Definitions

Here we attempt to describe in layman’s terms some definitions or phrases we use throughout our blog posts:

  • Economics:  The study of scarcity and the choices humans face and make in light of the scarcity they encounter.  Economics is a behavioural subject area, hence the fact that so much disagreement and controversy surrounds this subject area.
  • Supply & Demand curves:


Supply & Demand Curve

Even though we use the term curve, it can a curve or a straight line as in the diagramme above.

The theory behind the demand curve is that is slopes downward from left to right, because consumers will demand more of a good or service as the price of is declines.

The theory behind the supply curve sloping upwards from left to right is that producers and suppliers will make and deliver more of a good or service as the price increases.

Price is mostly indicated on the vertical Y axis and Quantity on the horizontal X axis.  The interchange between demand and supply curves, together with movements up or down of an entire shift of a demand or supply curve, will be discussed separately.

Where the supply & demand curves intersect, it is said to the price and quantity at which the ‘market clears’.  At this price the quantity supplied by producers is exactly the combination or price and quantity demanded by consumers and households.  This in effect is the ‘holy grail’ of economics and this is a state of equilibrium.  The Supply & Demand curve is off course a snap shot in time and hence the fact that the illustrated diagramme is purely a ‘theoretical concept’ in economics.

  • Value Based Principles:  Is an economic or financial concept or philosophy as opposed to a strategic overall governance objective.
“The right question is how can value be created so that all stakeholders benefit over the lifetime of the organisation” – Mills (P100 – Managerial Finance, Shareholder Value and Value Based Management)
  • Comparative Advantage

Comparative advantage is attributed to David Ricardo and is an economic law which states that a market actor (individual, firm, region or country) has the ability to produce goods and services at a lower opportunity cost than another actor or market participant.  This is a relative term as even if a market participant has a higher opportunity cost than another participant, by concentrating its efforts in the area where it has the least opportunity cost disadvantage it can still compete and produce output that would benefit its wealth creation possibilities.

  • Competitive Advantage

Competitive advantage on the other hand is the theory of concentrating one’s efforts on producing the highest quality goods and selling them at the highest possible price.  It has a purely price maximising focus with the hope of resulting in wealth creation.  Therefore, note the subtle difference in approach where comparative advantage tries to maximise wealth creation, competitive advantage has wealth creation as a by-product of focusing on maximising price.

theMarketSoul ©1999 – 2012

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