Download Econ Unit 2 Notes

1. Circular Flow of Economic
Activity- Graphical (visual) way of
showing how productive resources,
money, and goods and services
flow between individuals
(households), firms (businesses),
government and international
sector.
2. Resource/ Factor MarketMarket where productive resources
are exchanged for $.
3. Product Market- Market where
money is exchanged for goods and
services.
Circular Flow Diagram
Resource
Market
Businesses
Households
Product
Market
Resource
Market
Resources- $
Income/ Costs
1. Natural- Rent
2. Human- Wages,
Salaries, Tips
Commissions
3. Capital- Interest
4.
Households EntrepreneurshipProfit
Businesses
Product
Market
Injections ($)
1. Government
Spending
2. Exports
3. Investment
Withdrawals ($)
Circular Flow of
Economic Activity
1. Taxes
2. Imports
3. Savings
Both Flows Are Equal
Resource
Market
Businesses
Households
Product
Market
3 Withdrawals of $ from the Flow
1. Taxes
2. Imports
3. Savings
3 Injections of $ into the Flow
1. Government Spending
2. Exports
3. Investment
International
Sector
Exports
$
$
Imports
Product Market
Fin
Mkt
Savings
$
Households
G&S
$
G&S
G&S
$
Investment
Businesses
Government
PR
G&S
$
Productive Resources
Resource Market
4. Demand- The desire plus the
ability and willingness to pay.
5. Demand Schedule- A chart
showing the quantity demanded at
different prices at a given point in
time. Ex: Compact discs
Price
6. Law of Demand- Demand for
a product varies inversely with
its price. More will be
demanded at a lower price than
at a higher price (Thumbs
different).
D
0
Quantity
Individual Demand
P
6
P
$5
Qd
10
4
20
3
35
2
55
1
80
5
Price (per bushel)
Individual
Demand
4
3
2
1
0
D
10
20
30
40
50
60
70
80
Quantity Demanded (bushels per week)
Q
Price
7. Change in the quantity
demanded (∆Qd)- The change in
the amount purchased in response
to the change in price(movement
along the demand curve).
∆Qd
P1
P0
D0
0
Price
8. Change in Demand (∆D)- A shift
in the entire demand curve. Caused
by changing conditions other than
price!
Q1
Q0
Quantity
∆D
D1
D2 D0
0
Quantity
Demand Can Increase or Decrease
P
6
P
$5
Qd
10
4
20
3
35
2
55
1
80
5
Price (per bushel)
Individual
Demand
Increase in Demand
4
3
2
1
0
D2
Decrease in Demand
2
4
6
8
10
D1
D3
12
14
16
18 Q
Quantity Demanded (bushels per week)
Demand Can Increase or Decrease
An Increase in Demand
Means a Movement
of the Line
P
6
P
$5
Qd
10
4
20
3
35
2
55
1
80
5
Price (per bushel)
Individual
Demand
A Movement Between
Any Two Points on a
Demand Curve is
Called a Change in
Quantity
Demanded
4
3
2
1
0
D2
Decrease in Demand
2
4
6
8
10
D1
D3
12
14
16
18 Q
Quantity Demanded (bushels per week)
9. Supply- The quantity of a
product that would be produced
and offered for sale at each and
every possible price.
10. Supply Schedule- A chart
showing the quantity produced at
each and every possible price in the
market. Ex: Yard Work
11. Law of Supply- The quantity of a
product offered for sale varies
directly with price. More will be
