Unit 2 Microeconomics the study of small units
- Slides: 31
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. • 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 • 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, 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 axis and quantity is always on the x axis!
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 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 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 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 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. . . $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. . . 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 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 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: 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 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 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 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 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: 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 a certain price • Equilibrium price: the price where quantity demanded and quantity supplied are equal (also called the market clearing price)
Market equilibrium
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 supply’s affect on equilibrium
New equilibrium price (change in supply and demand)
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
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
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