Unit 2Microeconomics

Ch 4 – Demand

Ch 5 – Supply

Ch 6 – Prices and Decision Making

Ch 7 – Market Structures

• Microeconomics • The area of economics that deals w/ behavior + ______ ______ by _________, such as individuals + firms.

• Micro = ______

Ch 4 – Demand• Demand • The _____, _____, + ________ to buy a product.

• It is NOT just the ________ to have a product.• Ex. We all may desire a $100,000 sports

car, but there isn’t that much of a demand since we cannot all ____ it or are not willing to pay the price the dealer is selling at.

• Understanding demand is important to understand how the economy works + for good __________ ___________.

• Ex. Knowing where the demand is to ____ a business, knowing the competitors’ ______ (or if no competition, to know what people can + are willing to _____), + knowing who your ___________ would be (for things like ____________).

• Visualizing demand

• A demand schedule is a listing that shows the various ____________ demanded of a particular product at all ________ prevalent in the market.

Demand Schedule for Shoes at Payless

Price Quantity Demanded

$100 0

$90 5

$80 10

$70 20

$60 30

$50 35

$40 40

$30 60

• A demand curve is a ______ showing the ________ demanded at each + every ______ prevalent in the market.

Demand Curve for Shoes at Payless

0

10

20

30

40

50

60

70

80

90

100

5 10 15 20 30 30 35 40 45 50 55 60

Quantity

Pric

e

D1

• The Law of Demand

• States that the _________________ of a good or service _______________ w/ its _______.

• In other words, the ____ something costs, the ______ people demand.

• Marginal utility is the ____ usefulness or satisfaction a person gets from getting 1 _________ of a good or service.

• Ex. 2 Scoops of ice-cream.

• Diminishing marginal utility is when the extra satisfaction we get from using ____________________ of a product or service begin ____________.

• Ex. 6 Scoops of ice-cream

End Section 1

• Change in the quantity demanded

• A movement along the ___________ that shows a change in the quantity of the product purchased __________ to a change in price.

• Causes a ______________ along the demand curve.

• What causes a change in the quantity demanded?

- ________________

of the item being graphed.

Sellers start charging more or less for the product.

• Change in demand

• A demand curve shifts when consumers _________ more or less at ________ price.

• Causes a _________ in the demand curve.• What causes a change in demand?

- _____________________ You make more, you spend more + vice versa

- _____________________ Things go out of style or become popular

- ______________ Ex. Butter + margarine – if the price of one , demand

for its substitute + vice versa

- ______________ Ex. Peanut butter + jelly – If the price of one , demand for its complement

- _____________________________ Ex. Forecast predicts a blizzard – more people buy milk. Ex. AT&T announces a new phone to be released in 6 months, many people wait to buy new phone

- # of ________________ More or less people interested in an item

End Section 2

• Cause-and-effect + ___________

• Economics involves the study of _____________ relationships.

A business owner needs to know the effect a raise in prices would have on sales.

A corporation needs to know the benefits of diversifying vs. the benefits of further investing in current production.

An investor needs to know the effect various factors would have on his/her stock values.

A country’s people need to understand the effects of gov.’t policies on the economy which could effect their income, jobs, retirement, entitlement programs, etc…

A gov.’t needs to know the effect a tax increase would have on the economy (or on their chances of getting re-elected )

• Elasticity is a _________________________ that shows how a __________ variable responds to a change in an ____________ variable.

• It shows how much one thing changes due to a change in ____________________.

• Demand elasticity is the _____ to which a change in price causes a change in the __________ ___________.

• Elastic ________ • Demand is elastic when a change in price causes a relatively _____ change in quantity demanded.

• This is a ____________ to a price change.

• Ex. People demand 20 widgets @ $15, but they demand 50 widgets @ $10.

• Close to a ________ line on a graph.

• Inelastic demand • Demand is inelastic when a change in prices causes a relatively _______ change in quantity demanded.

• This is a ______________ to a price change.

• Ex. People demand 30 whats-its @ $10, but they only demand 32 whats-its @ $5.

• Includes things like basic ___________, salt, etc

• Close to a __________ on a graph.

• __________ demand

• Unit elastic demand is when a product is __________ b/w elastic + inelastic.

• Change in quantity demanded is ______________ to the change in price.

• People demand 15 whatchacallits @ $20, but they demand 30 whatchacallits @ $10.

• So if price drops 50%, quantity demanded increases _____%.

P

Q

D1

• ___________ of demand elasticity

• What makes demand elastic or inelastic?

1. _____________________________?

