Unit 2: Microeconomics

1. Define microeconomics

2. Define macroeconomics

Microeconomics: the study of people and businesses within a single market.

This small focus—on only one particular market—is one way microeconomics (literally “small economics”) is different from macroeconomics (“large economics”).

1. Define and give example of a product market

2. Define and give example of a factor or resource market

3. Define Economic Interdependence

4. Define the circular flow of goods and services

5. What is the role of households in the factor market?

6. What is the role of businesses in the factor market?

7. What is the role of households in the product market?

8. What is the role of businesses in the factor market?

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The Circular Flow Diagram When buyers and sellers freely and willingly engage in

market transactions, it is known in economics as voluntary exchange.

The transactions are made in such a way that both the buyer and seller benefit from the exchange. (SSEF3b)

The circular flow diagram shows the interactions between buyers and sellers in different markets.

Economic Interdependence: reliance on one another to provide the goods and services that people consume

Role of Households in Circular Flow Diagram Households in the factor market own productive

resources. They sell land, labor, and capital to businesses in the factor

market in exchange for income. Households in the product market are the consumers of

goods and services. They use their income to buy goods and services from

businesses.

Role of Businesses (firms) in Circular Flow Diagram Businesses (firms) in the factor market consume

productive resources (land, labor, capital, and entrepreneurship).

Businesses (firms) in the product market produce the goods and services purchased by households.

1. Define the law of supply

2. Define the law of demand

3. Does supply have to do with the BUYER or SELLER?

4. Does demand have to do with

Law of Supply and Demand Law of supply: an economic principle stating that as price

rises, the quantity a seller is willing and able to sell increases. (SSEMI2a)

Law of demand: an economic principle stating that as the price of a good rises, the quantity of the good consumers are willing and able to buy decreases. (SSEMI2a)

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the BUYER or SELLER?

1. What happens to the QUANTITY SUPPLIED as the price INCREASES?

2. What happens to the QUANTITY SUPPLIED as the price DEACREASES?

3. List the 6 Non-Price Determinants of Supply

4. What happens to supply when the resources needed to produce a product become more expensive?

5. What will happen to supply if the government decreases the regulations on sellers in a market?

6. If the number of sellers in the market increases, what will happen to the supply of the product?

Supply Curve

The determinants of supply describe the types of changes in a market that will cause the entire supply curve to move to the right or to the left. In other words, all sellers of a good, service, or productive resource will be willing and able to supply more or less of their product at all prices in the market. The shift will cause a change in the equilibrium price and equilibrium quantity in the market.

Change in the costs of productive resources1. Decrease in costs - If the resources needed to produce

a product become more less expensive, sellers will produce more and supply will increase and shift to the right.

2. Increase in costs – If the resources needed to produce a product become more expensive, sellers can produce less and supply will decrease and shift to the right.

Change in Government Regulations1. Decrease in Regulations - If the government

decreases the regulations on sellers in a market, sellers will produce more of the product and supply will shift to the right.

2. Increase in Regulations - If the government increases the regulations on sellers in a market, sellers will produce less of the product and supply will shift to the left.

Change in Number of Sellers1. Increase in the Number of Sellers - If the number of

sellers in the market increases, there will be more producers of the product, supply will increase and shift to the right.

2. Decrease in the Number of Sellers - If the number of sellers in the market decreases, there will be fewer producers of the product, supply will decrease and shift to the left.

7. What will happen to supply if producers expect the price of their product to rise in the future?

8. If production technology improves, will supply increase or decrease?

9. If the education of the workers in a market declines, will supply increase or decrease?

10. What direction does the supply curve shift when supply increases?

11. What direction does the supply curve shift when supply decreases?

Change in Producer Expectations1. Producers expect the price of their product to fall

in the future - If producers expect the price of their product to fall in the future, they will supply more in the present while the market price is higher. This will cause supply to increase and shift to the right.

2. Producers expect the price of their product to rise in the future - If producers expect the price of their product to rise in the future, they will supply less in the present and wait for the price to rise. This will cause supply to decrease and shift to the left.

Change in Technology 1. Production Technology used to produce a product

improves - If producers implement new, more efficient technology in the production process, supply will increase and shift to the right.

2. Production Technology, used to produce a product, declines – This scenario is unusual. This could occur if a natural or cyber disaster destroyed access to production technology for a large number of the market’s producers at one time or if a defect in production technology affects many producers all at one time. If producers lose the benefits of production technology, supply decreases and shifts to the left.

Change in Education1. Education of the workers in a market improves - If

many workers in a market improve their education, knowledge, and skills related to the production process, their labor productivity will increase. As a result supply will increase and shift to the right.

2. Education of the workers in a market declines - If the education, knowledge, and skills of many workers in a market declines, their labor productivity will decrease. As a result supply will decrease and shift to the left.

12. Does the graph to the right show an increase or decrease in the supply of T-Shirts?

Draw Two Graphs: One that shows an increase in demand and one that shows a decrease in demand

1.What happens to the QUANTITY DEMANDED as the PRICE of a good INCREASES?

2.What happens to the QUANTITY DEMANDED as the PRICE of a good DECREASES?

3. What will happen to demand when there is an increase in the price of a complementary good?

4. Provide an example of complementary goods

5. What will happen to demand if there is a decrease in the price of a substitute good?

6. Provide an example of substitute goods.

Determinants (Shifters) of Demand • The determinants of demand describe the types of changes in a market that will cause the entire demand curve to move to the right or to the left. In other words, all consumers of a good, service, or productive resource will be willing and able to purchase more or less of a product at all prices in the market. The shift will cause a change in the equilibrium price and equilibrium quantity in the market.

