Introduction to the Economics Theory Essay Sample

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Markets are usually a good way to organize economic activity. In his 1776 book An Inquiry into the Nature and Causes of the Wealth of Nations economist Adam Smith made the most famous observation in all of economics: Households and firms interacting in markets act as if they are guided by an “invisible hand” that leads them to desirable market outcomes.

Prices are the instrument with which the invisible hand directs economic activity. For example, Toys in the Europe market, the buyers look at the price when determining how much to demand, and the sellers in China look at the price when how much to supply. As a result of the decisions that the buyers and the sellers make, market prices reflect both the value of a good to society and the cost to society of making the good.

The toys are produced in China then exported into the Europe market. The following theories may be applied into current situation, the buyers and the sellers are facing.

Input Prices is the one of the factors changing supply. To produce its output of toy, sellers use various inputs. When the price of inputs rises as increasing the lab testing cost, producing toy is less profitable, and firms supply less toy. If input prices rise substantially, a firm might shut down and supply no toy at all.

The law of demand is the relationship between price and quantity demanded.
The claim that, other things equal, when the price of a good rises, the quantity demanded of the good falls, and when the price falls, the quantity demanded rises. The relationship between price of the toy and the quantity demanded, holding constant everything else that influences how many European consumers of the toy want to buy.

When the price of the toy of China rises, the European consumers will reduce interest to buy the toy of China. They may turn to buy the toy of European or other countries. When a fall in the price of one good reduces the demand for another good, the two goods are substitutes.

The price elasticity of supply measures how much the quantity supplied responds to changes in price. Supply of a good is said to be elastic if the quantity supplied responds substantially to changes in the prices. Supply is said to be inelastic if the quantity supplied responds only slightly to changes in the price.

The price elasticity of supply depends on the flexibility of sellers to change the amount of the good they produce. Due to new firms isn’t ease of entry the Toys field in China and more barriers now. The old firms may be shut down. The supply of the toy in China seems to be inelastic in the short run.

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