Monday, July 20, 2009

A Short Primer on Microeconomic Graphs

This is a very short primer on how to read micro economic graphs.

I have a feeling I'm going to be using these a lot to explain the problems with so much of the legislation coming out of Washington right now, so I figured I would publish a page with this short primer and keep it handy to link to anytime I use these graphs.

If you are familiar with how to read these, feel free to skip over this post. If not, take just a minute to read it so you can fully appreciate some of my arguments in upcoming posts. I make it very simple:
The Axes: Price & Quantity

The graph above depicts quantity on the x-axis and price on the y-axis, showing how the two relate. Quantity is the number of units of a good. Price is how much each individual unit costs.


The Demand Curve

The red line is a demand curve and illustrates The Law of Demand- if something is cheaper you are willing to buy more of it and if something is more expensive you buy less. That's why as you follow the demand curve, when price goes down, the quantity demanded of a good goes up.


The Supply Curve

The blue line is the supply curve, which illustrates The Law of Supply- that it is less lucrative to supply a good as the good's price decreases, so suppliers will want to supply less of it. Conversely- the more highly priced the good, the more of it they want to supply.


Equilibrium

Suppliers can't sell more of a good than buyers are willing to buy and buyers can't buy more of a good than suppliers are willing to supply, so the point where the interests of all buyers and all suppliers in a market meet determines the quantity of goods produced and what the price of each unit of that good is. This is the place where the two lines intersect and it is called equilibrium.


The Market for a Good

The total value of the market for that good is the quantity of goods sold times the price of each individual unit, which is graphically represented by the square created by the two arrows and the two axes.