Unit_2_Microeconomics-pp

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Unit 2
MICROECONOMICS
Microeconomics: is the area of
economics that deals with
behavior and decision making by
small units, such as individuals
and businesses.
Examples include looking at
individual businesses, a
particular industry or how prices
are established.
Which of the following is an example of a
microeconomic decision?
A whether to increase or decrease the
money supply
B whether to increase or decrease
taxes
C how to reduce the unemployment
rate
D how many hours an employee
should work each week
What is the unit of study in
microeconomics?
A. imports and exports
B. inflation and recession
C. individual businesses and
households
D. national consumption and
expenditures
Circular Flow Model: a
model that illustrates the
flow of economic
activity(buying & selling)
between households and
firms.
Market: is a location or mechanism
that allows buyers and sellers to
exchange goods and services.
Markets can be local, regional, or
global in scope.
1.Product Market: a market where
firms supply/sell goods and services
to consumers. Firms supply goods
and services while households
demand/buy goods and services.
2.Resource/Factor Market: a market
where resources are bought and
sold. Households supply/sell their
resources to firms while firms
demand/buy resources from
households.
When households sell resources
they receive income in return.
Land– rental income
Labor– wages or salary income
Capital– interest income
Entrepreneur– profit income
Study the information below and use it
to answer the question that follows.
The flow of goods and services to
consumers is illustrated by
A 4 to 2
B 8 to 6
C 2 to 5
D 6 to 1
The payments for land, labor,
capital, and entrepreneurial ability
respectively are
A. rent, profit, wages, and interest
B. profits, wages, interest, and
rent
C. rent, wages, interest, and profit
D. wages, rent, profit, and
interest
All the buying and selling that
take place in the circular flow
model requires money to help
facilitate exchange.
Barter: a moneyless economy
that relies on trading goods for
goods or goods for services.
This is not very efficient.
There are 3 main functions of money.
1.Medium of exchange: something
accepted by all parties as payment for
goods and services. This is the most basic
function, it must be accepted.
2.Measure of Value: a common
denominator that can be used to express
worth in terms that most people can
understand.
3.Store of Value: allows purchasing
power to be saved until needed in the
future.
On the island of Yap, large circular
stones are used for money. The
main reason why this type of
money serves its function as a
medium of exchange is because it is
A very portable
B highly divisible
C accepted as payment
D prized in foreign transactions
Commodity Money: money that has
an alternative use as an economic
good, or commodity.
Fiat Money: Money by government
decree. The money we carry is fiat
money.
Specie: money in the form of
coins made from silver or
gold.
Characteristics of Money
1.Portable
2.Durable
3.Divisible
4.Limited in Supply
Demand: is the desire and
ability of consumers to buy a
good or service.
Desire without ability does not
constitute demand.
Porshe– I have the desire but not the
ability to buy one.
McDonalds Happy Meal– I have the
ability but not the desire.
Demand Schedule:
is a table or
schedule that
shows the various
quantities
demanded by
consumers of a
good at all prices
that might prevail
in the market at a
given time.
The Demand Curve
 A demand curve is a
Market Demand Curve
Price per slice (in dollars)
graphical representation of a
demand schedule.
 When reading a demand
curve, assume all outside
factors, such as income, are
held constant.
3.00
2.50
2.00
1.50
1.00
Demand
.50
0
0
50
100 150 200 250 300 350
Slices of pizza per day
Figure 4.1
The Demand for Compact Discs
Figure 4.1
The Demand for Compact Discs
Figure 4.2
Individual and Market Demand Curves
When economists refer to “demand,”
they mean which of the following?
A how much satisfaction buyers
receive from a purchase
B how much consumers will purchase
at different prices
C how much sellers will supply at a
particular price
D how much people want the product
if it is free
Demand Curve:
is the graphical
picture of the
demand schedule.
It contains the
same information,
but in a different
format.
Law of Demand: states that the
quantity demanded of a good or
service varies inversely with its
price.
Inversely means opposite.
When price goes up, the quantity
demanded goes down.
When price goes down, the quantity
demanded goes up.
Change in Quantity
Demanded: this is
a movement along
the demand curve
and shows a
change in the
quantity
purchased in
response to a
change in price.
This is simply a
restatement of the
law of demand.
