MICROECONOMICS – UNIT 2

1. MICROECONOMICS – UNIT 2

2. What is Microeconomics? • Small scale economics • Decisions 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.

3. Demand • Demand: desire, ability, and willingness to buy a product • Factors of demand: price & quantity of a specific good or service at a given point in time • Demand schedule: representation of a good's demand at various prices

4. Demand Schedule

5. Demand Curve

6. Demand Curve • Take a moment and practice drawing a demand curve using the information below:

7. The Law of Demand • Quantity demanded varies inversely with its price • In other words...when the price of something increases, the demand of that thing decreases.

8. Market Demand Curve • Quantity demanded by everyone in a market who is interested in purchasing the product or service

9. Demand and Marginal Utility • Quantity 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

10. Factors Affecting QTY Demand • Price – 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 SOMETIMES • Substitution Effect: lower price on one good causes consumers to substitute costly goods with less expensive goods

11. Factors Affecting Demand • Consumer Income: Changes in your income. • Consumer Tastes: Changes in what you buy (seasonal, advertising, trends, ethics) • Substitutes: butter/margarine; CDs/mp3s • Expectations: What we think will happen • Complements: cell phones/cases; beds/sheets • Number of Consumers: just what it sounds like • Factors affecting demand are also referred to as “determinants”

12. Law of supply • As 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)

13. Law of Supply and Demand • Are 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.

14. Elasticity • Elasticity: 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)

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

16. 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

17. 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?

18. 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.

19. Supply Schedule

20. Supply Curve

21. Supply • Change in Quantity Supplied: This is determined by changes in price • Change in Supply: quantity supplied changes at all price levels.

22. Supply • Determinants of Supply: • Cost of Resources • Productivity • Technology • Taxes/Subsidies • Expectations • Government regulations • Number of sellers

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

24. 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

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

26. 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.

27. 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.

28. Cost • Grab an economics text book and turn to page 134.

29. 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.

30. Cost • If a firm’s total output increases, will the fixed costs increase?

31. Cost • What would be the benefit of owning a web-based business as opposed to a business with a physical store space?

32. 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?

33. Cost • Profit-Maximizing Quantity of Output: marginal cost and marginal revenue are equal. • Looking at the chart on page 134, where does this occur?

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

35. 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.

36. 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.

37. 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.

38. 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?

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

40. 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

41. 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.

42. 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.

43. 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

44. 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

45. Types of Markets • Oligopoly: few, very large sellers dominate the industry • Personal Computers • Cellular Phones • Fast Food

46. 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.

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