supplied at a higher price than at a
lower price (Thumbs same).
Price
S
0
Quantity
Individual Supply
P
6
P
$5
Qs
60
4
50
3
35
2
20
1
5
S1
5
Price (per bushel)
Individual
Supply
4
3
2
1
0
10
20
30
40
50
60
70
Quantity Supplied (bushels per week)
Q
Price
12. Change in the Quantity
Supplied (∆Qs)- The change in the
amount of a product offered for
sale (supplied) because of a price
change. Movement along the
supply curve.
S
P1
∆QS
P0
0
Price
Q0
Q1
Quantity
S2
S0
S1
13. Change in Supply (∆S)- A shift
in the entire supply curve. Caused
by changing conditions other than
price!
∆S
0
Quantity
Supply Can Increase or Decrease
P
6
P
$5
Qs
60
4
50
3
35
2
20
1
5
S1
5
Price (per bushel)
Individual
Supply
S3
S2
4
3
2
1
0
2
4
6
8
10
12
14
Quantity Supplied (bushels per week)
Q
Supply Can Increase or Decrease
P
6
P
$5
Qs
60
4
50
3
35
2
20
1
5
5
Price (per bushel)
Individual
Supply
A Movement Between
Any Two Points on a
Supply Curve is Called
a Change in Quantity
Supplied
S3
S1
S2
4
3
2
An Increase in Supply
Means a Movement
of the Line
1
0
2
4
6
8
10
12
14
Quantity Supplied (bushels per week)
Q
Elasticity Notes
14. Price Elasticity of Demand- The
extent to which changes in price cause
changes in the quantity demanded.
15. Elastic Demand- A change in
price leads to a relatively large
change in quantity demanded.
Ex: Ice Cream, Disneyland
Vacation
Price
P1
P0
D
0
16. Inelastic Demand- A change in
price leads to a relatively small
change in quantity demanded.
Ex: Gasoline, Cigarettes
Q1
Q0
Quantity
Price
Looks like
an “I”
P1
P0
D
0
Q1 Q0
Quantity
Elasticity Notes
15. Products that have elastic demand curves
have these characteristics:
Ex: Ice Cream, Disneyland Vacation
1. Many Substitutes
2. Luxuries
3. Relatively Expensive
Elasticity Notes
16. Products that have inelastic demand curves
have these characteristics:
1. Few Substitutes
2. Necessities
3. Relatively Inexpensive
Ex: Gasoline, Cigarettes
Extreme Cases
Perfectly Inelastic Demand
P
D1
Perfectly
Inelastic
Demand
(Ed = 0)
0
Q
Perfectly Elastic Demand
P
0
Perfectly
Elastic
Demand
(Ed = ∞)
D2
Q
Elasticity Notes
17. Price Elasticity of Supply- The extent
to which changes in price cause changes
in the quantity supplied.
Price
18. Elastic Supply- A change in
price leads to a relatively large
change in quantity supplied.
Ex: Fast Food, T-Shirts
S
P1
P0
0
19. Inelastic Supply- A change in
price leads to a relatively small
change in quantity supplied.
Ex: Sports car, Space
Shuttle, Oil, Gold
Q1 Quantity
Q0
Price
S
P1
Looks like
an “I”
P0
0
Q0 Q1
Quantity
Elasticity Notes
18. Products that have elastic supply curves have
these characteristics:
Ex: Fast Food, T-Shirts
1. Low technology
2. Easy to find or produce
3. Few skills needed
Elasticity Notes
19. Products that have inelastic supply curves
have these characteristics:
Ex: Sports car, Space
Shuttle, Oil, Gold
1. High technology
2. Difficult to find or produce
3. Skilled workers needed
Price Elasticity of Supply