Figure 4.3
A Change in Quantity Demanded
Change in
Demand: occurs
when people are
now willing to buy
different amounts
of the product at
the same prices as
before. This is
shown as a shift
in the curve, not a
movement along
the curve.
Let’s look at figure 4.4, pg. 98 in
the text.
Increase in demand– rightward
shift
Decrease in demand– leftward
shift
Figure 4.4
A Change in Demand
There are 6 factors that can
shift the demand curve to the
right or left. These factors
have nothing to do with the
price of the product.
They include:
1.Consumer Income: An
increase in income
allows consumers to
buy more of most goods
and services, so the
curve shifts right. A
decrease in income
would cause a decrease
in demand and
therefore a leftward
shift of the curve.
2. Tastes &
Preferences:
this reflects
our likes and
dislikes.
Advertising,
news
reports,
fashion
trends,
seasonal
changes, and
other things
can affect
our tastes.
3. Substitutes:
are products
that can be
used in place
of other
products.
When the
price of 1 good
goes up, the
demand for
the substitute
will also go up,
and vice versa.
4. Complements: are products that are
used together. When the price of 1 good
goes up, the demand for the complement
will go down, and vice versa.
5.
Change in Expectations: demand
may change because of the
expectation of some future event. If
I expect prices to rise in a few
weeks, I might buy more now. If I
think I might lose my job soon, I’ll
begin to spend less now.
6. Number of Buyers: more buyers in the
market will lead to an increase in
demand. Fewer buyers will lead to a
decrease in demand.
Some things that might affect number of
buyers are:




Population changes
Immigration trends
Medical advancements
Trade Agreements like NAFTA
Which of the following is an attempt by a
firm to increase the demand for its
product?
A the imposition of a price ceiling on the
product
B an advertising strategy designed to change
consumer tastes and preferences
C a marketing strategy to make the good scarce
and therefore more expensive
D a production strategy to flood the market
with the good or service
Which of the following is an attempt by a
firm to increase the demand for its
product?
B. an advertising strategy designed to change
consumer tastes and preferences
When there is __________________
the entire demand curve shifts, to the
right to show an increase in demand or
to the left to show a decrease in
demand.
A. change in quantity demanded
B. change in demand
C. change is quantity supplied
D. change in supply
When there is __________________
the entire demand curve shifts, to the
right to show an increase in demand
or to the left to show a decrease in
demand.
B. change in demand
Demand Elasticity: the extent to which a
change in price causes a change in the quantity
demanded.
Elasticity = Responsiveness
In essence, we want to know how much the
quantity changes in response to a change in price.
There are 3 ranges of elasticity
1. Elastic Demand: when a given change
in price causes a relatively larger change in
the quantity demanded. See figure 4.5, pg.
103.
Figure 4.5
The Total Expenditures Test for Demand Elasticity
2. Inelastic Demand: when a given
change in price causes a relatively
smaller change in the quantity
demanded.
3. Unit Elastic Demand: when a given
change in price causes a proportional
change in the quantity demanded.
Determinants of Demand
Elasticity– figure 4.6, pg. 106
These are 3 general
questions to ask yourself.
Figure 4.6
Estimating the Elasticity of Demand
1. Can the purchase be
delayed?
yes-- elastic
no-- inelastic
Fresh vegetables or
Insulin
2. Are adequate
substitutes available?
yes– elastic
no-- inelastic
Gasoline or
Butter
3. Does the purchase use a
large portion of income?
yes– elastic
no-- inelastic
New car or
Plastic bags
What does it mean when the demand for a
product is inelastic?
A. a price increase does have a significant
impact on buying habits
B. people will not buy any of the product
when price goes up
C. there are very few satisfactory substitutes
for the product
D. customers are very sensitive to the price of
the product
The other side of demand is supply. This
represents producers or firms that use
resources to make goods and services.
Producers attempt to maximize profits by
selling what consumers want and by
producing as efficiently as possible.
Supply: the amount of a product that firms
are willing to offer for sale at all possible
prices that might prevail in the market.
Supply Schedule: a table or schedule that
shows the various quantities supplied of a
product at all prices that might prevail in
the market at a given time.
Supply Curve: the graphical
representation of the supply
schedule. It contains the same
information as the schedule but in a
different format.
Law of Supply: states that the
price and the quantity supplied
are directly related to each
other. Direct means both
variables move together. As
price increases, so does
quantity supplied. As price
decreases, so does quantity
supplied.
