2 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.
3 microeconomic decision? A whether to increase or decrease the Which of the following is an example of amicroeconomic decision?A whether to increase or decrease themoney supplyB whether to increase or decreasetaxesC how to reduce the unemploymentrateD how many hours an employeeshould work each week
4 What is the unit of study in microeconomics? A. imports and exportsB. inflation and recessionC. individual businesses andhouseholdsD. national consumption andexpenditures
5 Circular Flow Model: a model that illustrates the flow of economic activity(buying & selling) between households and firms.
6 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.
7 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.
9 When households sell resources they receive income in return. Land– rental incomeLabor– wages or salary incomeCapital– interest incomeEntrepreneur– profit income
10 The flow of goods and services to consumers is illustrated by A 4 to 2 Study the information below and use it to answer the question that follows.The flow of goods and services toconsumers is illustrated byA 4 to 2B 8 to 6C 2 to 5D 6 to 1
11 A. rent, profit, wages, and interest B. profits, wages, interest, and The payments for land, labor, capital, and entrepreneurial ability respectively areA. rent, profit, wages, and interestB. profits, wages, interest, andrentC. rent, wages, interest, and profitD. wages, rent, profit, andinterest
12 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.
16 There are 3 main functions of money. Medium of exchange: something accepted by all parties as payment for goods and services. This is the most basic function, it must be accepted.Measure of Value: a common denominator that can be used to express worth in terms that most people can understand.Store of Value: allows purchasing power to be saved until needed in the future.
17 D prized in foreign transactions 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 isA very portableB highly divisibleC accepted as paymentD prized in foreign transactions
18 Commodity Money: money that has an alternative use as an economic good, or commodity.
19 Fiat Money: Money by government decree Fiat Money: Money by government decree. The money we carry is fiat money.
20 Specie: money in the form of coins made from silver or gold.
21 Characteristics of Money 1.Portable2.Durable3.Divisible4.Limited in Supply
22 Demand: is the desire and ability of consumers to buy a good or service. Desire without ability does not constitute demand.
23 Porshe– I have the desire but not the ability to buy one. McDonalds Happy Meal– I have the ability but not the desire.
24 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.
25 Price per slice (in dollars) The Demand CurveA demand curve is a graphical representation of a demand schedule.When reading a demand curve, assume all outside factors, such as income, are held constant.Market Demand Curve3.002.502.001.501.00.5050100150200250300350Slices of pizza per dayPrice per slice (in dollars)Demand
28 When economists refer to “demand,” they mean which of the following? A how much satisfaction buyersreceive from a purchaseB how much consumers will purchaseat different pricesC how much sellers will supply at aparticular priceD how much people want the productif it is free
29 Demand Curve:is the graphicalpicture of thedemand schedule.It contains thesame information,but in a differentformat.
30 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.
31 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.
36 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:
37 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.
38 Tastes & Preferences: this reflects our likes and dislikes Tastes & Preferences: this reflects our likes and dislikes. Advertising, news reports, fashion trends, seasonal changes, and other things can affect our tastes.
39 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.
40 4. Complements: are products that are used together 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.
41 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.
42 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 changesImmigration trendsMedical advancementsTrade Agreements like NAFTA
43 firm to increase the demand for its product? Which of the following is an attempt by afirm to increase the demand for itsproduct?A the imposition of a price ceiling on theproductB an advertising strategy designed to changeconsumer tastes and preferencesC a marketing strategy to make the good scarceand therefore more expensiveD a production strategy to flood the marketwith the good or service
44 Which of the following is an attempt by a firm to increase the demand for itsproduct?B. an advertising strategy designed to changeconsumer tastes and preferences
45 When there is __________________ the entire demand curve shifts, to theright to show an increase in demand orto the left to show a decrease indemand.A. change in quantity demandedB. change in demandC. change is quantity suppliedD. change in supply
46 When there is __________________ the entire demand curve shifts, to theright to show an increase in demand or to the left to show a decrease indemand.B. change in demand
47 Demand Elasticity: the extent to which a change in price causes a change in the quantity demanded. Elasticity = ResponsivenessIn essence, we want to know how much the quantity changes in response to a change in price.There are 3 ranges of elasticity
48 1. Elastic Demand: when a given change in price causes a relatively larger change in the quantity demanded. See figure 4.5, pg. 103.
