From 1979 to 1981, I was enrolled in an MBA Executive Program at Wake Forest University. We went to class on the weekends (all day Friday and Saturday). We had 2 classes in the morning and 2 classes in the afternoon. Each class lasted 2 hours. 12 hours of education each semester for 4 semesters (48 hours) and 2 classes in the summer (6 hours) and we were given 6 hours credit for our executive employment positions for a total of 60 hours.
My undergraduate degree was English so I was not very prepared to study Business Administration. Most of my fellow classmates had some sort of business undergraduate degree. So, I had to teach myself what they already knew.
Oddly enough, one of my favorite courses (outside of strategic planning and management) was Economics.
Basic economics is fairly easy to understand and is best described by using graphs. The first graph we will be exploring will be the demand graph or curve with illustrates consumer buying habits and what they are willing to pay for an item. The graph starts with price on the left and quantity on the bottom. Price gets higher as it moves up and quanity increases as it moves out to the right.
As you can see below, the demand curve moves down from right to left. This indicates that the consumer is willing to pay a high price one item but if they buy many of the same items, they expect a lower price.
Next, is the supply curve. This represents what the supply is willing to manufacture and put in the marketplace for sale. This lines moves up as it moves right to left, and indicates that the suppler is willing to sell one item for a lesser price but a higher price for multiple copies of that same item.
This makes sense because it does not take much labor or raw materials or electricity to produce one item, but it would take a lot of those 3 items to produce 100 of the same item.
When you put the supply and demand curves together, the result can be seen below. Where these two lines intersect is the ideal price for the ideal quantity of items. This is the market equilibrium for that one particular item. In order to consider all items being sold, one would have to do a chart for each individual item, them average them all together.
Here is where it really gets interesting. Our economy does not remain fixed forever. Consumer demand changes (based upon all sorts of factors which I will discuss later) and companies may decide to manufacture more or less of a specific item for one reason or another.
When there is a shift in demand (below right chart) then the demand curve shifts out to the right and prices will automatically increase. When this happens and under ideal circumstances, the suppler will increase supply and the price will drop but NOT BELOW its original price. A good example of this is gasoline price increases and decreases.
This last chart shows how prices rise because of consumer demand and then lower because of the supplier's response to the increase demand.
Under ideal circumstances this rise and fall of prices will gradually continue year after year which is an indication that the country has experience POSITIVE ECONOMIC GROWTH.
Bear in mind these charts only reflect an increase in wages when there is a demand increase. A demand increase typically occurs after a pay raise or after the government sends out its IRS refund checks.
Logic and historical data indicates that when the consumer gets more money, they spend that excess money rather than saving it. Ironically, when this happens, prices will always increase. If supply does not increase shortly afterwards, we experience inflation.
SOURCE: Alex Hutchins' Education
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