- The more urgent the need, the more ________ demand tends to be.

2. _____________________________?- The fewer substitutes available, the more __________ demand tends to be.

(- Also, depends on # of sellers for a ___________).

3. _______________________________ ______________________?

- If the answer to this question is no, demand tends to be ______.

- You can’t buy something if you don’t have the $. End Section 3

Ch 5 – Supply• Supply • The amount of a product that would be

______________ at all possible prices.• The law of supply says that suppliers

will normally offer ____ for sale at ____ prices + _____ at _______ prices.

• In other words, ______ will be offered at a _____________.

• Visualizing supply

• A supply schedule is a _______ of the various ____________ of a particular product supplied at all possible _____ in the market.

Supply Schedule for Shoes at Payless

Price Quantity Supplied

$100 60

$90 55

$80 50

$70 40

$60 30

$50 20

$40 10

$30 5

• A supply curve is a ____ showing the various quantities _______ at each + every ______ that might prevail in the market.

Supply Curve for Shoes at Payless

0

20

40

60

80

100

120

5 10 15 20 25 30 35 40 45 50 55 60 65

Quantity

Pric

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S1

• Change in the quantity supplied

• A movement along the ___________ that shows a change in the ______ of the product _________________ in response to a change in ________.

• Causes a _____________ along the supply curve.

• What causes a change in the quantity supplied?

- _______________ of

the item being graphed. Sellers start

charging more or less for the product.

• Change in supply

• A supply curve shift when _____________ more or less at _____________.

• Causes a ________ in the supply curve.• What causes a change in supply?

- _________________ If the cost of inputs , the amount supplied will + vice versa

NOTE: labor is an input

- ______________ An in productivity causes an in the amount supplied + vice

versa

- ______________ New technology causes an in the amount supplied

UNLESS there is an unexpected problem

- _______ + Subsidies (gov.’t payment to an individual, business, or other group to encourage or protect economic activity)

An in taxes causes a in the amount supplied + vice versa An in subsidies causes a in the amount supplied + vice versa

- Change in _______________ If sellers expect the price of their goods to in the future, the

amount supplied + vice versa

- ______________________ An in regulation causes a in the amount supplied + vice

versa

- # of _____________ An in the # of sellers causes an in the amount supplied +

vice versa

• Supply elasticity

• Is a measure of the way in which ______________ responds to a change in __________.

• The questions that determine demand elasticity (Substitutes? Delay? Large % of income?) ___________________!!!!

• What makes supply elastic or inelastic?

• _______________________________________________?

• If a firm CAN react fast then it is ____________.

• If a firm CAN NOT react fast then it is _____________.

• Types of supply elasticities

• Elastic supply – when a change in price causes a relatively _________ change in the ___________________.

• Ex. The price doubles + the quantity supplied triples.

• Inelastic supply – when a change in _______ causes a relatively ________ change in the quantity supplied.

• Ex. The price doubles + the quantity supplied only increases by 10%.

• Unit elastic supply – when a change in price causes a ________________ change in the quantity supplied.

• Ex. The price doubles + the quantity supplied doubles.

Supply

P

Q

S1

End Section 1

• The Theory of Production

• Deals w/ the ___________ b/w the __________ ____________ + the output of goods + services.

• Usually based on the short run, when the only thing producers can change in input is ________.

• During the long run producers can adjust the quantities of ___________________.

• Ex. In the short run, BMW fires 50 employees, but in the long run it closes down one of its factories.

• The Law of Variable Proportions says that in the short run, _____ will change as 1 ____ is varied while the others _______________.

• In other words, if you change only 1 input, the output will ________.

• Ex. Adding more salt to your meal changes the taste.

• Economists prefer to change only _____ at a time to better judge the __________ each input has on the output.

• The production function

• A concept that describes the relationship b/w changes in output to different amounts of a single input ______________________________________.

• Illustrates the Law of ___________ ________________.

• It can be illustrated w/ a schedule or w/ a graph.

• Measures marginal product (the extra _______ or change in total product by an addition of 1 more unit of ______). Current total product – Previous total

product = ____________________

Production Schedule for BMW

# of Worker

s

Total Product

Marginal

Product

0 0 0

1 7 7

2 20 13

3 38 18

4 62 24

5 90 28

6 110 20

7 129 19

8 138 9

9 144 6

10 142 -2

11 138 -4

12 129 -9

• The 3 stages of ______________ 1. _________________ – The marginal return grows at an increasing rate.

-Too many resources per worker so add a

worker(s) + production

2. ___________________ – The marginal return grows at a decreasing rate.

