Chapter4 Micro economic factors ACCA F1 Chapter4 Micro economic factors

Factors of micro economy The micro-environment Market Utility and demand Cost, revenue and supply Price mechanism and equilibrium price Government’s price regulation

Micro-environment The immediate operational environment (actual and potential) Customers Suppliers Intermediaries Competitors stakeholders A two-way relationship The business organization can control and influence the micro-environment to some degree.

Organization’s input and output Input (supplier) Materials Money Men Machines Management Output (customers) Quality Price

Basic concepts- market Market: a situation in which potential buyers and potential sellers(suppliers) of a good or service com together for the purpose of exchange. Price mechanism can determine the activities of buyers and sellers in a free market.（看不见的手） Demand, supply and price.

Basic concepts- utility Utility: the pleasure or satisfaction or benefit derived by a person from the consumption of goods. Total utility and marginal utility Consumer rationality: maximize the total utility attainable with a limited income. (经济学的基本假设：资源有限，人的欲望无限)

Demand and demand curve Demand: the quantity of a good or service that potential purchasers would be willing and able to buy, or attempt to buy, at any possible price. Customers: maximize the utility For most goods, the demand falls as price increases, so a demand curve generally slopes down from left to right. Demand curve and market demand curve

Substitutes and complements Substitute goods: goods that are alternatives to each other, so that an increase in the demand for one is likely to cause a decrease in the demand for another. Complements: goods that tend to be bought and used together, so that an increase in the demand for one is likely to cause an increase in the demand for the other. They will influence the demand curve.

Elasticity of demand The price elasticity of demand: a measure of the extent of change in the market demand for a good in response to a change in its price.(arc elasticity and point elasticity) Income elasticity of demand: the responsiveness of demand to changes in household income. Normal good Inferior good

Elasticity of demand Cross elasticity of demand: responsiveness of quantity demanded for one good following a change in price of another good. Complements Substitutes Unrelated products

Influencing factors of demand curve Households income and direct taxes Price of substitutes and complements Tastes towards the good/ fashion Expectation of the price of the good Population

Supply and supply curve Supply: the quantity of a good that existing suppliers or would-be suppliers would want to produce for the market at a given price. Supplier: maximize the profit, that is, MC=MR. Individual firm’s supply and market supply Supply curve is an upward sloping curve from left to right.

Influencing factors of supply curve Costs of the good Prices of other goods Expectation of price changes Changes in technology Other factors like international environment

Equilibrium price The price at which the volume demanded by consumers and the volume that firms would be willing to supply is the same. There is neither surplus nor shortage in the market- the market clearing price The price mechanism brings demand and supply into equilibrium

Price mechanism Prices act as signals to producers, changes in prices should be responded by changes in production quantities. Maximizing profits provide the incentive for firms to respond to changes in price or cost by changing the production quantities. When a firm operate efficiently, responding to changing prices is rewarded with profit.

Price regulation by government Maximum price(price ceiling): below the equilibrium price, so there is an excess of demand over supply. Minimum price(price floor): above the equilibrium, so there is an excess of supply over demand.