1. Unit 2: Microeconomics
How households and businesses are interdependent and interact through flows of goods, services, resources, and money. Within an economy, there are sectors

2. The Circular Flow of the Economy

3. Circular Flow Diagram
The Circular Flow Diagram: is a model economist use to show the characteristics of and relationships that exist between households and businesses in an economy.

4. The Resource Market Also known as the Factor Market Households:
Owners of Productive Resources (Factors of Production)
Sell their land, labor, capital, and entrepreneurship to businesses (firms) in exchange for income payments.
Businesses (Firms):
Consumers of the Productive Resources (Factors of Production)
Purchase the land, labor, capital, and entrepreneurship from households using the revenue they earned in the Product Market (Factor Market).
Wages, interest, rent, and profit flow from businesses to the resource market, becoming the flow of income from the resource market to the households.

5. The Product Market Households: Businesses (Firms):
Consumers of Goods and Services
Buy Goods and Services from Businesses (firms) using the income they earned in the Resource Market (Factor Market)
Households use their income for spending or “expenditures” in the product market.
Consumer “expenditures” is a fancy word for spending
Businesses (Firms):
Producers of Goods and Services
Sell goods and services to households and they earn revenue in exchange for their goods and services.

6. Remember...
Households and Businesses are located opposite each other on the diagram
The Resource and Factor Market are also going to be located opposite each other.
The arrows on the inside of the diagram all flow in the same direction, making a circle.
This is true on the outside as well, except those arrows flow in the opposite direction as the inside arrows.
The inside circle represents the flow of goods and services and/or resources.
The outside circle represents the flow of money or payments.

7. CIrcular Flow Simulation
Males = Households
Start with Resources
Sell your resources to a business for as high a prices as you can
Use this money to buy as many ECONOS from the business as you can
The male with the most goods and services (ECONOS) wins!
Females = Businesses (Firms)
Start with Money
Buy complete sets of resources for as low as you possibly can
Turn in complete sets of resources to me in exchange for ECONOS
Sell these Goods and Services (ECONOS) to the households
The female with the most money ($) at the end wins!

8. The law, graphing, and shifting!
Demand
The law, graphing, and shifting!

9. What is Demand?
Demand is the quantity a consumer is willing and able to purchase at each price.
In order for there to be a demand for a product people must be willing and able (can afford) to purchase it

10. *This is an INVERSE relationship*
Law of Demand
Law of demand states that as the price of a good rises the quantity of the good consumers are willing and able to buy will decrease.
*This is an INVERSE relationship*

11. Law of Demand

12. The Market Demand Curve
Market demand curve refers to all the quantities of a good, service, or resource buyers are willing and able to buy at each price.

13. Quantity demanded will ALWAYS move along the line!
Quantity demanded is the amount of a good, service, or resource buyers are willing and able to buy at one SPECIFIC price.
What is the quantity demanded at the price of $1 on the previous graph?
Quantity demanded will ALWAYS move along the line!

14. Demand Schedule
The table below is an example of a demand schedule and provides the data you use to create a demand curve.

15. Changes in Quantity Demanded
Changes in price cause a change in quantity demanded
This is illustrated by moving from one point to another on the line

16. Shifting Demand: Determinants
Determinants of demand describe the types of changes in a market that will cause the entire demand curve to move to the right or the left.
What does this mean?
All consumers of a good, service, or productive resource will be willing and able to purchase more or less of a product at all prices in the market.

17. Shifting Demand
Increase in demand means the entire curve will shift to the RIGHT
Decrease in demand means the entire curve will shift to the LEFT

18. Shifting Demands: Determinants
Price of Related Goods
Consumer Income
Consumer Expectations
Consumer Taste/Preferences
Change in Number of Consumers

19. Complementary goods are the items we buy together.
Price of Related Goods
Complementary goods are the items we buy together.
Example: peanut butter and jelly
If the price of peanut butter increases, then the demand for peanut butter AND jelly will decrease

20. Price of Related Goods
Substitute goods are items that could take the place of another product due to its similarity.
Example: Coke and pepsi
If the price of coke rises, then consumers who normally purchase coke will purchase pepsi

21. When consumer income increases then demand increases.
Consumer Incomes
When consumer income increases then demand increases.
Example: If the government decides to lower income tax rates, consumers will have more disposable income to spend on goods and service and demand will increase

22. Consumer Expectations
If consumers expect the price of a product to rise in the future, they will demand more in the present before the price rises causing the demand to increase and shift to the RIGHT
Example: If consumers expect producers to charge higher prices for candy during Halloween, some consumers will purchase candy early.

