ECON 1312
Introduction to Microeconomic
FALL Semester, Academic Year 2012/2013
(11:00 – 11:50)
Faisal Al Ulaiyan
200800221
Economics: “social science, study how societies use scarce resources to produce valuable goods
and services and distribute them among different individuals”.
Scarcity: is that economic resources in fact are limited in the short run. On the other side the
human wants are unlimited.
Microeconomics: focuses on the individual parts of the economy.
Macroeconomics: looks at the economy as a whole.
Post hoc fallacy occurs when we assume that, because one event occurred before another event,
the first event caused the second.
Failure to hold other things constant To isolate the effect of interest, economists use the
logical device called ceteris paribus or “other things being equal”.
Fallacy of composition occurs when you are assuming what is true for the part is also true for
the whole.
Positive Economics: It describes the facts of economy as it is.
Normative Economics: It involves value judgements.
Market is a mechanism through which buyers and sellers interact to determine prices and
exchange goods, services and assets.
Price is the value of a good, services or assets in terms of money.
Market Equilibrium represents a balance among all different buyers and sellers.
The invisible hand by Adam smith states that in a perfect competitive market economy, markets
will reach equilibrium by the interaction between demand and supply with no government
intervention. But if market failure present then the invisible hand may be destroyed.
The circular-flow model is a simple way to visually show the economic transactions that occur
between households and firms in the economy.
Market failure occurs when the market fails to allocate resources efficiently and reach
equilibrium.
Market failure may be caused by an Externality, which is the impact of one person or firm’s
actions on the well-being of people.
Market failure may also be caused by Market power, which is the ability of a single person or
firm to unduly influence market prices
Quantity demanded (Qd) is the amount of a good that buyers are willing and able to purchase
at given price in a period of time.
The demand schedule is a table that shows the relationship between the price of the good and
the quantity demanded (Qd) of that good.
The demand curve is the downward-sloping curve relating price to quantity demanded.
The law of demand states that there is an inverse relationship between price and quantity
demanded.
Normal good like new clothes, new cars, and all types of luxuries. When income increase,
consumption increase too
Inferior good like used clothes, used cars, homos and falafel, etc. When income increases,
consumption decreases.
Substitutes: are goods that substitute each other in consumption, like “tea and coffee”, “petrol
and electricity”
Complementary: products that should be consumed together, like “camera & film”, “petrol &
vehicles”
Independent: consuming one good has no effect on the demand for the other good.
Quantity supplied is the amount of a good that sellers are willing and able to sell at given
market price during a period of time.
Supply schedule is a table that shows the relationship between the price of the good and the
quantity supplied.
Supply curve is the upward-sloping line relating price to quantity supplied.
Law of supply states that there is a direct (positive) relationship between price and quantity
supplied.
Equilibrium Price The price that balances supply and demand. On a graph, it is the price at
which the supply and demand curves intersect.
Equilibrium Quantity The quantity that balances supply and demand. On a graph it is the
quantity at which the supply and demand curves intersect.
Excess Supply Price is above equilibrium price. Producers are unable to sell all they want at the
going price.
Excess Demand Price is below equilibrium price. Consumers are unable to buy all they want at
the going price.
The price elasticity of demand is a units-free measure of the responsiveness of the quantity
demanded of a good to a change in its price when all other influences on buyers’ plans remain
the same.
If the quantity demanded doesn’t change when the price changes, the price elasticity of demand
is zero and the good as a perfectly inelastic demand.
If the price doesn’t change when the quantity demanded changes, the price elasticity of demand
is infinity and the good as a perfectly elastic demand.
The total revenue from the sale of good or service equals the price of the good multiplied by the
quantity sold.
The total revenue test is a method of estimating the price elasticity of demand by observing the
change in total revenue that results from a price change
The elasticity of supply measures the responsiveness of the quantity supplied to a change in the
price of a good when all other influences on selling plans remain the same.
If the quantity supplied doesn’t change when the price changes, the price elasticity of supply is
zero and the good as a perfectly inelastic supply.
If the price doesn’t change when the quantity supplied changes, the price elasticity of supply is
infinity and the good as a perfectly elastic supply.
The price elasticity of supply is less than 1 and the good has inelastic supply.
The price elasticity of supply is greater than 1 and the good has elastic supply.