The term "demand" in economics means payment need, i.e. need that the subject is able to pay. From this definition it follows that the demand for a particular commodity (service) depends on the price. This means that the increase in commodity prices will lead to a decrease in demand, and, conversely, a decrease in prices will lead to higher demand. The relationship between price and quantity demanded is stable. (Agarwal, 2013)
The cause of the change in demand is change. This reverse causal relationship between price and quantity demanded is the law of demand. The law of demand manifests itself through consumer behavior. How to explain the fact that the consumer is willing to buy more goods at a lower price?
First, the income of the consumer is always limited, therefore, objectively at a lower price he can buy more goods.
Second, in economics consists the law of diminishing marginal utility, the content of which is that each successive unit of a good brings less satisfaction than the previous so that the consumer is willing to buy each additional unit of a product at a lower price.
Third, this behavior is explained by the income effect, the content of which is that the decline in the prices of consumer goods is equivalent to an increase of income. Therefore, at a lower price, the consumer can buy more of the product, not limiting yourself to the consumption of other goods.
And, finally, consumer behavior also determines the substitution effect because the consumer is interested in how to replace the consumption of luxury goods more cheap (under other equal conditions, that is, if they are high quality, meet standards, etc.). (McEachern and Lunn, 2012) For example, if the price of yogurt will decrease, and the yogurt will remain high, the consumer can replace the consumption of yogurt kefir.
Supply is the willingness of sellers to sell a particular product. The quantity supplied is determined by the quantity of goods that sellers are willing to sell at a given price within a specified period. The relationship between the volume of goods sold and the price for the unit is stable and has a causal character. This is the law of supply. The law of supply expresses the direct dependence of the quantity supplied of a commodity from its price. Ceteris paribus increase in the price of goods leads to increase in its offer, and its decline, the opposite. (Besanko, 2013)
The law of supply graphically illustrates the supply curve:
The supply curve shows that, for example, in the case of a price increase of product 1 to 2 units of money, volume of deals increased from 10 to 50 units.
Change sales price, the graph shows only a transition to another point on the supply curve, putting this new supply. However, the volume of supply really influenced by other, non-price factors that shift the supply curve left and right.
The main non-price factors of market supply are:
prices of inputs. The rise in price of resources leads to an increase in production costs, and thus reduces the production and supply of goods (supply curve shifts left);
prices of related goods. If, for example, the price of pork will rise, the manufacturer of pork sausage probably think about switching to beef sausages (the supply curve of pork sausage shift to the left);
technological changes. Technological progress contributes to reducing production costs, and consequently expansion of production and supply (shift curve right);
government economic policy. In the case of increasing the tax burden on producers, production will be reduced. When the government will increase support to producers, for example, by the provision of soft loans, grants and subsidies, of course, the supply of goods will increase;
the number of sellers. Of course, the increase in the number of sellers means an increase in product offerings;
expectations of sellers. Optimistic expectations of the sellers affect the increase in the supply of goods and shift the curve to the right, pessimistic — on the contrary. (Marshall, 2010)
The relationship between stocks and flows is the basis of the original macroeconomic model the circular flow. The basis for macroeconomic analysis laid the simplest model of the circular flow (or model of circulation of incomes and expenses). In its basic form the model contains only two categories of economic agents – households and firms – and does not involve state intervention in the economy, as well as any communications with the outside world.
(Mankiw, 2006)
The chart shows that the economy is a closed system, in which the incomes of some economic agents are expenses other:
consumer expenditures of households for purchase of goods are firm revenues from sales of finished products;
the costs of firms paying resources are household income (wages, rents, and other income).
Real (“resources – products”) and cash (the“costs – revenues”) flows occur simultaneously in opposite directions and endlessly repeated. The main conclusion from the model is the equality between the total value of sales of firms and total value of household income. This means that for a closed economy (i.e. without any relations with the outside world) without government intervention in the economy the value of total output in monetary terms equal the sum of households ' cash income. Also fair is equality of income (Y) and total costs (in this model it is spending on current consumption – S), i.e. Y = C. (Gnos and Rossi, 2012)
Stock variables can be measured only at some moment in time and describe the state of the object of study for a specific date – the beginning or the end of the year, and the like. Examples of stock can serve the public debt, the amount of capital in the economy total number of unemployed and the like.