-Production at a ________

rate.3. ___________________ – The

marginal return decreases.

-Workers are getting in the way + production

Production Schedule for BMW

# of Worker

s

Total Produ

ct

Marginal

Product

Stage of Producti

on

0 0 0

Stage 1

1 7 7

2 20 13

3 38 18

4 62 24

5 90 28

6 110 20

Stage 27 129 19

8 138 9

9 144 6

10 142 -2

Stage 311 138 -4

12 129 -9End Section 2

• Measures of ______

• To run businesses __________, owners must analyze the _________________ of costs.

• Fixed cost – the cost of production that _____ _______ when output changes.

• These are costs the business ________ even if they ______________ anything.

• ______________ combined make up a business’s overhead.

• Ex. Executive salaries, rent, etc• Variable cost – the cost of production that

__________ when output changes.• These are the costs the business can

change to ___________________.• Ex. Labor, raw materials, electricity etc

• ___________ + _____________ = total cost.• Marginal cost is the ____ cost incurred when a

business produces 1 __________ of a product.• It is a type of __________ cost.

• Measures of ______

• Revenue - $ ___________.

• Total # of _______ x the ______________ per unit = total revenue

• All the $ a __________________.

• Ex: 7 units are sold at $15 each

Total Revenue = 105

• Marginal revenue is the ____________ earned w/ the production + sale of 1 ____________ of output.

• Ex: 5 workers produce 90 units and generate 1,350 total revenue. 6 workers produce 110 units (extra 20) and generate 1,650. Total revenue is increased by $300 by the additional 20. SO the marginal revenue is 15 dollars. (300 divided by 20).

End Section 3

Ch 6 – Prices and Decision Making• Price • The ______________ of a product determined

by _____________________.• It communicates info:

• _____ prices are signals for producers to produce _____ + for buyers to buy ____.

• _____ prices are signals for producers to produce _____ + for buyers to buy ____.

• __________ of prices in a competitive market:

1. _____ – favor neither sellers nor buyers.

2. _________ – can adjust to unpredictable factors.

3. __________ of administration.

4. _______ + easy to ____________.

• How can resources be __________ w/o ______?

1. Rationing – a system in which an agency (usually a ________) decides everyone’s “_____” share.

• Often used in ______________.• Problems: almost everyone

thinks their share is too ______, high ____________________, negative impact on people’s ________________ + produce.

2. _________________ – influential, powerful, member of the __________ in power (ex. Communist), etc…

3. __________

End Section 1

• Economic ________

• B/c transactions in a market economy are _______, buyers + sellers must _____________.

• An economic model is a set of __________ that can be listed in a _____ or illustrated w/ a _____ to help analyze __________ + predict ___________.

• We get an economic model by combining ______ + ______ info.

- Remember the Payless examples?

Economic Model for Shoes at Payless

Price

Quantity Demand

ed

Quantity Supplie

d

Surplus/

Shortage

$100 0 60 60

$90 5 55 50

$80 10 50 40

$70 20 40 20

$60 30 30 0

$50 35 20 -15

$40 40 10 -30

$30 60 5 -55

Economic Model for Shoes at Payless

0

20

40

60

80

100

120

0 5 10 15 20 25 30 35 40 45 50 55 60

Quantity

Pric

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D1

S1

• What can we determine w/ the economic model?

• The equilibrium price – the price at which _______________ = _________________.

• What is the equilibrium price of the shoes?

$______

Economic Model for Shoes at Payless

0

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40

60

80

100

120

0 5 10 15 20 25 30 35 40 45 50 55 60

Quantity

Pri

ce

Economic Model for Shoes at Payless

Price

Quantity Demand

ed

Quantity Supplie

d

Surplus/

Shortage

$100 0 60 60

$90 5 55 50

$80 10 50 40

$70 20 40 20

$60 30 30 0

$50 35 20 -15

$40 40 10 -30

$30 60 5 -55

S1

D1

• Market equilibrium

• A situation in which the _______________ is equal to the ______________________.

• ________ = _________

• Surplus • A situation in which the quantity supplied is ____________ the quantity demanded at a given ______.

• ________ > _________

• Shortage • A situation in which the quantity demanded is ____________ the quantity supplied at a given price.

• ________ < _________

• So why does this matter?

• Economists + businesses use economic models to determine _________________ if there is a change in _______ or _________.

End Section 2

• __________ market outcomes

• Sometimes we don’t want the market to adjust to the ________________ – so we establish price ceilings + floors.

• Price ceilings – the ______________ ______ that can be charged for a product or service.