54 1. Can the purchase be delayed? yes-- elasticno-- inelasticFresh vegetables orInsulin
55 2. Are adequate substitutes available? yes– elasticno-- inelasticGasoline orButter
56 3. Does the purchase use a large portion of income? yes– elasticno-- inelasticNew car orPlastic bags
57 What does it mean when the demand for a product is inelastic? A. a price increase does have a significantimpact on buying habitsB. people will not buy any of the productwhen price goes upC. there are very few satisfactory substitutesfor the productD. customers are very sensitive to the price ofthe product
58 The other side of demand is supply 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.
59 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.
60 Supply Curve: the graphical representation of the supply schedule Supply Curve: the graphical representation of the supply schedule. It contains the same information as the schedule but in a different format.
61 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.
62 The resulting supply curve is upward sloping The resulting supply curve is upward sloping. The reason is that we assume costs increase as output increases.Ex. Low hanging fruit
63 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.
64 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.
65 Let’s look at figure 5.3, pg. 117.Increase in supply– rightward shiftDecrease in supply– leftward shift
67 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:
68 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.
69 2. Productivity: When workers are more efficient they can produce more 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.
70 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?
71 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.
72 5. Subsidies: are the opposite of a tax 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.
73 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.
74 The factor that would cause the supply curve to shift to the left isA. higher taxesB. a decrease in the cost ofinputsC. an increase in governmentsubsidiesD. all of the above
75 The factor that would cause the supply curve to shift to the left isA. higher taxes
76 The factor that would cause the supply curve to shift to the right is A. higher taxesB. an increase in the cost ofinputsC. a decrease in governmentsubsidiesD. none of the above
77 The factor that would cause the supply curve to shift to the right is D. none of the above
78 Supply Elasticity is the same concept as demand elasticity Supply Elasticity is the same concept as demand elasticity. See figure 5.4, pg. 119.Elastic Supply: when a given change in price causes a relatively larger change in quantity supplied.Inelastic Supply: when a given change in price causes a relatively smaller change in quantity supplied.Unit Elastic Supply: when a given change in price causes a proportional change in quantity supplied.
83 Price: is the monetary value of a product or service and is established by supply and demand.
84 Prices act as signals that help us make our economic decisions Prices act as signals that help us make our economic decisions. Prices communicate information and provide incentives to buyers and sellers.
85 For example:High Price– firms want to produce moreconsumer want to buy lessLow Price– firms want to produce lessconsumers want to buy more
86 A prices indicate to sellers the types of Prices act as signals in the market becauseA prices indicate to sellers the types ofgoods and services to offer for saleB prices can determine dividends forbusinessesC high prices for goods and servicessignal a healthy economyD entrepreneurs become motivated asprices rise
87 A. prices indicate to sellers the types of Prices act as signals in the market becauseA. prices indicate to sellers the types ofgoods and services to offer for sale
88 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.
89 3 problems of rationing include: FairnessAdministrative costsDiminished incentives
90 Rebate: a partial refund of the original price of the product.
91 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.
92 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.
94 Price Quantity Supplied Quantity Demanded $$$$$$The demand schedule above shows quantity supplied and quantity demanded datafor a given product. In a market economy what price will this product most likelysell for?A. $1.50B. $2.50C. $3.00D. $4.00Using the above schedule what is the quantity demanded at $1.50?A. 800B. 600C. 400D. 200
95 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 )
96 A. the quantity supplied is greater than the quantity demanded. At a given price, a surplus occurs whenA. the quantity supplied is greater thanthe quantity demanded.B. the quantity demanded is more thanthe quantity supplied.C. the quantity demanded is the same asD. Thompson says it occurs.
97 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 )
98 Equilibrium Price: the price that clears the market by leaving neither a surplus nor a shortage. ( Qs = Qd )
99 D. will always be found for every product produced Equilibrium price will dowhat?A. clear the marketB. result in a surplusC. result in a shortageD. will always be found forevery product produced
100 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.
101 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:
102 Price Ceiling: the maximum legal price that can be charged for a product. See figure 6.5, pg. 151. Ex. Rent control on apartments
103 Price Floor: the lowest legal price that can be charged for a product Price Floor: the lowest legal price that can be charged for a product. See figure 6.5, pg. 151.Ex. MinimumwageFarmproducts
104 A. price floor B. comparable worth C. price ceiling D. marginal price The minimum wage is a type ofA. price floorB. comparable worthC. price ceilingD. marginal price
105 What happens when wages are set above the equilibrium level by law? A. firms employ more workers than they would atthe equilibrium wageB. firms employ fewer workers than they would atC. firms tend to try to break the law and hirepeople at the equilibrium levelD. firms hire more workers but for fewer hoursthan they would at the equilibrium wage
106 What does the horizontal dashed line on the chart above best represent? A) supplyB) demandC) price floorD) price ceiling
107 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
109 1. Sole Proprietorship: A business owned and operated by 1 person 1. Sole Proprietorship: A business owned and operated by 1 person. It is the most common form of business numerically.
