1. Microeconomic Review

2. 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

3. 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.

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

5. Circular Flow

6. Examples of opportunity costs?

7. 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?

8. Production Possibility Frontier/Curve

9. Market Systems

10. 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)

11. 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

12. 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

15. 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!

16. 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.

17. 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

18. 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)

19. 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)

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

21. 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

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

23. 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.

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

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

26. Supply and Demand Review
What were factors that shifted demand?
Expectations
Population
Media reports
Fads
What were factors that shifted supply?
Government
Number of suppliers
Cost of inputs
Natural disasters

27. 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.
(Your DEMAND for a good that you will keep buying no matter the price)

28. 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.

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

32. Perfect Competition
The simplest market structure is known as perfect competition.
A perfectly competitive market is one with a large number of firms all producing essentially the same product
Each firm produces so little of the product compared to total supply, no single producer can influence price

33. Conditions for Perfect Competition
There are surprisingly only a few good examples of perfect competition because of the conditions needed for a perfectly competitive market.
1. Many Buyers and Sellers - There are many participants on both the buying and selling sides.
2. Identical Products - There are no differences between the products sold by different suppliers.
3. Informed Buyers and Sellers - The market provides the buyer with full information about the product and its price.
4. Free Market Entry and Exit - Firms can enter the market when they can make money and leave it when they can't.

34. Examples of Perfect Competition
It is difficult to meet all 4 criteria for perfect competition.
Examples tend to be commodities – a product that is the same no matter who produces it
Notebook paper
Milk
Corn
Soy-beans

35. Examples of Barriers Start-up Costs Technology
The expenses that a new business must pay before the first product reaches the customer are called start-up costs.
Have to buy land, labor, capital
Technology
Some markets require a high degree of technological know-how. As a result, new entrepreneurs cannot easily enter these markets.
Human and physical capital

36. Monopoly Defined A monopoly is a market dominated by a single seller.
Monopolies form when barriers prevent firms from entering a market that has a single supplier.
Monopolies can take advantage of their monopoly power and charge high prices.

37. Causes of a Monopoly 1. Economies of Scale 2. Natural Monopolies
If a firm's start-up costs are high, and its average costs fall for each additional unit it produces, then it enjoys what economists call economies of scale. An industry that enjoys economies of scale can easily become a natural monopoly.
2. Natural Monopolies
A natural monopoly is a market that runs most efficiently when one large firm provides all of the output.
3. Technology and Change
Sometimes the development of a new technology can destroy a natural monopoly.

38. Natural Monopolies
When a market runs most efficiently with only one large firm providing the output, it is known as a natural monopoly
Public water is the best example
If different companies had to set up separate reservoirs, separate pipes, and separate cleaning/distribution systems
Often in the case of a natural monopoly the government provides the service (which comes with some inefficiency)
DMV
Water
Sewer

39. Monopolistic competition
In monopolistic competition, many companies compete in an open market to sell products which are similar, but not identical.
Each firm technically holds a monopoly over its specific product
Goods sold under monopolistic competition are similar enough that they can be substituted, but they are not identical

40. 4 Conditions of Monopolistic Competition
1. Many Firms
As a rule, monopolistically competitive markets are not marked by economies of scale or high start-up costs, allowing more firms.
2. Few Artificial Barriers to Entry
Firms in a monopolistically competitive market do not face high barriers to entry.
3. Slight Control over Price
Firms in a monopolistically competitive market have some freedom to raise prices because each firm's goods are a little different from everyone else's.
4. Differentiated Products
Firms have some control over their selling price because they can differentiate, or distinguish, their goods from other products in the market.

41. Oligopolistic Competition
Oligopoly describes a market dominated by a few large, profitable firms.
Examples
Cars
Movie Studios
Tobacco

42. Review Perfect Comp. Monopolistic Comp. Oligopoly Monopoly # of Firms
Many, Many
Many
A few dominate
One
Variety of goods
None
Some
Control over prices
Little
Complete
Barriers to entry
Low
High
Examples
Wheat, Corn, Paper
Jeans, Pizza
Cars, Movies
Public water

43. Sole Proprietorship A business with a single, private owner.
“Flying solo!”
Examples:
Tailor shop
Restaurant
Small merchants in the village

44. Advantages for Sole Proprietor
Easy to start up, easy to close
May not require lots of financial capital to start up
Owner has complete control and receives all profits (owner and business are one for taxes/income— d.b.a. – doing business as)

45. Disadvantages Unlimited personal liability!
Business tied closely to owner
Difficult to raise $ to start up or expand
Difficult to recruit/hire professionals

46. Partnership A business with 2 or more owners Examples: Family business
Restaurant
Law firm, accounting firm, consulting firm

47. 2 kinds of partnerships
General Partnership—equal shares of both responsibility and liability
Limited Partnership—At least 1 partner is the general partner, others are limited (investors only)

48. Advantages Partners share responsibilities & liabilities Easy start-up
“two heads are better than one”
Easy start-up
May increase chance of continuity of business
May increase access to financial capital

49. Disadvantages Unlimited personal liability (for at least 1 partner)
Conflicts among partners
Must share profits according to agreement

50. Corporation
A legal entity owned by stockholders, charted by the state, managed by professionals, governed by a board of directors.
Two types:
Publicly-held: trades on “the market”
Closely (or privately) held: few shareholders

51. Advantages No personal liability Perpetual life--continuity
Stockholders can limit losses
Access to financial capital

52. Disadvantages Difficult to start-up Strict legal requirements
Founders can lose control, owners and management can be distant
Double taxation, once to corporation and again to shareholders receiving dividends

53. Limited Liability Company (LLC)
Combination of corporation and partnership (hybrid)
Shields owners from personal liability like a corporation
Allows tax and profit treatment of partnerships. Profits and taxes “flow through” like a partnership.

54. Other forms of organization
Franchise—a semi-independent business that has exclusive use of name (brand), product or service in a specific area.
Examples: McDonalds, 7-Eleven, Dairy Queen.

55. Cooperative—a member-owned business operated for the members’ mutual benefit. Profits are shared.
3 types
Consumer
Service
Producer
Examples
Pittsford Federal Credit Union
Legal Services
Land O’ Lakes
Dartmouth Coop (Grocery Store)

56. Nonprofit Organization—operate with a goal of helping society/members rather than earning profits for owners.
Examples
American Red Cross
Rochester Chamber of Commerce
American Automobile Association
PBS
Mutual of Omaha