23. Consumer Expectations
If consumers expect the price of a product to fall in the future, they will demand less in the present while the market price is higher causing the demand to decrease and shift to the LEFT
Example: If consumers expect prices for airline tickets to fall in September when families are less likely to travel due to the school calendar, consumers will demand fewer tickets and shift the curve to the LEFT

24. Consumer Taste/Preference
If consumers in a market for a good or service have an increase in their taste for that product, then the demand for the product in this market will rise and shift to the RIGHT
Example: If researchers publish a study concluding that eating grapefruit every day causes people to lose weight, there will be an increase in taste for grapefruit and demand will increase

25. Consumer Taste/Preference
If consumers in a market for a good or service have a decrease taste for a product, then the demand for the product in this market will decrease and shift to the LEFT
Example: A series of airplane crashes will decrease consumer taste for air travel and demand will decrease.

26. Number of Consumers
If consumers leave the market for a product, then the demand for the product in this market will fall and shift to the LEFT
Example: as ride and room sharing apps have expanded, the number of consumers in the traditional taxi and hotel markets has decreased, decreasing demand for these services

27. Number of Consumers
If more consumers enter the market for a product, then the demand for the product in this market will rise and shift to the RIGHT
Example: As the number of Americans connected to the internet has risen, the number of consumers in the market for online retail has increased and demand has increased

28. The law, graphing, and shifting!
Supply Notes
The law, graphing, and shifting!

29. What is Supply?
Supply is the quantity a seller is willing and able to sell at each price.

30. Law of Supply
The law of supply says that as price rises the quantity a seller is willing and able to sell will increase.
DIRECT RELATIONSHIP

31. Law of Supply

32. The Market Supply Curve
The market supply curve refers to all the quantities of a good, service, or resource sellers are willing and able to sell at each price.

33. Quantity Supplied
The quantity supplied is the amount of a good, service, or resource sellers are willing and able to sell at one specific price.
Changes in quantity supplied result from a change in price.
Changes in quantity supplied ALWAYS moves along the line!

34. Supply Schedule
The table below is an example of a supply schedule and provides the data you use to create a supply curve

35. Shifting Supply Determinants
Cost of Productive Resources
Government Regulation
Number of Sellers
Producer Expectations
Technology
Education

36. Cost of Productive Resources
If the resources needed to produce a product become less expensive, sellers will produce more and the supply will increase (shift to the RIGHT).
Example: If the cost of cotton decreases, what happens to the supply of T-shirts?

37. Cost of Productive Resources
If the resources needed to produce a product become more expensive, sellers will produce less and the supply will decrease (shift to the LEFT).
Example: If the cost of peanuts rise, what happens to the supply of peanut butter?

38. Government Regulation
If the government decreases regulation on sellers in a market, sellers will produce more products and supply will increase (shift to the RIGHT)
Example: The U.S. stops controlling fares and routes for air travel, what happens to the supply of flights?

39. Government Regulation
If the government increases regulation on sellers in a market, sellers will produce less products and supply will decrease (shift to the LEFT)
Example: If the government requires factories to reduce pollution, what will happen to supply of goods made in factories?

40. Number of Sellers
If the number of sellers in the market increase, there will be more producers of the product and supply will increase (shift RIGHT).
Example: The demands for pecans in China has increased. What happens to the market for pecans?

41. Number of Sellers
If the number of sellers in the market decrease, there will be less producers of the product and supply will decrease (shift LEFT).
Example: The demand for DVDs has decreased due to streaming movies, what happens to the supply of DVDs?

42. Producer Expectation
If producers expect the price of their product to fall in the future, they will supply more right now while the price is higher. This will cause supply to increase (shift RIGHT)
Example: If J.Crew expects to have a sale at the end of the summer because of a change in season, what will happen to supply now?

43. Producer Expectations
If producers expect the price of their product to rise in the future, they will supply less right now and wait for the price to rise. This will cause supply to decrease (shift LEFT)
Example: If consumers are willing to pay a high price for wrapping paper during Christmas, what will happen to the supply of wrapping paper during December?

44. Technology
If producers implement new, more efficient technology in the production process, supply will increase (shift RIGHT)
Example: Brandon and Trent buy an electric juicer for their lemonade stand. What happens to supply?

