You may have heard in your econ class about a good’s elasticity of demand, or about “elastic” or “inelastic” goods. Consumers’ elasticity of demand is just a fancy way economists talk about how sensitive people are to changes in a good’s price.

Tags: economics

# What is supply and demand?

In economics, supply and demand is the relationship between the quantity of a commodity that producers wish to sell at various prices and the quantity that consumers wish to buy.  Though it is a seemingly straightforward relationship, in practical application it can become quite complicated.  In this blog, we will use an example to illustrate the basic relationship between supply and demand

Tags: economics

If you are a student of economics, one of the first axioms you are instructed to adapt is that everyone should be considered a “rational actor.” What this means is that all people who take part in economic decisions and transactions are informed by self-interest and do so in a manner that maximizes their potential self-benefit.  This is essential to understanding choice theory.

Tags: economics

If you’re majoring in economics, you will likely also need to take a statistics course.  One of the trickiest concepts is dealing with conditional probabilities.  In most classes, they teach you a fairly complicated equation known as Bayes’ Theorem.

While this isn’t a hard formula to plug values into, it doesn’t give an intuitive understanding of what the conditional probability P(A|B) actually is.  Also, think about being a few years out of school – what are the chances you’ll remember Bayes’ Theorem and properly calculate a conditional probability?

Tags: economics

# Introduction

In this post, I start off explaining the Marginal Rate of Substitution (Sections II-IV). Then, I cover the concept of Marginal Utility (Sections V-VII). In both cases, I start with a story explanation, then give a formal definition, and finally provide some other useful information about the concept. After that, I connect the two concepts (Marginal Utility and Marginal Rate of Substitution) and show how they relate mathematically, first without calculus (Section VIII) and then with calculus (Section IX). Finally, I demonstrate that the Marginal Rate of Substitution has an advantage over Marginal Utility in terms of describing preferences and behavior (Section X), because it is less sensitive to the exact utility function you choose to use!