The resulting
supply curve is
upward sloping.
The reason is that
we assume costs
increase as output
increases.
Ex. Low hanging
fruit
Change in Quantity
Supplied: is a
movement along
the supply curve
showing a change in
the quantity of
product supplied in
response to a
change in price.
This is simply a
restatement of the
law of supply.
Change in Supply:
when firms are
now willing to
offer different
amounts of the
product for sale at
the same prices as
before. This is
shown as a shift in
the curve, not a
movement along
the curve.
Let’s look at figure 5.3, pg.
117.
Increase in supply–
rightward shift
Decrease in supply–
leftward shift
Figure 5.3
There are 7 factors that can
shift the supply curve to the
right or left. These factors
have nothing to do with the
price of the product.
They include:
1.Cost of Inputs/Resources: When a
firm pays less for its land, labor, or
raw materials, it is willing to
supply more now. The reason is
that the firm is making more
profits as their costs fall. If the
cost of resources increases, the
firm will supply less.
2. Productivity: When workers are more
efficient they can produce more. The
result is that costs fall, so firms are
willing to supply more than before.
When workers are not as productive,
costs rise and the firm is not as willing to
supply.
3. Technology: the introduction of a new
machine or process will lower the
firm’s costs and will result in an
increase in supply. Think about flat
screen tv’s and computers. What has
happened to their costs over the last
several years?
4. Taxes: firms
view taxes as
an increase in
their costs
and therefore
supply will
fall. Taxes will
always shift
the supply
curve to the
left.
5. Subsidies: are the opposite of a tax. In
this case the government gives money to
firms to encourage or protect a certain type
of economic activity. Subsidies lower costs
and increase supply.
6. Government Regulations: when the
government regulates a firm’s product, costs rise
and supply falls. Ask yourself how much more
expensive it is to comply with federal standards
on exhaust emissions on cars. More regulation
means less supply. Less regulation means more
supply.
7. Number of Sellers: more firm’s leads to
more supply, fewer firms leads to less supply.
The factor that would cause the
supply curve to shift to the left is
A. higher taxes
B. a decrease in the cost of
inputs
C. an increase in government
subsidies
D. all of the above
The factor that would cause the
supply curve to shift to the left is
A. higher taxes
The factor that would cause the
supply curve to shift to the right
is
A. higher taxes
B. an increase in the cost of
inputs
C. a decrease in government
subsidies
D. none of the above
The factor that would cause the
supply curve to shift to the right
is
D. none of the above
Supply Elasticity is the same concept as
demand elasticity. See figure 5.4, pg. 119.
1. Elastic Supply: when a given change in price
causes a relatively larger change in quantity
supplied.
2.Inelastic Supply: when a given change in
price causes a relatively smaller change in
quantity supplied.
3.Unit Elastic Supply: when a given change in
price causes a proportional change in quantity
supplied.
Figure 5.4a
Figure 5.4b
Figure 5.4c
Figure 5.4d
Price: is the monetary value of a product
or service and is established by supply
and demand.
Prices act as
signals that help
us make our
economic
decisions. Prices
communicate
information and
provide
incentives to
buyers and
sellers.
For example:
High Price– firms want to produce more
consumer want to buy less
Low Price– firms want to produce less
consumers want to buy more
Prices act as signals in the market
because
A prices indicate to sellers the types of
goods and services to offer for sale
B prices can determine dividends for
businesses
C high prices for goods and services
signal a healthy economy
D entrepreneurs become motivated as
prices rise
Prices act as signals in the market
because
A. prices indicate to sellers the types of
goods and services to offer for sale
How would society
allocate goods
/services and
resources without a
system of prices? One
possible method could
be rationing.
Rationing: is a
system under which an
agency such as
government decides
everyone’s fair share.
3 problems of rationing include:
Fairness
Administrative costs
Diminished incentives
Rebate: a partial refund of the original
price of the product.
We now want to bring supply and demand
together to determine how prices are
established in a market economy.
It is a process of trial and error.
Market Equilibrium: is a situation in which prices
are relatively stable and the quantity supplied is
equal to the quantity demanded. See figure 6.1, pg.
143 and figure 6.2, pg. 145.
Figure 6.1a
Figure 6.1b
Price
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
Quantity Supplied
200
300
400
500
600
700
Quantity Demanded
800
700
600
500
400
300
The demand schedule above shows quantity supplied and quantity demanded data
for a given product. In a market economy what price will this product most likely
sell for?