110 2. Partnership: a business jointly owned by 2 or more people 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.
111 3. Corporation: is recognized by law as a separate legal entity having all the rights of an individual.
112 Important aspects of corporations include: Charter: a government document giving permission to create a corporation.Corporation’s nameIts purposeNumber of shares to be issuedNames of parties who started it
114 Stock: ownership certificates in a 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.
116 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.
117 Mr. Simpson is liable for all the debts of his company. Mr Mr. Simpson is liable for all the debts of his company. Mr. Simpson has which type of business organization?A) conglomerateB) sole proprietorshipC) corporationD) monopoly
118 Greg has financed Betty’s future sewing business Greg has financed Betty’s future sewing business. Which of the following best describes this type of business they have established?A) proprietorshipB) general partnershipC) limited partnershipD) corporation
119 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 – profitsTotal revenue < Total cost– lossesTotal revenue = Total costs-- breakeven
120 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.
121 We will examine 4 types of market structures by looking at their characteristics. Figure 7.2, pg 169.
123 Perfect CompetitionLarge numbers of buyers and sellers, 100’s to 1000’s.Have no control over price.Buyers and sellers deal in an identical product.Buyers and sellers are free to enter or leave the market when they choose.Do not need to advertise.The best examples include certain types of farming.
125 Large number of buyers and sellers, 20 to 70. 2. Monopolistic CompetitionLarge number of buyers and sellers, 20 to 70.Have a little bit of control over price.Buyers and sellers deal in a differentiatedproduct.Buyers and sellers are free to enter orleave the market.There is a lot of advertising by firms.Examples include gas stations and drycleaners.
126 Product Differentiation: the real or imagined differences between competing products in the same industry. Examples include:Store locationStore designManner of paymentDelivery optionsPackagingServiceStore merchandising
127 Non-price competition: the use of advertising, promotions or giveaways to convince buyers that their product is better than another brand.
128 3. OligopolyFew 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.
129 Interdependent behavior: whenever one firm acts, it must consider how the other firms will respond. Ex. Raise price– ignoreLower price– lowerCollusion: 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.
130 4. MonopolyA 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.
131 Types of monopoliesNatural 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.
132 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.
133 A. a very few companies selling identical products What is monopolistic competition?A. a very few companies sellingidentical productsB. many companies selling similarbut not identical productsC. one company selling the identicalproduct under different namesD. one company selling severaldifferent products under differentnames
134 B. many companies selling similar but not identical products What is monopolistic competition?B. many companies selling similarbut not identical products
135 In which market structure are businesses most interdependent? A. oligopolyB. monopolyC. pure competitionD. monopolistic competition
136 In which market structure are businesses most interdependent? A. oligopoly
137 (electric company) are examples of A. natural monopolies B. cartels Public utility companies,(electric company) are examples ofA. natural monopoliesB. cartelsC.technological monopoliesD. subsidized monopolies
138 Public utility companies, (electric company) are examples ofA. natural monopolies
139 A. a monopoly B. pure competition C. monopolistic competition A new firm will find it impossible to enter a market dominated byA. a monopolyB. pure competitionC. monopolisticcompetitionD. an oligopoly
140 A new firm will find it impossible to enter a market dominated by A. a monopoly
141 Sometimes markets fail because of inadequate competition, inadequate information, resource immobility, externalities and public goods.We will focus on 2 types of market failures.
142 Externalities: a cost or benefit that accrues to a 3rd party not involved in the transaction. Look at the photo on pg. 175.
145 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.
146 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.
147 Private goodsIce-cream conesClothingcarsPublic goodsTornado sirensNational defenseFlood control programsThe left column is rival and excludable, and the right column is non-rival and non-excludable.
149 In the U.S., how are public goods paid for? A. Private firms collect fees from theiremployees.B. Non-profit organizations collectcharitable donations from people.C. The government collects tax revenuesfrom individuals and firms.D. Corporations make profits fromselling goods and services.
150 In the U.S., how are public goods paid for? C. The government collects tax revenuesfrom individuals and firms.