MICROECONOMICS – UNIT 2

What is Microeconomics?Small scale economicsDecisions made by individuals and businesses. This includes household economics.We study pricing, markets, supply-demand, monopolies, competition, and the role of consumers and workers in economics when we focus on microeconomics.

DemandDemand: desire, ability, and willingness to buy a

productFactors of demand: price & quantity of a specific good or service at a given point in timeDemand schedule: representation of a good's demand at various prices

Demand Schedule

Demand Curve

Demand CurveTake a moment and practice drawing a demand curve using the information below:

PRICE QUANTITY DEMANDED

$30 0

$25 0

$20 1

$15 3

$10 5

$5 8

The Law of DemandQuantity demanded varies inversely with its price

In other words...when the price of something increases, the demand of that thing decreases.

Market Demand CurveQuantity demanded by everyone in a market who is interested in purchasing the product or service

Demand and Marginal UtilityQuantity demanded by everyone in a market who is interested in purchasing the product or service(again, Marginal Utility is the extra usefulness or satisfaction a person gets from one more of a good)Consumers are less willing to pay as much for more of a good

Factors Affecting QTY DemandPrice – A change in price (when all other factors remain constant) shifts demand

RESULTS IN Income Effect: prices decrease, consumer money increases, consumers have more to spend.Prices increase, consumer money decreases, consumers have less to spend and look for substitute goods.

AND SOMETIMESSubstitution Effect: lower price on one good causes consumers to substitute costly goods with less expensive goods

Factors Affecting DemandConsumer Income: Changes in your income.Consumer Tastes: Changes in what you buy (seasonal, advertising, trends, ethics)Substitutes: butter/margarine; CDs/mp3sExpectations: What we think will happenComplements: cell phones/cases; beds/sheetsNumber of Consumers: just what it sounds like

Factors affecting demand are also referred to as “determinants”

Law of supplyAs the price of a good or service increases the supplier will try to capitalize on this and increase the quantity of the good or service available to the consumer.

(supply curves always slope upwards)

Law of Supply and DemandAre you ready…?

This is really simply and common sense-ish Here it is…

If there is a high supply of a good, price should go down.If there is a low supply of a good, price should go up.

ElasticityElasticity: The measure of flexibility of consumers and producers when the price changes.

Demand elasticity: How much the quantity demanded changes if another factor changes.

PEoD= (% Change in QTY Demanded)(% Change in Price)

Elasticity

Price QTY Demanded QTY Supplied

$7 200 50

$8 180 90

$9 150 150

$10 110 210

$11 60 250

Step 1: [Qdemand(NEW) – Qdemand(OLD)] / Qdemand(OLD) = Change QTY Step 2: [Price(NEW) – Price(OLD)] / Price(OLD) = Change PriceStep 3: Insert values from steps 1 and 2 into original equation

Elasticity•If PEoD > 1, Demand is price elastic•If PEoD = 1, Demand is unit elastic•If PEoD < 1, Demand is price inelastic

•If result is positive: Substitute goods•If result is negative: Complementary goods

Elasticity•Determinants of Demand (three more questions!)

• Can the purchase be delayed?• Are adequate substitutions available?• Does the purchase use a large portion of

income?

Supply•Supply: The amount of a product that will be made available for purchase at various prices

•Law of Supply: suppliers will normally offer more for sale at high prices and less at lower prices.

•Supply Schedule: same as the demand schedule, only with quantities supplied instead of quantities demanded.

Supply Schedule

Supply Curve

Supply•Change in Quantity Supplied: This is determined by changes in price

•Change in Supply: quantity supplied changes at all price levels.

Supply•Determinants of Supply:

• Cost of Resources• Productivity• Technology• Taxes/Subsidies• Expectations• Government regulations• Number of sellers

Supply Elasticity•Supply Elasticity: How the supply reacts to change in price

Production•Production Function: How total output changes when the amount of a single variable input changes while all other inputs remain constant.

