ECONOMICS chapter 4 & 5 Chapter 4- Understanding Demand Chapter 5- Understanding Supply

MICROECONOMICS Microeconomics: is a branch of economics that studies how the individual parts of the economy, the household and the firms, make decisions to allocate limited resources,[1] typically in markets where goods or services are being bought and sold.

FYI Microeconomics examines how these decisions and behaviors affect the supply and demand for goods and services, which determines prices, and how prices, in turn, determine the supply and demand of goods and services.[2][3]

How does Microeconomics Differ from Macroeconomics? Microeconomics examines the behavior of individual economic entities: firms and consumers. How do individuals make consumption decisions? How do firms make profits and price their goods and services? The focus of microeconomics is markets: wage markets, the market for gasoline, rent markets, etc.   

FYI Macroeconomics is the study of the economy as a whole. Macroeconomics asks questions like: Why does the U.S. economy generally experience higher rates of growth than European economies? What causes inflation? What effect does the national debt have on economic growth? etc.

Law of Demand What Does Law Of Demand Mean? A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer demand for the good or service will decrease and vice versa.   

FYI Investopedia explains Law Of Demand This law summarizes the effect price changes have on consumer behavior. For example, a consumer will purchase more pizzas if the price of pizza falls. The opposite is true if the price of pizza increases.

UTILITY In economics, utility is a measure of relative satisfaction. Given this measure, one may speak meaningfully of increasing or decreasing utility, and thereby explain economic behavior in terms of attempts to increase one's utility.

FYI Utility is often modeled to be affected by consumption of various goods and services, possession of wealth and spending of leisure time.

SUBSTITUTE GOODS Substitute goods can be used in place of each other, so that as the cost of one rises, everything else the same, people will buy more of the other. For example, Coke and Pepsi.

substitute good A substitute good, in contrast to a complementary good, is a good with a positive cross elasticity of demand. This means a good's demand is increased when the price of another good is increased. Conversely, the demand for a good is decreased when the price of another good is decreased.

FYI If goods A and B are substitutes, an increase in the price of A will result in a leftward movement along the demand curve of A and cause the demand curve for B to shift out. A decrease in the price of A will result in a rightward movement along the demand curve of A and cause the demand curve for B to shift in.

LAW OF SUPPLY A microeconomic law stating that, all other factors being equal, as the price of a good or service increases, the quantity of goods or services offered by suppliers increases and vice versa.

FYI Investopedia Says: As the price of a good increases, suppliers will attempt to maximize profits by increasing the quantity of the product sold.

ELASTICITY In economics, elasticity is the ratio of the percent change in one variable to the percent change in another variable. It is a tool for measuring the responsiveness of a function to changes in parameters in a unit-less way..

FYI Frequently used elasticity's include price elasticity of demand, price elasticity of supply, income elasticity of demand, elasticity of substitution between factors of production and elasticity of intertemporal substitution

LAW OF DIMINISHING MARGINAL UTILITY What Does Law Of Diminishing Marginal Utility Mean? A law of economics stating that as a person increases consumption of a product - while keeping consumption of other products constant -

LAW OF DIMINISHING MARGINAL UTILITY This is the premise on which buffet-style restaurants operate. They entice you with "all you can eat," all the while knowing each additional plate of food provides less utility than the one before.

FYI And despite their enticement, most people will eat only until the utility they derive from additional food is slightly lower than the original.

LAW OF DIMINISHING MARGINAL UTILITY For example, say you go to a buffet and the first plate of food you eat is very good. On a scale of ten you would give it a ten. Now your hunger has been somewhat tamed, but you get another full plate of food.

FYI Since you're not as hungry, your enjoyment rates at a seven at best. Most people would stop before their utility drops even more, but say you go back to eat a third full plate of food and your utility drops even more to a three.

FYI If you kept eating, you would eventually reach a point at which your eating makes you sick, providing dissatisfaction, or 'dis-utility'.

EQUILIBRIUM PRICE The market price at which the supply of an item equals the quantity demanded.

COMPLEMENTARY GOODS Material or good whose use is interrelated with the use of an associated or paired good such that a demand for one (tires, for example) generates demand for the other (gasoline, for example).

FYI If the price of one good falls and people buy more of it, they will usually buy more of the complementary good also whether or not its price also falls.

FYI Similarly, if the price of one good rises and reduces its demand, it may reduce the demand for the paired good as well. Also called complementary product.

complementary good    Goods that usually are consumed together; demand for one falls when the other's price rises; demand for one increases when the price of the other decreases.

FYI VCRs and videotapes are complementary goods; if VCRs become cheaper, people will buy more of them, and, consequently, demand for videotapes will increase.

SURPLUS Being more than or in excess of what is needed or required: surplus grain. See synonyms at superfluous. An amount or a quantity in excess of what is needed. Accounting. Total assets minus the sum of all liabilities.

SHORTAGES A deficiency in amount; an insufficiency. Economic shortage is a term describing a disparity between the amount demanded for a product or service and the amount supplied in a market. Specifically, a shortage occurs when there is excess demand!

SHORTAGES Economic shortages are related to price—when the price of an item is "too low," there will be a shortage. In most cases, a shortage will compel firms to increase the price of a product until it reaches market equilibrium..

fyi Sometimes, however, external forces cause more permanent shortages—in other words, there is something preventing prices from rising or otherwise keeping supply and demand unbalanced

SHORTAGE

SHIFT IN SUPPLY an increase/decrease in government purchases -a reduction/increase in taxes -an increase/decrease in investor confidence -

FYI foreigners develop/lose a taste for American goods or aMericans develop/lose their taste for foreign goods -increase/decrease in money supply

COST OF PRODUCTION production cost - combined costs of raw material and labor incurred in producing goods cost - the total spent for goods or services including money and time and labor.

FACTS The Demand Curve Introduces the demand curve and lists some factors that may cause a shift in demand. Price Elasticity of Demand An introduction to the price elasticity of demand. Defines price elasticity, its significance, and factors that influence it.

FYI The Supply Curve Introduces the supply curve with an example and a brief discussion of some factors that may cause a shift in supply.

FYI Supply and Demand Describes how the price level is determined by the crossing of the supply and demand curves, and how a shift in supply or demand will influence the equilibrium price and quantity.

FACTS Opportunity Cost Introduces the concept of opportunity cost and relative price. Provides simple examples.

FYI The Production Possibility Frontier Illustrates the effect of limited resources on the possibilities for production, and how the law of increasing cost influences the shape of the production possibilities curve.

FYI Comparative Advantage Introduces David Ricardo's principle of comparative advantage. By means of example, shows how specialization and trade result in more output.