Microeconomic Review

Scarcity and the Factors of Production Need: something like food, air, shelter that is necessary for survival Want: an item that we desire but that is not essential to survival Goods: physical objects such as clothes or shoes Services: actions or activities that one person performs for another

Scarcity vs. Shortage Scarcity: Implies limited quantities of resources to meet unlimited wants. Limits are always reached. Economics is about solving the problem of scarcity. Resources are scarce because they are limited relative to our wants Shortage: occurs when producers will not or cannot offer goods or services at the current prices. Can be temporary or long term.

Factors of Production Land: Labor: Capital Anything found naturally in the earth Examples? Labor: Capital Physical Capital: Human Capital:

Circular Flow

Examples of opportunity costs?

Three Basic Economic Questions What goods and services should be produced? How should these goods and services he produced? Who consumes these goods and services?

Production Possibility Frontier/Curve

Market Systems

Market Economy Definition: Details: Decisions are made by individuals and are based on exchange, or trade. Also called: FREE MARKET/Capitalism Details: Choices made by individuals determine what gets made and how (and who consumers the goods and services produced)

Mixed Economy Definition: Details: Market-based economic systems in which the government plays a limited role Details: Exist because no one is self-sufficient Markets allow us to exchange the things we have for the things we want Establishes goods and services that markets cannot so efficiently or fairly Balance between control and freedom

Command Economy Centrally Planned Economy: Details: The central government alone decides how to answer all three key economic questions. Also Called: COMMAND ECONOMIES Details: Central authority is in command of the economy

ECONOMIC GOALS Major U.S. Goals: Economic Growth Secondary Goals: Full Employment Economic Efficiency Price Stability Economic Freedom Equitable Distribution of Income Economic Security Balance of Trade

What is American Free Enterprise? Profit Motive—force to improve material well-being Competition—rivalry to attract customers & lower costs Private Property Rights—you own your possessions Voluntary Exchange—you may decide what & when to buy & sell Open Opportunity—everyone can compete Free Contract—you decide what agreements to enter into Legal Equality—everyone has the same legal rights Public Disclosure Laws—companies provide full information

Law of Demand At a given point in time, a rise in price causes a fall in the quantity demanded; a decline in price causes an increase in the quantity demanded. An INVERSE relationship. Ex. Pizza!

Law of Supply At a given point in time, The lower the price, the smaller the quantity supplied; The higher the price the larger the quantity supplied. This is a DIRECT relationship.

Law of Supply Price As price increases… Supply Quantity supplied increases The law of supply predicts that producers will offer more of a good as its price goes up. Individual firms will raise their level of production New firms will enter the market If the price goes down, the opposite would be true We will discuss costs to enter/exit later Price As price falls… Supply Quantity supplied falls

Supply and Demand Both supply and demand influence the price of a good and the quantity produced We’ll generally be looking for the equilibrium (or the market clearing price)

Shifts in the Demand Curve Shifts to the Right: If consumers decide they are willing to pay higher prices for a product a want to purchase more of it (Increased worth of the product)

Shifts in the Demand Curve Shifts to the Left: The less consumers are willing to pay for a product (decrease worth of the product)

Shifts in Demand Curve Shift to the Right: Shifts to the Left: Increase in Demand, More Desirable Shifts to the Left: Decrease in Demand, Less Desirable

Shifts Occur: What Determines Demand? The determinants of demand include: Tastes and preferences. Income. Price and availability of substitutes and complements. Consumer Expectations Population.

Changes in Cost affect Supply Any change in the cost of an input such as the raw materials, machinery, or labor used to produce a good, will affect supply.

Changes in Cost affect Supply As input costs increase, the firm’s marginal costs also increase, decreasing profitability and supply.

Changes in Cost affect Supply Input costs can also decrease. New technology can greatly decrease costs and increase supply.

Supply and Demand Review What were factors that shifted demand? Population Tastes and Preferences Income Price and availability of substitutes and compliments Fads Consumer Expectations What were factors that shifted supply? Government Number of suppliers Cost of inputs Natural disasters Technology Outsourcing Producer Expectations

Elastic or Inelastic Elastic Describes demand is very sensitive to a change in price You will by less of a good after a small price increase Inelastic Describes demand that is not very sensitive to change in price. You will continue to buy the good no matter the price.

Factors that determine the value of price elasticity of demand # of close Substitutes Necessity v. Luxury % of Income Spent on Good Habit-Forming Goods Time Period under consideration Demand sometimes becomes more elastic over time because people are able to find close substitutes.

Types of Demand Elasticity Price ($) 2 4 6 8 10 12 Quantity Relatively elastic Perfectly inelastic Perfectly elastic Relatively inelastic 14