• Established by the _____ if they feel prices are too _______.

• Problems – can lead to __________, little incentive for suppliers to be __________, suppliers may ___________ the product in favor of something more _________, etc…

• Ex: Rent control.

• Price floors – the _______________ ______ that can be paid for a good or service.

• Established by the _____ if they feel prices are too _____.

• Problems – can lead to _________, not as many people can ________ to purchase the goods/services, etc…

• Ex: Minimum wage (another potential problem w/ minimum wage is that fewer workers may be hired).

End Section 3

Ch 7 – Competition, Market Structures, and the Role of Gov.’t

• Classifying market structures

• The nature + _____________________ among firms operating in the ________________.

• What determines a market structure?• How many buyers + __________ are there?

• How ________ are they?

• Does either have any influence over ________?

• How much _______________ exists b/w firms?

• What kind of ________ is involved (are they exactly the same or just similar)?

• Is it easy or difficult for new firms to enter the market?

• Economists group industries into 4 different market structures:

• _____________________• _____________________• __________• ___________

• Perfect competition

• Characterized by a ____ # of well-informed independent buyers + sellers who exchange ____________ products.

• Necessary conditions:1. Large # of ________________________.

2. Buyers + sellers deal in identical products.

3. Each buyer + seller acts _______________.

4. Buyers + sellers are well-informed about products + prices (keeps prices _________).

5. Buyers + sellers are free to enter, conduct, or get out ________________.

• Few if any perfectly competitive markets ______ (Ex: farmers selling produce out of their trucks). Imperfect competition is a market that is _____ one of the necessary conditions of a perfect competition. _____ businesses in the US are imperfect competition markets.

• Monopolistic competition

• The market structure that has all the conditions of perfect competition except for the __________________.

• The products’ differences may be ___ or ________ or just in ____________.

• Ex: Athletic shoes• ____________ is VERY important to

inform potential buyers about why their product is ___________ to the competition.

• Oligopoly • A market structure in which a __ very ____________ dominate the industry.

• The product may be _____________ or __________.

• Ex: Coke + Pepsi, automotive industry, etc…

• Sometimes the businesses may take part in collusion – the formal agreement to ____________ or to otherwise behave in a ____________ manner.

• In these cases, supply + demand doesn’t determine the _______.

• _______.

• Monopoly • A market structure w/ only _______ of a particular product.

• Extremely _______.• It is a ___________.• Ex: Utilities – determined by the gov.’t

(Microsoft, DeBeers, etc…).• Mostly _______.

End Section 1

• ______ in a market economy

• A ____________ economy needs 4 conditions:

1. ___________ competition.

2. Buyers + sellers must be reasonably well-informed about _________ + ____________ in the market.

3. _________ must be free to _____ from 1 industry to another.

4. Prices must ______________ the costs of __________ (includes the ________ for the entrepreneur).

• A market failure can occur when any of these 4 conditions are ____________ __________.

• Inadequate __________

• Over time, _______ + acquisitions have led to larger + ____ businesses dominating various industries. This has led to a in ___________ which has several important consequences:

1. ________________________ – including $ (instead of investing in the company, executives may get big bonuses + benefits).

2. Higher _____ + reduced output – “____________________”

3. Economic + ______________

• Inadequate __________

• W/o knowing the _________ of goods or services, market prices can be ________ high or low. Also, workers may be over or under ___. $ may be invested ________. Stocks could be priced unnaturally high + the market could crash causing a __________ or the housing market may be overvalued causing it to go bust which starts a _________ (sound familiar?).

• __________ immobility

• If resources don’t ______ to where they’re ___________, markets don’t function __________.

• Ex: A factory closes in Greenville + many people are out of jobs.

• Those same employees refuse to __________ in a factory in South Dakota that _________________ workers.

• Ex: A gas shortage in the southeast causes gas stations to run out of gas while in other parts of the country, they’ve got plenty of gas.

End Section 2

• The role of the _______

• Laissez-faire – is belief that the ____ should ___________ w/ or regulate industries or the __________.

• Based on the idea that gov.’t ____________ only interfered w/ the ______________________.

• What are some ways in which the gov.’t intervenes in the economy?

• __________________ – to prevent monopolies + promote competition.

• ______________ – allows monopolies when beneficial (ex: some utilities)

• ________ – protective (ex: tariffs)• Public disclosure – requires

businesses to make ______________ available to the _____ (ex: food labels, financial data, credit card agreements, “truth-in-advertising”, etc…)

• ________ b/w labor disputes End Section 3