•Short Run vs. Long Run

Production•Marginal Product: Extra output or change in total product caused by adding one more unit of variable input (usually labor)

Production•Stages of Production: increasing, diminsing, negative

• Increasing marginal returns: as more workers are added, they contribute and work together to make better use of resources.

• Decreasing marginal returns: output increases at a diminishing rate as more variable inputs are added.

• Negative marginal returns: output decreases as more workers are added.

Cost•Fixed Cost: costs incurred even with little or no activity. (sometimes referred to as overhead)

•Variable Cost: costs that change depending on rate of operation and/or output changes.

•Total Cost: sum of the fixed and variable costs.

•Marginal Cost: cost of producing one more unit.

Cost

•Grab an economics text book and turn to

page 134.

Cost•Fixed Cost: costs incurred even with little or no activity. (sometimes referred to as overhead)

•Variable Cost: costs that change depending on rate of operation and/or output changes.

•Total Cost: sum of the fixed and variable costs.

•Marginal Cost: cost of producing one more unit.

Cost

•If a firm’s total output increases, will the fixed

costs increase?

Cost

•What would be the benefit of owning a

web-based business as opposed to a business with a physical store

space?

Cost•Break-Even Point: when a firm is making just enough total revenue to “break-even”

•Looking at the chart on page 134, where would the firm find the break-even

point?

Cost•Profit-Maximizing Quantity of Output: marginal cost and marginal revenue are equal.

•Looking at the chart on page 134, where does this occur?

Pri¢e$•What is price? Think of how you would define price and prepare to share with

the class.

Pri¢e$•Price: the monetary value of a product which is determined by supply and demand.

• Prices are ultimately determined by the seller, but demand greatly influences the seller’s pricing decision.

• Prices act as signals, indicating when buyers and sellers should perform their market duties.

Price$•Why we need prices:•1. Flexibility: respond to events which impact the market.•2. Familiarity: free market economies are familiar with pricing systems (easy).•3. No cost: no special entity is required to set a price.

•While these are benefits to how things are bought and sold in a market economy…they only work because the market is a “living” thing.

Pri¢e$•In a world…where prices don’t matter or do not exist…rationing occurs.

•Rationing: government decides how much of a good each person or household should receive.

•Ration Coupon: ticket that entitles the holder to procure a certain amount of a product.

Pri¢e$•Think back through your knowledge of history…way back there in sophomore and junior years.

•Where have we seen rationing before? What led to the rationing? What were the ramifications?

•What would be a situation today where we might see rationing?

Pri¢e$•Rationing Problems:•1. Satisfaction shortage•2. Expensive to implement and maintain•3. Diminishing incentive to produce.

Market Efficiency•Price Ceilings: maximum price that can be charged for a good.

• Government regulates ceilings• Typically implemented at a local level• Changes how resources are allocated

Market Efficiency•Price Floors: lowest price that can be charged for a good.

• Eliminates the market determining an equilibrium price.

• Minimum Wage is our most prominent example of a price floor.

Competition•Laissez-faire: essentially, the government should play as small a role as possible in economic affairs (Adam Smith)

•Market Structure: nature and degree of competition among firms doing business in the same industry.

Types of Markets•Perfect Competition: large number of well-informed independent buyers and sellers who exchange identical products.

• Necessary Conditions:• Must be large number of buyer & sellers• Identical products• Each buyer and sellers acts

independently• EDUCATED SELLERS AND BUYERS• Buyer and Seller Freedom

Types of Markets•Monopolistic Competition: Similar products with subtle differences.•Product Differentiation: real or perceived differences between competing products in the same industry•Nonprice Competition: methods of enticing customers to buy one product over another without price incentive

Types of Markets•Oligopoly: few, very large sellers dominate the industry

•Personal Computers•Cellular Phones

•Fast Food

Types of Markets•Oligopoly (cont)

•When one firm in an oligopoly makes a move, the rest of the firms usually follow.

•Collusion: agreement among firms to behave in a cooperative manner.

•Price-Fixing: agreement among firms to charge the same or similar prices.

Types of Markets•Monopoly: market in which there is only one seller of a product.

•Natural Monopoly: