HEILBRONER – THE ECONOMIC EVOLUTION – CHAPTER 2

 Problem of Survival – Community breakdown due to human wants + misery along with
Human predictability. It could be prevented by Traditions along with shared ideas that
help define each community/person’s role; Rules of competition/conflicts by using
various guidelines; Government/Law & Order; Social Institutions; Authoritarian rule; and
Market System. There is an enduring problem of human survival within social groups,
noting that despite progress, want and misery persist even in wealthy nations. Tradition
involves passing down tasks through generations, while authoritarian rule ensures tasks
are completed. The market system, however, relies on individuals acting in their best
monetary interest, aligning personal gain with societal needs. For this system to work, the
acceptance of the market idea was essential.
 Under less stringent conditions, individuals perform tasks under powerful guidance of
universally accepted norms of kinship and reciprocity. The concept of a system organized
around personal gain had not yet emerged, even during medieval times. This is because
the economy had not yet separated itself from social structures and norms. In other words,
economic activities were still closely tied to social relationships and obligations. The idea
that pursuing personal gain is socially acceptable is a more recent development, emerging
later as societies evolved to prioritize individual achievements and personal goals.
 In traditional societies, work was not merely a means to an end but a way of life, deeply
embedded in tradition. Economic and social life were intertwined, with a strong aversion
to change and innovation. The market system, as a social invention, had not yet emerged.
Unlike simple trade, the market system is a complex mechanism for sustaining and
maintaining society, allowing for economic activities to be directed by individual interests
within a structured framework.
 Land, labour, and capital were present, but they were not yet recognized or allocated as
agents of production by the market. Land was not available for sale, leading to a scarcity
of opportunities for ownership and development. Additionally, the lack of a structured
network for job-seeking and bargaining hindered the efficient use of labour. This, in turn,
diminished the aggressive utilization of capital, including investments and advertising.
The abstract concepts of production factors had not yet been developed, and societal
organization relied heavily on command and tradition. Despite these constraints, there
was a burgeoning commercialization of land, labour, and life. This early stage of
commercial activity marked the initial steps towards a more market-driven economy,
although it was still deeply rooted in traditional and command-based structures.
 The market system, a significant social invention, separates economic activities from
social norms, allowing for individual interests to drive economic activities within a
structured framework. The shift from feudalism to market economies involved significant
changes in property rights, labour organization, and societal attitudes, ultimately leading
to the development of capitalism characterized by private property, market exchanges,
and firms.
 The institutions of capitalism encompass an economic system based on private property,
markets, and firms. Initially, production was largely family-based and self-sufficient, with
 households owning and controlling resources. As markets developed, they facilitated the
exchange of goods and services within and between communities, expanding the scope of
economic activity. Over time, firms emerged as central players in the capitalist system,
organizing production on a larger scale for profit and driving economic growth through
the use of capital, such as machinery and technology. Together, these institutions underpin
the capitalist economy, promoting individual ownership, market exchanges, and
organized production. The current world is so intertwined that one error in any field can
cause the entire workforce and industry to be disrupted and become disorganised.
 Commercializing land required uprooting the feudal way of life leading to wool becoming
a profitable commodity that required grazing pastures. Enclosures of common land led to
being declared private property. Workhouses were made leading to peasants not being
able to farm anymore eventually causing riots against these changes. It was a spontaneous
process leading to many siding with it causing an emergence of national political units
and laws with standardised measurements and currencies. People were encouraged to
explore. There was a slow decay of religious spirit eventually leading to the Renaissance.
Scientific curiosity began to emerge with an appreciation for innovation and discoveries.
New attitudes toward work and health appeared along with material changes, thus
developing the idea of an economic man who is familiar with money and markets.

SUPPLY AND DEMAND – GOODWIN CHP 4

 The neoclassical or marginal revolution in economics marked a significant shift towards
making the discipline more scientific and less influenced by social and political factors.
This revolution, which occurred in the late 19th century, emphasized the use of
mathematical models and marginal analysis to explain economic phenomena.
 By focusing on individual decision-making and the optimization of resources,
neoclassical economists aimed to establish economics as a more objective and scientific
discipline, akin to the natural sciences. This approach sought to isolate economic analysis
from social and political influences, emphasizing universal principles and rational
behaviour. The marginal revolution thus contributed to the development of modern
microeconomics, providing tools and frameworks that are still fundamental in economic
analysis today.
 Lionel Robbins (1932) – Science of studying human behaviour as a relationship between
scarce resources with alternative uses. This concept emphasizes scarcity as the central
issue in economics, asserting that resources are limited while human wants are unlimited.
Therefore, individuals and societies must make choices on how to allocate these scarce
resources efficiently to satisfy various needs and desires, highlighting the trade-offs and
opportunity costs inherent in decision-making processes.
 Demand is the willingness and ability of purchases to buy goods and services whereas
Supply is the willingness of producers to produce, and merchandisers to sell goods and
services, where if either side has more pressure, the equilibrium is disturbed.
 Market Price: The market price is the current price at which a specific good or service is
bought and sold in a particular market. Although price is susceptible to change at any
point in time, it does not vary at a single point in time. It reflects the balance between
supply and demand at a given time, influenced by various factors like competition,
production costs, and consumer preferences.
 Market Quantity Sold: The market quantity sold refers to the total number of units of a
specific good or service exchanged in a given market over a specific period. Buyers and
sellers act to enhance their well-being, driving transactions through voluntary exchanges.
 The basic microeconomic model involves voluntary interactions between buyers
(individuals, households, businesses) and sellers (usually businesses but sometimes
individuals, as in labour markets). Both parties seek to enhance their well-being—buyers
through satisfying needs, and sellers primarily through profit. The model examines how
market prices and quantities are determined through these interactions, focusing on the
perspectives of both buyers and sellers.
 Theory/Law of Supply – If the cost of something increases, then the supply also
increases in a directly proportionate manner. There is a positive or direct
relationship/proportionate between price and quantity supplied in the form of an upward
slope. If the price of a commodity increases, then the sellers will want to sell more
quantity of that particular commodity. The individual supply is the quantity supplied by
one seller, and the market supply is the quantity supplied by all the sellers in the market.
The graph below is for individual supply and market supply through a supply schedule
provided. It is based on keeping in mind – Ceterus Paribus – All other factors remaining
constant.