A. $1.50
B. $2.50
C. $3.00
D. $4.00
Using the above schedule what is the quantity demanded at $1.50?
A. 800
B. 600
C. 400
D. 200
Surplus: when the quantity supplied
is greater that the quantity demanded
at a given price. The result of the
surplus is that price will fall. ( Qs >
Qd )
At a given price, a surplus occurs when
A. the quantity supplied is greater than
the quantity demanded.
B. the quantity demanded is more than
the quantity supplied.
C. the quantity demanded is the same as
the quantity supplied.
D. Thompson says it occurs.
Shortage: when the quantity
demanded is greater that the quantity
supplied at a given price. The result of
the shortage is that price will rise. (
Qd > Qs )
Equilibrium Price: the price that
clears the market by leaving
neither a surplus nor a shortage.
( Qs = Qd )
Equilibrium price will do
what?
A. clear the market
B. result in a surplus
C. result in a shortage
D. will always be found for
every product produced
Sometimes society may
have to sacrifice some
efficiency and freedom in
order to achieve greater
equity and security. Think
back to the economic and
social goals in unit 1.
One common way to achieve
more equity or security for
certain groups of people is for the
government to set prices at the
socially desirable level. When
this happens, prices are not
allowed to adjust to reach
equilibrium.
2 examples include:
Price Ceiling:
the maximum
legal price
that can be
charged for a
product. See
figure 6.5, pg.
151.
Ex. Rent
control on
apartments
Price Floor: the
lowest legal
price that can be
charged for a
product. See
figure 6.5, pg.
151.
Ex. Minimum
wage
Farm
products
The minimum wage is a type of
A. price floor
B. comparable worth
C. price ceiling
D. marginal price
What happens when wages are set above the
equilibrium level by law?
A. firms employ more workers than they would at
the equilibrium wage
B. firms employ fewer workers than they would at
the equilibrium wage
C. firms tend to try to break the law and hire
people at the equilibrium level
D. firms hire more workers but for fewer hours
than they would at the equilibrium wage
What does the horizontal dashed line on
the chart above best represent?
A) supply
B) demand
C) price floor
D) price ceiling
Legal Forms of Business - shows the
3 main ways businesses are set up.
To compare advantages and
disadvantages of each form of
business, look at Chapter 8 pg. 184
1. Sole Proprietorship: A
business owned and operated
by 1 person. It is the most
common form of business
numerically.
2. Partnership: a business jointly
owned by 2 or more people. 2 types
include:
General– all partners are responsible
for the management and financial
obligations of the business.
Limited– at least 1 partner is not
active in the daily operation of the
business although they may have
contributed funds to finance the
operation.
3. Corporation: is
recognized by law as a
separate legal entity having
all the rights of an
individual.
Important aspects of corporations
include:
Charter: a government document giving
permission to create a corporation.
•Corporation’s name
•Its purpose
•Number of shares to be issued
•Names of parties who started it
Figure 3.3
Ownership, Control, and Organization of a Typical Corporation
Stock: ownership certificates in a
corporation. Investors buy shares
of stock in hopes of making a
profit by selling the stock for more
than they paid for them.
Stockholders/Shareholders: investors
who buy shares of stock.
Dividends: a check representing a
portion of the corporations profits paid
back to the stockholders each quarter.
This is another way investors make
money in the stock market.
Mr. Simpson is liable for all the
debts of his company. Mr. Simpson
has which type of business
organization?
A) conglomerate
B) sole proprietorship
C) corporation
D) monopoly
Greg has financed Betty’s future sewing
business. Which of the following best
describes this type of business they
have established?
A) proprietorship
B) general partnership
C) limited partnership
D) corporation
Profit Motive: this is the driving force that
encourages people and organizations to
improve their material well-being.
Entrepreneurs start businesses to make
the greatest amount of profit possible.
Total revenue >Total cost – profits
Total revenue < Total cost– losses
Total revenue = Total costs-- breakeven
Market Structure: represents the
nature and degree of competition
among firms operating in the same
industry.
An industry represents all firms in
the same market like airlines or
cars.
We will examine 4 types of market
structures by looking at their
characteristics. Figure 7.2, pg 169.
