Microeconomics
Unit 2
Microeconomics:
 An
area of economics that deals with
behavior and decision making of
small units, such as individuals and
firms.
 Helps explain how prices are
determined and how economic
decisions are made.
Demand:
 Desire
 Ability
 Willingness
to buy a product
Demand
 The Law of Demand States
 The quantity demanded of a good or service
varies inversely with its price.
 What does that really mean?
 When the price goes up, quantity demanded goes
down and likewise.
Demand Curves
 Demand
Curves are always DOWNWARD
sloping.
 They are evidence of the INVERSE
relationship between price and quantity
demanded.
 Also note that movement along a demand
curve is a change in the quantity demanded.
 Remember, it’s not just PRICE and
QUANTITY that affect demand, but also
BUSINESS PLANNING.
Marginal Utility
 Marginal
utility is the
extra USEFULNESS
or SATISFACTION a
person gets from
acquiring or using
one more unit of a
good or service.
Marginal Utility
Diminishing
Marginal Utility
states that: decreasing
satisfaction or usefulness as
additional units of a product
are required.
Consider this scenario:

You buy a can of Red Bull for $1.50. You
discover that it works by keeping you awake all
day at school, so you think, “hey, why don’t I buy
2 more?” However, you don’t want to buy 20
Red Bull’s to drink in a day, right? So, that
means you definitely won’t be willing to pay the
same price for even the 5th Red Bull as you
would for the 1st.
 Therefore, you get less satisfaction from the 2nd
purchase and even less from the next, and so on
– so you simply are not willing to pay as much.
When you reach the point where the marginal
utility is less than the price, you stop buying.
Demand vs. Market Demand
Schedules
 DEMAND

A table or graph that shows how much of a
good or service an INDIVIDUAL is willing and
able to purchase at each price in a market.
 MARKET

Schedule/Curve
Demand Schedule/Curve
A table or graph that shows how much of a
good or service a group of people are willing
and able to purchase at each price in a
market.
What Factors Affect Demand?
 What
would happen to the demand for fast
food hamburgers if the following
happened?
 Minimum wage decreased to $6.00 an
hour
 Prices of burgers decreased
 New ads made burgers more appealing
 Mad cow epidemic hit WNY
Reasons for Change in Quantity
Demanded
 1.
Income Effect
 The quantity demanded changes because
of a change in price that alters consumers’
real income
 Lower price= you feel confident, so you
buy more
 Higher price= you feel unsure, so you buy
less
Reasons for Change in Quantity
Demanded
 2.
Substitution Effect:
 Change in quantity demanded when a
consumer finds a product that is similar
that is cheaper.
 The price of butter increases so you eat
margarine instead.
Reasons for Change in Demand
 1.
Consumer Income:
 When income increases, you can buy
more products at the same price.
(opposite with a decrease in income).
Reasons for Change in Demand
 2.
Consumer tastes:
 Changes in a products appeal make
consumers want more or less of a product
at fair market value.
 What might explain these changes?
 ads, news, fashion, introduction of new
products, changes in season
or
Reasons for Change in Demand
Substitutes:


Goods and services that can be used in place of other
goods and services to satisfy consumer wants are called
substitutes. Because the products are similar, if the price
of the substitute goes down, people will choose to buy it
instead of the original item.
So the demand for the product goes up if the price of its
substitute goes up, and the demand for a product goes
down if the price of its substitute goes down.
VS.
Reasons for Change in Demand
Complements:
 When
the use of one product increase the
use of another product, they are called
complements. An increase in the demand
of one will cause al increase in the
demand of the other- they work in tandem
(unlike substitutes).
Reasons for Change in Demand
Change in Expectations:

People purchase more or less at each and every
price today based on
 How people think about the future
 If you think the price of a good or service will
change, that expectation can determine whether
you buy it now or late until later.
Reasons for Change in Demand
Number of consumers:
 Changes
in the number of people
purchasing a product will affect the
demand for most products.
VS.

