" is involuntary, certainly given the conditioning that people have to expect certainquality of life. This leads to one of the most hotly debated areas in economic policy: namely, the effect and efficacy of welfare policies. Libertarians, view this as a failure to respect economic reasoning. They argue that redistribution of wealth is morally and economically wrong. And socialists view it as a failure of economics to respect society. They argue that disparities of wealth should not have been allowed in the first place. This led to both 19th centurylabour economics and 20th century welfare economics before being subsumed into human development theory.

The older term for economics, political economy, is still often used instead of economics, especially by certain economists such as Marxists. Use of this term often signals a basic disagreement with the terminology or paradigm of market economics. Political economy explicitly brings political considerations into economic analysis and is therefore openly normative, although this can be said of many economic recommendations as well, despite claims to being positive. Some mainstream universities (such as the University of Toronto and many in the United Kingdom) have a "political economy" department rather than an "economics" department.

Information theory has been applied to economics since the work of Ronald Coase in the 1930s. However, with Herbert Simon and John von Neumann in the 1950s, it gathered a more specificformalism as part of game theory. This emphasizes that the decision-making process itself is costly.

Marxist economics generally denies the trade-off of time for money. In the Marxist view, concentrated control over the means of production is the basis for the allocation of resources among classes. Scarcity of any particular physical resource is subsidiary to the central question of power relationships embedded in the means of production.

The question of the environment is viewed, in the traditional economic framework, as being related to the externalization of costs. That is, market economics assumes that underpriced goods are overconsumed. Externalization of cost, in this view, will be corrected by pricing the overconsumed resources at their true social marginal cost.