1. Perfect Competition
o Large numbers of buyers and sellers,
100’s to 1000’s.
o Have no control over price.
o Buyers and sellers deal in an identical
product.
o Buyers and sellers are free to enter or
leave the market when they choose.
o Do not need to advertise.
The best examples include certain types
of farming.
2. Monopolistic
Competition
•Large number of buyers and sellers, 20 to
70.
•Have a little bit of control over price.
•Buyers and sellers deal in a differentiated
product.
•Buyers and sellers are free to enter or
leave the market.
•There is a lot of advertising by firms.
Examples include gas stations and
drycleaners.
Product Differentiation: the real or
imagined differences between competing
products in the same industry. Examples
include:
•Store location
•Store design
•Manner of payment
•Delivery options
•Packaging
•Service
•Store merchandising
Non-price competition: the use of
advertising, promotions or giveaways
to convince buyers that their product
is better than another brand.
3. Oligopoly
•Few firms, 3 to 12.
•Some control over price with
collusion.
•The product can be identical or
differentiated.
•It is very difficult for firms to enter
this market.
•There is a lot of advertising by firms.
Examples include airlines, automobiles
and steel.
Interdependent behavior: whenever one
firm acts, it must consider how the other
firms will respond.
Ex. Raise price– ignore
Lower price– lower
Collusion: a formal agreement to set prices
or behave in a cooperative manner to
increase profits. A good example is OPEC.
This behavior is illegal in the U.S.
Price-fixing: agreeing to charge the same
or similar price for a product.
4. Monopoly
•A single firm, 1.
•Almost complete control over price.
•The product is unique with no close
substitutes.
•It is almost impossible to enter this
market.
•No advertising is needed unless it is for
public relations reasons.
Best example would be the local power
company or water company.
Types of monopolies
Natural Monopoly: when the costs of
production are minimized by having a
single firm produce the good. This is
called economies of scale.
Geographic Monopoly: a single firm by
virtue of its location such as a country
store.
Technological Monopoly: a monopoly
based on the ownership or control of a
manufacturing method, process, or
other scientific advance such as a
patent or copyright.
Government Monopoly: a monopoly
that the government owns and runs
like the postal service, the city water
company, or the TVA.
What is monopolistic competition?
A. a very few companies selling
identical products
B. many companies selling similar
but not identical products
C. one company selling the identical
product under different names
D. one company selling several
different products under different
names
What is monopolistic competition?
B. many companies selling similar
but not identical products
In which market structure are
businesses most interdependent?
A. oligopoly
B. monopoly
C. pure competition
D. monopolistic competition
In which market structure are businesses
most interdependent?
A. oligopoly
Public utility companies,
(electric company) are examples
of
A. natural monopolies
B. cartels
C.technological monopolies
D. subsidized monopolies
Public utility companies,
(electric company) are examples of
A. natural monopolies
A new firm will find it
impossible to enter a market
dominated by
A. a monopoly
B. pure competition
C. monopolistic
competition
D. an oligopoly
A new firm will find it impossible to enter
a market dominated by
A. a monopoly
Sometimes markets fail because
of inadequate competition,
inadequate information,
resource immobility,
externalities and public goods.
We will focus on 2 types of
market failures.
1.Externalities: a cost or
benefit that accrues to a 3rd
party not involved in the
transaction.
Look at the photo on pg. 175.
Negative– noise, air or
water pollution.
Positive– education or
immunizations
2. Public Goods: goods or
services that are collectively
consumed by everyone, and
whose use by 1 person does
not diminish the satisfaction
or value available to others.
Public goods are not excludable
and non rival.
Excludability- refers to the idea that a
person can be prevented from using a
product they don’t pay for.
Rivalry- refers to the idea where one
person’s use of a product will diminish
other people’s use of the same product.
Free rider- refers to a person who receives
the benefit of a good without paying for it.
Private goods
Ice-cream cones
Clothing
cars
Public goods
Tornado sirens
National defense
Flood control
programs
The left column is rival and excludable,
and the right column is non-rival and
non-excludable.
In the U.S., how are public goods paid
for?
A. Private firms collect fees from their
employees.
B. Non-profit organizations collect
charitable donations from people.
C. The government collects tax revenues
from individuals and firms.
D. Corporations make profits from
selling goods and services.
In the U.S., how are public goods paid for?
C. The government collects tax revenues
from individuals and firms.

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