MICROECONOMICS

Microeconomics-the study of choices made by individuals, households and firms (companies)

Demand-Amount of a good or a service a consumer is willing and able to buy at various prices during a given time Quantity Demanded-Amount of a good or a service that a consumer is willing and able to buy at each particular price.

Law of Demand An increase in the price of a good causes a decrease in the quantity demanded Price and quantity demanded works inversely=↓↑

Law of Demand can be explained by… Income effect-change in quantity demanded because of an increase in a consumer’s purchasing power caused by a change in price…works conversely Substitution effect-change in quantity demanded because change in price that caused Consumer to substitute for similar lower-priced product works inversely Diminishing marginal (additional) utility-the more of a product consumed, the less satisfaction you receive from it…works inversely

Demand Curve-illustrates the relationship between price and quantity demanded.

Determinants of Demands Factors other price that causes a change in demand

Consumer Tastes and Preferences Changes in consumer tastes and preferences can have a major impact on demand for products Ex. The popularity of the Backstreet Boys has dwindled. Their music is bought less

Market Size Changes in the size of a market affect demand too Ex. Pres. Nixon opened trade with China

Income When people have a higher income they can buy more consumer goods which increases the demand for the good Ex. A person gets a $10,000 raise.

Prices of a Related Good The demand for a good is often related to the demand for related goods Substitute – Goods that can be used to replace the purchase of similar goods Complementary Good – Goods that are commonly used with other goods

Consumer Expectations