To Good To Be True?
1.
What happened to the price of
(Be Specific)?
1.
2.
3.
Tulips
Beanie Babies
Internet Stocks
Why were many people buying realestate in California in 2003?
3. What do you think has happened to
American home values since 2003?
2.
Demand of Food
What’s happening to the
Demand for food?
2. What is happening to the price of
food?
3. What is happening to wages?
4. Why will people pay these
prices?
1.
Elasticity
 Elasticity
of Demand: The extent to which
a change in price causes a change in
quantity demanded
 Elastic- when a change in price causes a
larger change in quantity demanded.
• WANTS
 Inelastic- when a change in price causes
a smaller change in quantity demanded.
• NEEDS
 The
Elasticity of Demand
Governor has proposed an “obesity tax”
that would be applied to non-diet soft drinks.
His reasoning for the tax is that an additional
$404 million in revenue would be raised to help
cut the state budget. He also believes that the
tax would help the fight against childhood
obesity. Do you agree with the governor?
 An important part of decision making for
business and government officials is to be able
to measure the effect a price change will have
on the quantity demanded.
Can
purchase
be
delayed?
Are
adequate
substitutes
available?
Does purchase
use a large
portion of
income?
Type of
elasticity?
FRESH
PRODUCE
YES
YES
NO
ELASTIC
TABLE
SALT
YES
YES
NO
ELASTIC
GAS IN
GENERAL
(YOU NEED A
CAR TO GET
TO WORK)
NO
NO
YES
INELASTIC
Determinants
of Elasticity
Can
purchase
be
delayed?
Are
adequate
substitutes
available?
Does purchase
use a large
portion of
income?
Type of
elasticity?
GAS FROM A
PARTICULAR
STATION
YES
YES
YES
ELASTIC
SERVICE
OF A
DOCTOR
NO
YES
YES
INELASTIC
INSULIN
NO
NO
YES
INELASTIC
Determinants
of Elasticity
Determinants
of Elasticity
Can
purchase
be
delayed?
Are
adequate
substitutes
available?
Does purchase
use a large
portion of
income?
Type of
elasticity?
BUTTER
YES
YES
NO
ELASTIC
CIGARETTES
YES
YES
NO
ELASTIC
RENT
NO
YES
YES
INELASTIC
Demand Elasticity
 What
determines the price elasticity of
demand?
Change in Price
Determination of Price
Elasticity of Demand
Change in Spending
Movement of Price
and Spending
Supply

Scenario:
It’s Friday, and you’re sitting on
the couch on a cold winter night. You’ve just
finished all of your homework and just started
watching the Sabers vs. Leafs game. Suddenly,
a neighbor from down the street calls and asks if
you could come over and watch his 4 kids for the
weekend. You’ve babysat before, and usually
charge $5 per hour. You politely decline the
offer and say that you already have plans.
However, your neighbor says that he’s
desperate and asks you what will make you
change your mind. He then offers $15 per hour
to watch his kids. Do you accept the offer?
Supply
 Supply
is: the amount
of a product that
would be offered for
sale at all possible
prices.
 Law of Supply: supply
will normally offer
more for sale at
higher prices and less
at lower prices.
Reasons for Change in Supply
 1.Costs
of Inputs: decrease in the cost of
labor packaging, supply curve shifts to the
right
 2. Productivity: increased motivation,
efficiency, increased supply curve shifts to
the left
 3. Technology: supply curve shifts to the
right, lower cost of production, or higher
productivity
Reasons for Change in Supply
 4.
Taxes and Subsidies: increase taxes=
supply shifts to the left, lower taxes =supply
shifts to the right, fees raise production costs
 5. Expectations: withhold some of the
supply
 6. Government Regulations: new
regulations causes producers to adjust prices
 7. Number of Sellers: change in the number
of suppliers causes market supply curve to
shift right or left (ex. Increase in the number
of firms= supply to shift to the left)
Supply Elasticity

