Graph Beer’s Law
How does a free market works
Today most modern developed economies are based on free market principles first introduced by the famous economist Adam Smith. We all have often heard of the model of supply and demand is always represented by the curves intersect on the chart. I will try illustrate the main concept of the free market a little more simple way of not using the graphics.
First let's understand two basic economic assumptions free market: the law of demand and supply law.
The law of demand as the price of a good increases the demand for consumption of that good decreases, and vice versa. Just the word when used to buy a bottle of beer for $ 3 and a day is observed in a room in the same bottle of $ 5 that almost did not buy it. On the other hand, if the same beer is offered to us by 2 USD we are ready to buy a dozen.
The law of supply that as the price of a good rises, the quantity of products offered by suppliers increases and vice versa. Next we must think in terms of supplier or producer. If your company makes a fashionable clothing, is interested in having a store in Milan, where people used to pay well for it, rather than in Mexico, where many low-income population can not afford to wear expensive. In other Words seller always ready to produce and sell more at a higher price to maximize profits.
Note that both laws are valid only if all other factors being equal. For example when comparing Milano and Mexico in the previous example that, seemingly, have ignored the enormous differences in population size of these two cities.
Once these two laws understand that they can change up to the main point of the free market economy – such as price and quantity of goods determined. Take for example mobile phones. Given the law of demand going to guess how many mobile customers in our market is ready to buy at each price special
Items $ 150 – 1000
Items $ 140 – 1500
Items $ 125 – 2200
$ 110 – 3600 items
At the same time, manufacturers are willing to produce and sell at prices and quantities:
Items $ 100 – 850
Items $ 120 – 1200
$ 140 – 1500 items
Items $ 150 – 2000
Looking over two tables can be noticed when the volume of production equal to 1,500 points and clients suppliers according to price. This match usually determines the price and quantity of product being bought and sold on the market. So $ 140 might be named market price of mobile telephony in our example.
To market rules are valid as follows:
Increased demand leads to market price increases, and vice versa.
Increased supply leads to lower market price and vice versa.
To understand why this works thus becomes the previous case with mobile phones. We have determined that the optimum volume to occur in this virtual market would be 1500 items with price equal to $ 140 per item. Imagine that this market demand of mobile phones skyrocketed. That will end the situation when all mobile phones are sold out, but some customers are unhappy. Meet the seller's desire to sell at higher prices (the law of supply) customers will begin to offer more than $ 140 for the phone to get the deal. So the average market price will rise.
Let's reverse case, when demand for phones has fallen or increased supply resulting in a surplus of phones on the market. In this case, the suppliers know the customer wishes to buy cheaper (Law of demand) will reduce the price to sell phones that are not made. So the average market price will fall.
Laws of supply and demand can be represented in the graph as curved lines, visually showing how these work rules. Intersection of lines will be the market price. Moving Lines asset or liability will show the increase or decrease in market price.
About the Author
Read Dawood Mamedoff’s blog here: www.myhowtoos.com
TZDOctconference.mpg