Change in Price of Related Goods1. Decrease in the Price of a Complementary Good -

If the price of a good, service, or resource that is consumed with the product in this market falls, then the demand for the product in this market will rise and shift to the right.

2. Increase in the Price of a Complementary Good - If the price of a good, service, or resource that is consumed with the product in this market rises, then the demand for the product in this market will fall and shift to the left.

Change in Price of Related Goods1. Increase in the Price of a Substitute Good - If the

price of a good, service, or resource that is consumed in place of the product in this market rises, then the demand for the product in this market will rise and shift to the right.

2. Decrease in the Price of a Substitute Good - If the price of a good, service, or resource that is consumed in place of the product in this market decreases, then the demand for the product in this market will fall and shift to the left.

7. What will happen to demand if consumer income increases?

8. If consumers expect the price of a product to fall in the future, what will happen to demand?

9. If there is a decrease in consumer taste for a product, then demand will ____________________.

10. What will happen to demand if there is an increase in consumers in the market?

11. What direction will the demand curve shift if there is an increase in demand?

12. What direction will the demand curve shift if there is a decrease in demand?

Change Consumer Income1. Increase in Consumer Income – If consumers in a

market for a normal good have an increase in income, then the demand for the product in this market will rise and shift to the right.

2. Decrease in Consumer Income - If the income of consumers in the market for a normal good falls, then the demand for the product in this market will fall and shift to the left.

Change Consumer Expectations1. Consumers expect the price of a product to rise in

the future - If consumers expect the price of a product to rise in the future, they will demand more in the present before the price rises. This will cause demand to increase and shift to the right.

2. Consumers expect the price of a product to fall in the future - If consumers expect the price of a product to fall in the future, they will demand less in the present while the market price is higher. This will cause demand to decrease and shift to the left.

Change Consumer Tastes/Preferences1. Increase in Consumer Taste for a Product – If

consumers in a market for a good or service have an increase in their taste for that product, then the demand for the product in this market will rise and shift to the right.

2. Decrease in Consumer Taste for a Product – If consumers in a market for a good or service have a decrease taste for a product, then the demand for the product in this market will rise and shift to the right.

Change in Number of Consumers in the Market1. Increase in Consumers in the Market – If more

consumers enter the market for a product, then the demand for the product in this market will rise and shift to the right.

2. Decrease in Consumers in the Market – If consumers leave the market for a product, then the demand for the product in this market will fall and shift to the left.

A shift of the demand curve to the left indicates a decrease. A shift of the demand curve to the right indicates an increase. (SSEMI2f)

Draw a demand graph that shows an increase in demand and a demand graph that shows a decrease in demand.

1.2. 1.What is another term for

equilibrium price?

3. 2.What is the market clearing price?

4. What is the equilibrium price in the graph to the right?

5. What would happen to the equilibrium price and quantity if (you may need to draw the graph to answer the questions):

a. There was an increase in supply

b. There was a decrease in supply

c. There was an increase in demand

d. There was a decrease in demand

6. What is a price floor? What is an example of a price floor?

7. Does a price floor result in a shortage or surplus?

8. Is a price floor above or below the equilibrium price?

Equilibrium Price Equilibrium price or market clearing price is found at

the intersection of the market demand and supply curves. It is the point at which the quantity demanded by

consumers is equal to the quantity supplied by producers. (SSEMI2c)

Equilibrium Price Graph

Price Floors and Price Ceilings A government may set a price floor or price ceiling on a

good or service. A price floor sets a minimum price for which a product can

be sold. Price floors often lead to a surplus of a good. A surplus is

when Quantity Supplied is greater than Quantity Demanded An example of a price floor is a minimum wage. A price ceiling sets a maximum price at which a good can

be sold. A price ceiling often leads to a shortage. A shortage is

when Quantity Demanded is more than Quantity Supplied An example of a price ceiling would be rent control.

(SSEMI2g)

Price Floors and Price Ceilings Graph

9. What is a shortage?

10. What is a surplus?

11. What is a price ceiling? What is an example of a price ceiling?

12. Does a price ceiling result in a shortage or surplus?

13. Is a price ceiling above or below the equilibrium price?

1.What do you think the advantages and disadvantages of EACH type of business organization?

Types of Business Organizations There are many different types of business

organizations, and each type has its advantages and disadvantages.

1. Sole proprietorship: A sole proprietorship has a single owner. (SSEMI3a)

2. Partnership: A partnership divides up the risk and reward among a group of people. (SSEMI3a)

3. Corporations: Corporations issue stock, and anyone who owns stock in the corporation owns a portion of that corporation. (SSEMI3a)

Give a real life example of each type of market structure:

Monopoly:

Oligopoly:

Monopolistic competition:

Pure(Perfect) competition:

Four Types of Market Structures1. Monopoly: a market structure in which a commodity is

supplied by one firm. (SSEMI3b) 2. Oligopoly: a market structure of imperfect competition in

which an industry is dominated by a small number of suppliers. (SSEMI3b)

3. Monopolistic competition: a market structure in which there are a large number of sellers who are supplying goods that are close, but not perfect, substitutes. Sellers have a degree of control over price. There are few long-term barriers of entry and exit. (SSEMI3b)

4. Pure (perfect) competition: a market structure in which there are a large number of sellers who are supplying goods but not a large enough number to set the price of the goods. There are no barriers of entry and exit. (SSEMI3b)