45. Technology
If producers lose the benefits of production technology, supply decreases (shift to LEFT)
This is unusual and typically occurs because of a natural or cyber disaster.
Example: A tornado hits Brandon and Trent’s lemonade stand destroying the juicer. What happens to supply?

46. Education
If workers in a market improve their education, knowledge, and skills related to the production process, their labor productivity will increase and as a result supply will increase (shift RIGHT).
Example: Workers train on a new software package to increase productivity. What happens to supply?

47. Education
If the education, knowledge, and skills of many workers in a market decline, their labor productivity will decrease and as a result supply will decrease (shift LEFT).
Example: High school drop out rate increases.

48. Combining Supply and Demand
Equilibrium, Surplus, and Shortage!

49. Equilibrium Price and Quantity
The market clearing or equilibrium price is the point of intersection between the market demand curve and the market supply curve.
This is the point where the quantity demanded by consumers is equal to the quantity supplied by consumers.

50. Graphing Equilibrium

51. Price Equilibrium What is the equilibrium price?
What is the equilibrium quantity?

52. Price Floor
A price floor is when the price is set above the equilibrium price.
Since they are set above equilibrium, there will be a larger quantity supplied then there is quantity demanded.

53. Price Floor and Surplus
When the quantity supplied is greater than the quantity demanded there is a surplus of the product.

54. Price Floor and Surplus
The government sets the price floor of Lemonade to $3. What is the amount of surplus?

55. Price Ceiling
A price ceiling is when the price is set below the equilibrium price.
Since price ceilings are below equilibrium, there will be a larger quantity demanded then there is quantity supplied.

56. Price Ceiling and Shortage
When quantity supplied is less than quantity demanded, there is a shortage of the product in the market.

57. Price Ceiling and Shortage
The government sets the price ceiling of Lemonade to $1. What is the amount of shortage?

58. Business Organizations and Market Structures
SSEMI3

59. Three Forms of Business Organization
Sole proprietorships are firms legally owned by only one person.
Partnerships are firms legally owned by two or more people.
Corporations are firms legally owned by stockholders who purchased “shares” of the company in hope that the value of the shares will increase overtime and they will make money.

60. How do they compare?

61. Important Terms
Liability refers to the responsibility for paying the debts of the business.
Unlimited liability means if a business is unable to meet its financial obligations, the owner is personally responsible
Limited liability means the responsibility of debts is restricted to the ownership stake (shares of stock) the business owner owns.

62. Important Terms
Lifespan of the business refers to what happens to the business when an owner leaves or dies.
Limited life means the business will close or reorganize if it switches owners.
Unlimited life means the business passes to new owners through the sale of shares without ending the business.

63. Important Terms
Decision making refers to the entity responsible for the day to day operating decisions of the business.
Owner
Board of Directors

64. Important Terms
The way a business is organized affects taxation on the profits of the business.
Single tax means the amount of income they earn from their business will determine the income tax rate they charge.
Double tax means that corporations must pay corporate income tax on profits along with a tax on all dividends from shareholders.

65. Four Types of Market Structures
Pure (Perfect) Competition is a market structure characterized by a large number of buyer and sellers of an identical product.
Example: crude oil
Monopolistic Competition is a market structure characterized by a large number of buyers and sellers of products that are similar to one another but can be differentiated by brand, quality, etc.
Example: restaurants and retail clothing

66. Four Types of Market Structures
Oligopoly is a market structure characterized by only a few sellers of a product who dominate the market.
Example: Breakfast cereals and natural gas
Monopoly is a market structure characterized by only one seller of a product dominating the market
Example: electrical power companies and cable tv companies

67. Basic Characterisitics

68. Basic Characteristics

69. Market Structure Characteristics
Number of sellers: Are there many, few, or one seller of a product? The more sellers there are the more competitive the market.
Barriers to entry: Are there any obstacles that prevent other firms from entering the market for the good? If barriers are weak or absent from the market, the market will be more competitive.

70. Market Structure Charactersitics
Price control: Can the individual firms in the market for a product exercise any control over the price they charge?
The weaker the control over price, the more competitive the market.
Product differentiation: Is there any difference between the products sold by the sellers in the market for the good?
If the products sold by the firms in the market are identical, there is no reason for sellers to engage in non-price competition which refers to methods other than price used to attract customers.