Flow variables are measured per unit of time (per month, quarter, year, etc.) and characterize the actual “flow” of economic processes in time: the size of the consumer expenditure for the year, the investment volume for the year, the number of unemployed during the quarter, etc. Flows are changes in stocks: the accumulation of budget deficits over a number of years leads to an increase in public debt; the change in the stock of capital at the end of the current year in comparison with its size at the end of last year can be represented as the flow of net investment during the year, etc. In the baseline macroeconomic model the circular flow is the relationship between stocks and flows, which involves analysis and measurement of time.
The concept of “flow” describes the process that occurs continuously and is measured in units over a period of time. To model the circuit we considered the flows of production, expenditure and income. The concept of “stock” is the value which is used for measuring at a specific time on a specific date. (Gnos and Rossi, 2012)
The Irish case is particularly fascinating for a few reasons. On the one side, there are a few elements that may make financial approach particularly successful in current Irish circumstance. To begin with, the moderately low introductory level of open obligation at the onset of the emergency implies that Ireland is preferred set over some other part nations in having space for some level of financial extension. Second, the serious and delayed nature of lodging related log jams implies that there might be a helpful part for optional financial strategy in building up the Irish economy, since the conventional study that business cycles are excessively shallow and brief, making it impossible to be amiable to monetary mediations may not have any significant bearing with full compel. Third, too many years of interest in the social organization process may empower the administration to execute radical monetary mediations that may not be politically possible in more antagonistic sociopolitical frameworks. (O'Leary, 2010) On the opposite side, there are imperative requirements that farthest point the potential adequacy of Irish financial approach. Most clearly, the high exchange openness of the Irish economy implies that the effect on local request of a given monetary mediation is lower in Ireland than in more shut economies. Furthermore, the Irish economy right now experiences a noteworthy basic irregularity, with fare segments having been crushed as of late by the extension of movement in locally orientated divisions (development, open administrations, and utilization related administrations). The long haul wellbeing of the Irish economy requires a rebalancing towards parts that have a more prominent potential for conveying efficiency development. Hence, the fiscal financial strategy for Ireland needs to join the requirement for rebalancing. (Lane, 2009)
The scarcity is a quantity which buyers cannot purchase at the prevailing market price. The deficit indicates the divergence of supply and demand and lack of balances the price. (Simpson, Toman and Ayres, 2012) A permanent scarcity in the countries with a planned economy associated with the state regulation of prices. If in a market economy, the excess of demand over supply leads to higher prices (inflation), when regulated prices the result is a trade deficit, and especially, it increases with sudden increase in the money supply. (Holton, 1992)
References
Agarwal, H. (2013). Principles of economics. 1st ed. Cranbrook, Kent: Global Professional Pub.
Besanko, D. (2013). Microeconomics. 4th ed. [Place of publication not identified]: John Wiley.
Gnos, C. and Rossi, S. (2012). Modern monetary macroeconomics. 1st ed. Cheltenham: Edward Elgar.
Holton, R. (1992). Economy and society. 1st ed. London: Routledge.
Lane, P. (2009). A New Fiscal Strategy for Ireland. 1st ed. Dublin: IRCHSS.
Mankiw, N. (2006). Essentials of economics. 1st ed. Mason, OH: Thomson/South-Western.
Marshall, A. (2010). Principles of economics. 1st ed. Memphis, Tenn.: General Books.
McEachern, W. and Lunn, J. (2012). Microeconomics. 1st ed. Australia: South-Western, Cengage Learning.
O'Leary, J. (2010). External surveillance of Irish fiscal policy during the boom. 1st ed. Maynooth: National University of Ireland, Maynooth.
Simpson, P., Toman, P. and Ayres, P. (2012). Scarcity and Growth Revisited. 1st ed. Taylor & Francis.
