Essay: Economics Is the Study of How Markets

Pages: 3 (931 words)  ·  Bibliography Sources: 1  ·  Level: College Junior  ·  Topic: Economics  ·  Buy This Paper

Economics is the study of how markets work. It is based around describing the patterns and interrelations of the production, distribution and consumption of goods and services. Microeconomics is concerned with the economics of individual decision making. By understanding the rational for individual-level decisions, microeconomics helps to provide insight into the specific patterns of production, distribution and consumption that we see in society.

Two key points in microeconomics are the law of supply and the law of demand. The law of supply holds that all other things being equal, as the price of a good increases, supply of that good will increase. This is because producers can increase their profits, and produce more in order to do so. The law of demand holds that all other things being equal, as the price of a good increases, demand for the good will decrease. An important underlying factor in the law of demand is the concept of utility. Utility is the value that a consumer gains from a product or service. That value is often difficult to measure quantitatively, but is known qualitatively as utility -- what the consumer gets out of the bargain. Rational consumers will only purchase a product if the utility they expect to gain from that product exceeds the cost of that product. Thus, as the price of the product increases, fewer consumers will find that the product delivers more value in utility than the cost of the good. As a result, demand for the good decreases as the price increases.

The New Housing Market -- Factors to Consider

When we look at the new housing market, there are a number of different factors that go into a change in supply. Generally, supply is led by expected demand in the new housing market. Because of the high sunk costs, and the inability to move the finished product, developers only build when they expect to sell, so all three of those factors play into the supply decision. In addition, government action plays into the decision, since governments must license land for development. There is a balance between offering ample land for development (which developers like to see -- ease of access to a key input) and too much access to land, which risks market saturation.

The factors that have an impact on demand are perhaps more complicated. The prevailing price of new homes is important. This means that all the costs associated with a new home purchase are a factor, including interest rates. Indeed, interest rates are a key driver in new housing demand because of their impact on total purchase cost. New home sales fell, however, despite low rates, indicating that there are also other factors at work. One such other factor is the expected state of the economy. Home ownership is a… [END OF PREVIEW]

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Economics Is the Study of How Markets.  (2012, April 6).  Retrieved May 27, 2019, from https://www.essaytown.com/subjects/paper/economics-study-markets/7747190

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"Economics Is the Study of How Markets."  6 April 2012.  Web.  27 May 2019. <https://www.essaytown.com/subjects/paper/economics-study-markets/7747190>.

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"Economics Is the Study of How Markets."  Essaytown.com.  April 6, 2012.  Accessed May 27, 2019.
https://www.essaytown.com/subjects/paper/economics-study-markets/7747190.