Chapter 2 Microeconomic Principles 2.1 The Difference between Macroeconomics and Microeconomics 2.2 Supply and Demand 2.3 Price Elasticity

The Difference Between Macroeconomics and Microeconomics Macroeconomics is the study of economy-wide factors such as inflation, unemployment and economic growth. Microeconomics deals with specific economic agents, such as particular firms and particular consumers, and investigates how they behave in specific industries.

Demand The quantity of a good demanded will change due to: Amount of a good a consumer or market is willing to buy at a specific price. The quantity of a good demanded will change due to: A change in price. A change in conditions

Demand Schedule The demand schedule shows how much an individual is willing and able to purchase as price changes. Notice that as price rises demand falls. This is the law of demand Price of mangoes ($) 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60 1.80 Quantity of mangoes Demanded 9 8 7 6 5 4 3 2 1

Demand Curve The demand curve is a graphical representation of the demand schedule. Price is always on the vertical axis and Quantity is always on the horizontal axis.

Demand Curve Shows the relationship between the quantity of a good demanded and the price of that good. Typically downward sloping. As price rises the quantity demanded decreases. As price falls the quantity demanded increases.

Determinants of Demand Price of substitute goods Income Advertising Tastes

The Supply Curve Supply is the number of units of a particular good or service a producer or the market will choose to supply at a given price. The quantity supplied will change for two reasons: A change in price. A change in conditions.

The Supply Curve The supply curve is upward-sloping. As price rises, the quantity supplied also rises as it is more profitable to supply more units As price falls, the quantity supplied decreases, as it is less profitable to produce. This is the law of supply.

The Supply Curve

Factors that Determine Supply Input Prices Technology Expectations

Shifts vs. Movements Along the Curve A change in conditions such as income, tastes, or advertising will shift the curve to the left or right. A change in price will result in a movement along the demand curve.

Shifts vs. Movements along the Supply Curve Any change in conditions such as input prices, technology or expectations of sales will cause the supply curve to shift to the right or left. A change in price will cause a movement along the curve.

Supply and Demand Together When consumers and producers come together in a market, supply and demand interact to create an equilibrium price and quantity sold. The market equilibrium is where the demand curve and the supply curve intersect. Equilibrium price is often referred to as the market clearing price, as everything that producers are willing to supply is sold and everything that consumers are willing to buy is bought.

Demand and Supply Together

Equilibrium is Efficient Equilibrium is what economists refer to as an efficient outcome. An efficient outcome it is the best possible total outcome that can be achieved for society or the market as a whole. In an efficient outcome no-one can be made better off without making someone else worse off.

Price Elasticity Measures how much the quantity of a good demanded changes in response to a change in price. Demand for a good is price elastic if the quantity demanded responds significantly to a change in price. Demand for a good is inelastic if the quantity demanded does not respond significantly to a change in price.

Determinants of Price Elasticity of Demand Availability of substitute goods. Necessity vs. Luxury. Necessities will be more price inelastic than luxury items. Luxury items tend to be highly price elastic. Duration. Over time goods will become more price elastic as consumers find ways to substitute away from more expensive options.

Calculation of Price Elasticity Percentage change in quantity demanded Price Elasticity of Demand = __________________________________ Percentage change in Price

How Elasticity Affects the Demand Curve The more inelastic demand is for a good the steeper the demand curve will be. The more elastic the demand for a good the flatter the demand curve will be.

Price Elasticity of Supply Price elasticity of supply measures the extent to which a change in price causes a change in the quantity supplied. Depends on how easy it is for firms or producers to change their level of production after there is change in price.

Determinants of the Price Elasticity of Supply Supply is more price elastic over the long-term as over long periods of time it becomes easier to change levels of production. Rare items such as precious stones, famous artworks or premium land may be more supply inelastic to price as it is difficult to produce more of these goods. Complex goods or goods that take time to produce such as cars or crops will be more supply inelastic as it is difficult to change production volume in a short period of time. Goods that are easy to produce such as books, will be more supply elastic as extra units can be produced quickly and easily to adjust to changes in price.

Calculating the Price Elasticity of Supply Price Elasticity of Supply = Percentage change in quantity supplied Percentage change in price

Price Elasticity and the Slope of the Supply Curve The lower the elasticity (the more price inelastic supply is), the steeper the slope of the supply curve. The higher the elasticity (the more price elastic supply is), the flatter the supply curve.