Microeconomics

Microeconomics Deals with behavior and decision making by small units, such as individuals and firms.

Demand Desire for isn’t enough. Must coincide the ability and willingness to pay for it. All 3 constitute demand.

Demand Schedule A listing that shows the various quantities demanded of a particular product at all prices that might prevail in the market at a given time.

Demand Curve A graph showing the quantity demanded at each and every price that might prevail in the market.

Law of Demand The quantity demanded of a good or service varies inversely with its price.

Market Demand Curve The demand curve that shows the quantities demanded by everyone who is interested in purchasing a product.

Demand and Marginal Unity Marginal unity: The extra usefulness or satisfaction a person gets from acquiring or using one more unit of a product. Diminishing marginal unity: The extra satisfaction we get from using additional quantities of the product begins to diminish.

Factors Affecting Demand Change in quantity demanded: A movement along the demand curve that shows a change in the quantity of the product purchased in response to a change in price.

Income Effect The change in quantity demanded because of a change in price that alters consumers’ real income.

Substitution Effect Change in quantity demanded because of the change in the relative price of the product.

Consumer Demand Changes in consumer income, whether positive or negative, can cause a change in demand. Changes in consumer tastes as well can cause a change in demand.

Substitutes Products that can be used in place of other products. Butter or margarine?

Complements The use of one good can increase the use of another. Computers and software

Elasticity of Demand A measure of responsiveness that tells us how a dependent variable such as quantity responds to a change in an independent variable such as price. Very general concept and can be applied to many things.

Demand Elasticity Consider whether a change in price will cause a relatively larger, smaller, or proportional change in quantity demanded.

Inelastic Demand A given change in price causes a relatively smaller change in the quantity demanded.

Unit Elastic A given change in price causes a proportional change in quantity demanded. “Somewhere in the middle.”

Theory of Production The relationship between factors of production and the output of goods and services. Generally is based on the short run. Allows production to change only the amount of the variable input called labor. Long run deals with a period where producers have time to adjust the quantities of all their resources.

Law of Variable Proportions In the short run, output will change as one input is varied while the others are held constant. Example: Salt added to a meal can make it taste better, but too much can ruin it.

The Production Function Describes the relationship between changes in output to different amounts of a single input while other inputs are held constant.

Law of Variable Proportions Total product Total product rises Total product slows Marginal product: The extra output or change in total product caused by the addition of one more unit of variable input. Example: 2 workers adding their production total together. One may complete 4 total products, while the other may complete 6 total products, which is a sum total of 10 products.

Three Stages of Production Increasing returns Diminishing returns Negative returns

Prices and Decision Making Price: Monetary value of a product as established by supply and demand. Price is a signal that helps us make our economic decisions. Link between producers and consumers.

Allocation of Prices Prices in a competitive market economy are neutral because they favor neither the producer nor the consumer. Result of competition between buyers and sellers which causes both sides to compromise.

Allocation of Prices Prices in a market economy are flexible. Unforeseen events can affect the prices. Natural disasters, wars, etc. Allows the market economy to accommodate change.

Allocation of Prices Prices have no cost administration Competitive markets tend to find their own prices without outside help or interference. Many times, the change of price is so gradual, no one really notices.

Allocation of Prices Prices are something that we have known about all our lives. Makes pricing familiar and easily understood.

Prices Without Allocation Without prices, another system must be used. Rationing: Government decides everyone’s “fair” share. Ration coupons, etc.

Prices Without Allocation Problems Fairness High Administrative Cost Printing and distributing coupons for rationing Diminishing Incentive Incentive to work and produce

Prices More Than Information System of informational networks that link all markets in an economy.