Supply Elasticity

Just as demand has
elasticity, there is
elasticity of supply. If
a small increase in
price leads to a
relatively larger
increase in output,
supply is elastic. If
the quantity supplied
changes very little,
supply is inelastic.
There is very little
difference between
supply elasticity and
demand elasticity.
Characteristics of Price Systems
Page 175
CHARACTERISTCS
OF PRICE SYSTEM
ADVANTAGE
Neutral
Doesn’t Favor Producer or Consumer. Both
Make Choices to Determine Price
Flexible
When Market Conditions Change, Prices
Change. Surplus and Shortage Effect Price
No Cost
(Market
Driven)
No Central Planning Determines Price.
Supply and Demand Shape Market Price.
Familiar
(Efficient)
Price Adjusts Once Maximum # of Goods
are Sold
No Prices

Many Countries with Command economies do not
use markets to set price.

Rationing Programs
• Government limits an amount of a good because of scarcity or
supply


Fairness


People tend to feel their amount is to small
Cost


US during WWII & Gas Shortage in the 1970’s
Cost is incurred for running any system rationing or
command. Who pays?
Incentive

No matter how hard one works they will receive the same
amount.
Surplus and Shortage
 Surplus:
a situation in which the
quantity supplied is greater than
the quantity demanded at a
certain price
 Shortage: (opposite of a surplus)
situation in which the quantity
supplied is less than the quantity
demanded at a certain price
 EXPLAINING
AND PREDICTING
PRICES
 Economists use their market models to
explain how the world around us works
and to predict how certain events such as
changes in prices might occur. A change
in price is normally the result of a change
in supply, a change in demand, or
changes in both. Elasticity of demand is
also important when predicting prices.
Market Structures
 Market
Structure: nature and degree of
competition among firms operating in the
same industry
 1.
Perfect Competition- A large number of
well-informed independent buyers and
sellers who exchange identical products.
Necessary Conditions
 A) Number of buyers and sellers: Large number of
buyers and sellers. No single buyer or seller is large
enough or powerful enough to effect price.


B) Products: Identical Products means there is no
need for brand names or advertising. (Salt)
C) Each buyer and seller acts independently
 D) Buyers and sellers are reasonably Well-Informed
about product and prices.
 D) Buyers and sellers are free to enter into, conduct or
get out of business.
Imperfect Competition

The name given to a market structure that lacks one
or more of the conditions of perfect competition.
2. Monopolistic competition: the market structure that
has all the conditions of perfect competition except for
identical products. Examples: Computers, cereal,
restaurants, shoes, books, cds
a) Instead of perfect competition
product
differentiation: real or imagined differences between
competing products in the same industry.
b) Non price competition: the use of advertising,
giveaways, or other promotional campaigns to
convince buyers that the product is somehow better
than another brand.

C) Similar products sell within a narrow price range
 D) The competitive aspect is that if sellers: raise or
lower the price enough, customers will forget minor
differences and change brands.

3) Oligopoly: is a market structure in which a few
very large sellers dominate the industry.
 Examples: auto, steel

A) Interdependent Behavior: Collusion or a formal
agreement to set prices or to otherwise behave in a
cooperative manner.
 B) Price-fixing (illegal): agreeing to charge the
same or similar prices for a product.

4. Monopoly: a market structure with only one seller of
a particular product.
 One reason we have so few monopolies is that
Americans traditionally have disliked and tried to
outlaw them. New technologies often introduce
products that compete with existing monopolies.
Fax
US postal service
E-mail
a) Natural: a market situation where the costs of
production are minimized by having a single firm
produce the product
Example: Telephone, utilities
b) Geographic: a monopoly based on the absence of
other sellers in a certain geographic area. (One
drugstore in a VERY small town- no need for more).

Technological: A monopoly that is based on
ownership or control of a manufacturing method,
process or other scientific advancement.
 Examples: patents, copyrights,

Government: a monopoly the government owns and
operates
 Example: water, weapons, alcohol
 All
visuals taken from Google images