 Change in quantity supplied – The movement along the supply curve in response to a
change in the price of the good or service, holding all other factors constant (CP). When
the price increases, suppliers are willing to produce and sell more, moving up along the
supply curve. Conversely, when the price decreases, the quantity supplied falls, resulting
in a downward movement along the curve. This direct relationship between price and
quantity supplied is depicted as an upward-sloping supply curve. It also changes in
response to changes in the determinants of supply. A supply curve shifts outward when
sellers decide to offer a higher quantity for sale at the same price, on the other hand, it
shifts backwards when sellers decide to offer a lower quantity for the same price.
 Changes in the number of sellers, technology production, input prices, seller expectations
about the future, prices of related goods and services, and physical supply of natural
resources also determine supply other than price.
 Theory/Law of Demand – there is an inverse relationship between price and quantity
demanded: as the price of a good or service increases, the quantity demanded generally
decreases, and vice versa. This relationship is typically represented by a downward-
sloping demand curve thus showing a negative/inverse relationship. The demand curve
reflects consumers' willingness and ability to purchase a good, which depends not only on
their desire but also on their financial capacity to pay the prevailing market price. When
aggregated, individual demand curves form the market demand curve, capturing the
overall demand within a market, though it may not fully account for every consumer's
willingness or ability to pay.

 Changes in buyers' tastes and preferences can increase or decrease demand depending on
how appealing a product becomes. Shifts in income and assets affect consumers'
purchasing power, influencing their ability to buy goods; higher income generally
increases demand, while lower-income decreases it. The prices of related goods—such as
substitutes or complements—also impact demand; for example, a price drop in a
substitute may reduce demand for the original good. Buyers' expectations about future
prices or availability can lead to increased demand if they anticipate higher prices or
shortages later. Lastly, the number of buyers in the market affects overall demand, with
more buyers typically increasing market demand and fewer buyers decreasing it.
 There are 2 types of related goods which include substitute goods for most market
products i.e., good for another good (E.g. – Tea instead of coffee) and complimentary
 goods which include those goods that tend to be used along with other goods (E.g. –
Sugar for coffee).
 Market Equilibrium (Market-Clearing Equilibrium) - This is a situation where the
quantity of a good or service supplied equals the quantity demanded, resulting in no
pressure for the price or quantity to change. At equilibrium, the market "clears," meaning
all goods produced are sold, and there are no excesses or shortages.
 Shortage - This occurs when the quantity demanded at a particular price exceeds the
quantity supplied. In a shortage, consumers are willing to pay more than the current price
to obtain the good, creating upward pressure on prices as sellers raise prices to meet
demand.
 Surplus - This is the opposite of a shortage; it occurs when the quantity supplied exceeds
the quantity demanded at a particular price. Surpluses put downward pressure on prices as
sellers reduce prices to clear excess stock.
 Market Adjustment Process - This refers to the natural tendency of prices and quantities
to move towards equilibrium. In the case of a surplus, prices tend to fall as sellers
compete to attract buyers, while in the case of a shortage, prices tend to rise as buyers
compete for limited goods. Over time, these adjustments lead the market to settle at the
equilibrium price and quantity.
 Disequilibrium - This term describes any situation where there is a mismatch between
quantity supplied and quantity demanded, resulting in either a surplus or a shortage.
Disequilibrium is temporary as market forces push the market back towards equilibrium.

 The speed at which markets adjust to equilibrium varies significantly, with some markets,
like stock exchanges, adjusting almost instantaneously due to rapid, frequent trades. In
contrast, other markets, such as labor markets, may take months or years to reach
equilibrium, if they do at all. Factors like slow production processes, long-term contracts,
and a lack of information can hinder quick adjustment. Additionally, human behaviour,
 habits, and nonmarket forces—such as the reluctance to raise wages in the nursing
shortage—can further delay or even prevent equilibrium. While equilibrium analysis
predicts that market forces tend to push prices toward balance, the real-world adjustment
process is often complex and unpredictable.
 In the real world, prices often fluctuate due to changes in supply and demand, which can
be explained by shifts in the corresponding curves in our microeconomic model. For
example, in the coffee market, an increase in supply, such as the entry of a new seller,
leads to a surplus, causing downward pressure on prices until a new, lower equilibrium
price is reached. Conversely, if demand increases, perhaps due to a larger freshman class,
it creates a shortage that pushes prices up until a new, higher equilibrium price is
established. When both supply and demand shift simultaneously, the effect on the
equilibrium quantity is clear, but the impact on price is ambiguous, depending on the
relative magnitude of each shift. Additionally, real-world factors like the cost of changing
prices, slow adjustments, and other non-market forces can cause prices to deviate from
the simple predictions of equilibrium models, leading to a more complex and often slower
adjustment process than the model suggests.