Unit 2 Microeconomics the study of small units

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Unit 2: Microeconomics (the study of small units, such as individuals & businesses) SSEMI

Unit 2: Microeconomics (the study of small units, such as individuals & businesses) SSEMI 1: I can describe how households and businesses are interdependent and interact through flows of goods, services, resources and money. a. I can illustrate a circular flow diagram that includes the product market, the resource (factor) market, households & firms. b. I can explain the real flow of goods, services, resources and money between and among households and firms.

Markets • Market: group of buyers and sellers of a particular good or service.

Markets • Market: group of buyers and sellers of a particular good or service. • The terms supply and demand refer to the behavior of people. . . as they interact with one another in markets.

Circular flow diagram • Tool that visualizes how interactions occur in a market economy

Circular flow diagram • Tool that visualizes how interactions occur in a market economy • Product market: market for goods & services • Factor market: market for factors of production (resources)

SSEMI 2: I can explain how the law of demand, the law of supply,

SSEMI 2: I can explain how the law of demand, the law of supply, and prices work to determine production & distribution in a market economy. • Demand: willingness to buy a good or service & the ability to pay for it • Law of demand: when prices go down, quantity demanded increases, and when prices go up, quantity demanded decreases (inverse or opposite relationship) or • Demand schedule: listing of how much of an item a person is willing to buy at each price • Market demand schedule: listing of how much of an item all consumers are willing to purchase at each price

Demand schedule/ market demand schedule When graphing curves, price is always on the y

Demand schedule/ market demand schedule When graphing curves, price is always on the y axis and quantity is always on the x axis!

Demand curve: graph showing data from a demand schedule y x 45 0

Demand curve: graph showing data from a demand schedule y x 45 0

Why does the demand curve slope downward? • Because of the Law of Diminishing

Why does the demand curve slope downward? • Because of the Law of Diminishing Marginal Utility: • Utility: the extra satisfaction that one receives from consuming a product. • Marginal means extra (one more). • Diminishing means decreasing. • So, as you add one more, then one more, there’s less satisfaction with each unit. • Example: eat one donut—yummy!! Eat another, still yummy!, but a little less so. Eat another: still yummy, but even less…continue eating them, and they get less and less yummy as you eat more and more.

And…in ceteris paribus In ceteris paribus: Latin phrase meaning all variables other than the

And…in ceteris paribus In ceteris paribus: Latin phrase meaning all variables other than the ones being studied are assumed to be constant. Literally, in ceteris paribus means “other things being equal. ” The demand curve slopes downward because, in ceteris paribus, lower prices imply a greater quantity demanded! It’s an inverse (opposite relationship).

Types of goods in supply & demand • Normal goods: increase in income causes

Types of goods in supply & demand • Normal goods: increase in income causes increase in demand (good coffee, Snickers, Reese’s, steak) & vice-versa • Inferior goods: increase in income causes a decrease in demand (cheap coffee, off-brand/generic candy, cheap cuts of meat like Spam) & vice-versa • Luxury goods: increase in income causes increase in demand (luxury cars, jewelry, clothing, boats) & vice-versa

Change in Quantity Demanded Price of Ice Cream Cone $4. 00 A tax that

Change in Quantity Demanded Price of Ice Cream Cone $4. 00 A tax that raises the price of ice cream cones results in a movement along the demand curve. C A 2. 00 D 1 0 12 20 Number of Ice Cream Cones per day

Consumer Income Price of Ice -Cream Cone Normal Good An increase in income. .

Consumer Income Price of Ice -Cream Cone Normal Good An increase in income. . . $3. 00 2. 50 Increase in demand 2. 00 1. 50 1. 00 0. 50 D 1 0 1 2 3 4 5 6 7 8 9 10 11 12 D 2 Quantity of Ice-Cream Cones

Consumer Income Price of Ice -Cream Cone $3. 00 A decrease in income. .

