Question

List, label, graph, define, and discuss ALL the parts of the most important model in all of economics

Answer 1

The most important model in all of economics is the standard model of supply and demand.

Its basic purpose is to explain and analyze prices and quantities traded in a competitive market. The model’s equations determine the level of supply and demand as a function of price. The market-clearing price is determined by the requirement that supply equal demand at that price. Demand is usually set to decline and supply to increase with price, yielding a system that moves toward the market-clearing price- equilibrium- without intervention.

Its graphical representation is shown below.

Lets define everything one by one.

On X-axis, we have Quantity- This is the amount, of a particular product/service, demanded or supplied at a particular price. It increases as we go from left to right.

On Y-axis, we have Price- It is the price of the particular product/service which is being offered in the market.

Then there are two curves- Demand Curve- which is the relation between price and demand. As price increases, demand falls down. This is obvious- as the cost of a product increases, its demand decreases (usually).

The other one us Supply curve- which is the relation between price and supply. This is supply for producers' side. As price increases, supply increases as producers supply more.

The point where these two curves cross, is called the equilibrium point. This point corresponds to the price (shown as P1) and quantity (Q1) which will actually be prevalent in the market. At this point, the quantity demanded is exactly equal to the quanity supplied. At this point, the market is equilibrium.