Consumer Income Price of Ice -Cream Cone $3. 00 A decrease in income. . . 2. 50 2. 00 Decrease in demand 1. 50 1. 00 0. 50 D 2 0 1 D 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of Ice-Cream Cones

Change in quantity demanded vs change in demand • Change in quantity demanded: increase

Change in quantity demanded vs change in demand • Change in quantity demanded: increase or decrease in amount demanded because of a change in price (move along the curve) • Change in demand: when something makes consumers buy different amounts at every price (the whole curve shifts)

Causes of changes (determinants of) in demand: 1. 2. 3. 4. 5. Income: increase

Causes of changes (determinants of) in demand: 1. 2. 3. 4. 5. Income: increase or decrease buy more or less Market size: when # of consumers increases or decreases Consumer tastes: trends, styles, advertising all affect this Consumer expectations: what people think will happen to the price Substitute goods: takes the place of something else (gas prices go up, people might car pool or take the train instead) 6. Complementary goods: goods that are used together; increase in one causes an increase in the other (phone & phone case)

Supply • Supply: desire & ability to produce a product • Law of supply:

Supply • Supply: desire & ability to produce a product • Law of supply: when prices decrease, quantity supplied decreases; when prices increase, quantity supplied increases (direct or positive relationship) or • Supply schedule: how much of a good or service a producer is willing to sell at each price • Market supply schedule: how much of a good or service all producers are willing to offer for sale at each price

Supply schedule

Supply schedule

Supply curves • Supply curve: graph showing the data from a supply schedule •

Supply curves • Supply curve: graph showing the data from a supply schedule • Market supply curve: graph showing the data from a market supply curve

Change in quantity supplied vs change in supply • Change in quantity supplied: rise

Change in quantity supplied vs change in supply • Change in quantity supplied: rise or fall in the amount producers offer for sale because of a change in price (move along the curve) • Change in supply: when a change in the marketplace prompts producers to sell different amounts at every price (shifts the whole curve)

Change in Quantity Supplied Price of Ice -Cream Cone S C $3. 00 A

Change in Quantity Supplied Price of Ice -Cream Cone S C $3. 00 A 1. 00 0 1 5 A rise in the price of ice cream cones results in a movement along the supply curve. Quantity of Ice-Cream Cones

Change in Supply S 3 Price of Ice -Cream Cone S 1 S 2

Change in Supply S 3 Price of Ice -Cream Cone S 1 S 2 Decrease in Supply Increase in Supply 0 Quantity of Ice-Cream Cones

Causes of a change in supply/determinants (curve shift) 1. 2. 3. 4. Input costs:

Causes of a change in supply/determinants (curve shift) 1. 2. 3. 4. Input costs: price of resources; if they go up, the curve shifts left Labor productivity: amt. of g&s a person can produce in a given time Technology: improved tech leads to more production Government action: taxes (decrease), subsidies (increase), regulations (could do either one—depends on the regulation) 5. Producer expectations: expectations about future prices affects production 6. Number of producers: more producers usually increases supply, until competition may force some out of business (decreases supply)

Market equilibrium • Market equilibrium: when quantity demanded and quantity supplied are equal at

Market equilibrium • Market equilibrium: when quantity demanded and quantity supplied are equal at a certain price • Equilibrium price: the price where quantity demanded and quantity supplied are equal (also called the market clearing price)

Market equilibrium

Market equilibrium

Surplus vs shortage (usually temporary) • Surplus: when quantity supplied is greater than quantity

Surplus vs shortage (usually temporary) • Surplus: when quantity supplied is greater than quantity demanded • Shortage: when quantity demanded is greater than quantity supplied

Change in demand’s affect on equilibrium

Change in demand’s affect on equilibrium

Change in supply’s affect on equilibrium

Change in supply’s affect on equilibrium

New equilibrium price (change in supply and demand)

New equilibrium price (change in supply and demand)

Price ceilings & price floors • Price ceiling: legal maximum price sellers can charge

Price ceilings & price floors • Price ceiling: legal maximum price sellers can charge (can lead to shortages); example: rent controls shortage of apartments • Price floor: legal minimum price consumers have to pay (can lead to surpluses); example: minimum wage hire fewer workers

Price ceilings & price floors graph

Price ceilings & price floors graph

Government Involvement • Rationing: when the government gets to decide everyone’s “fair” share. (usually

Government Involvement • Rationing: when the government gets to decide everyone’s “fair” share. (usually only in wartime) • Subsidies: payments made by government to producers or distributors in an industry to prevent the decline of that industry