Applications

Antiques/ Original Art and Reproductions
With originals it’s hard /impossible to make more
 With Reproductions you can mass produce them quickly


Gold Prices- Boom and Bust cycles
Gold Prices have shot up so can gold mines produce a lot more
gold quickly?
 The fastest way to produce more gold has been to do what?
 Think about all of the “We Buy Gold! “ signs around town…
 Get people, mostly women, to sell their old jewelry
 There are even “gold parties” where women gather to have fun
and sell their old gold jewelry that they don’t wear any more.

Marginal Utility Notes
20. Marginal Utility- The extra utility or satisfaction a person
gets from acquiring an additional "unit" of a product. Amount
added "at the margin".
21. Principle of Diminishing Marginal Utility- Each
additional unit of a product will be less satisfying than the
previous one. The more of a product a person acquires, the less
likely they will consume (purchase) more.
Ex: Candy consumption, Buying in bulk (Costco, Sam’s Club,
Buying a case of soda instead of a can
22. Market Price- The price where quantity
supplied equals quantity demanded (Qs = Qd).
Occurs at the intersection of the supply and
demand curves. Also known as equilibrium
price and market clearing price.
Price
3 Names for the
intersection point:
1. Market Price
S
Qs = Qd
P0
2. Equilibrium (Price)
D
0
Q0
Quantity
3. Market-Clearing Price
Market Equilibrium
200 Buyers & 200 Sellers
Market
Demand
200 Buyers
$5
6
Qd
2,000
4
4,000
3
7,000
2
11,000
1
16,000
S
5
Price (per bushel)
P
Market
Supply
200 Sellers
4
3
P
Qs
$5
12,000
4
10,000
3
7,000
2
4,000
1
1,000
2
1
0
D
2
4
6 7 8
10
12
14
16
18
Bushels of Corn (thousands per week)
Determinants of Demand and Supply
23. Determinants of Demand: Reasons for
Change/ Shift in Demand (SEPTIC) A
change in:
Price of Substitutes- things that replace each other: pork
v. beef, pinto beans vs. black beans, TV shows and video
rentals (If P of Substitute ↑, D for other good ↑) (If P of
A ↑, D for B ↑).
Consumer Expectations-if they expect a change in prices
or their income to happen in the future or a prediction is
made
Determinants of Demand and Supply
23. Determinants of Demand: Reasons for
Change/ Shift in Demand (SEPTIC) A
change in:
Population: Number of consumers, more or
less people means more or less demand
Consumer Taste- preferences, styles, fads,
fashion, health, advertising, popularity
Determinants of Demand and Supply
23. Determinants of Demand: Reasons for
Change/ Shift in Demand (SEPTIC) A
change in:
Income (y) (If Y ↑ , D ↑. If Y↓, D↓) more or less
income means more or less demand. Ex: Steak,
Sports Car
Price of Complementary good- things that go
together: ketchup and fries; movies and popcorn,
cars and gasoline (If P of Complement ↑, D for
other good ↓) (If P of A ↑, D for B ↓).
Determinants of Demand and Supply
24. Determinants of Supply: Reasons for
Change/ Shift in Supply (GETNoCredit)
A change in:
Government Policies - taxes, regulations, tariffs,
quotas, setting prices, or any other government
action.
Expectations- businesses expect a change to occur to
sales, profits, etc. in the future.
Determinants of Demand and Supply
24. Determinants of Supply: Reasons for
Change/ Shift in Supply (GETNoCredit)
A change in:
Technology- increases the efficiency of your natural,
human, capital, and entrepreneurship resources.
Number of Suppliers- Companies entering or
leaving the market.
Determinants of Demand and Supply
24. Determinants of Supply: Reasons for
Change/ Shift in Supply (GETNoCredit)
A change in:
Costs of Production- anything that increases or
decreases the cost of your land , labor, capital, and
entrepreneurship.
25. Price Floor- Legislated or
regulated minimum price
below which transactions
(buying or selling) are
prohibited. Will cause a
surplus (Qs › Qd). Done for
Producers!
26. Price Ceiling- Legislated or
regulated maximum price above
which transactions (buying or
selling) are prohibited (Qd › Qs).
Will cause a shortage. To get
around this producers and
consumers will create a black
market. Done for consumers!
Price
Floor on the TOP!
S
Pf
P0
D
0
Price
Qd
Q0
Qs Quantity
Ceiling on the BOTTOM!
S
P0
Pc
D
0
Qs
Q0
Qd
Quantity
Floors and Ceilings
When the government sets the price
200 Buyers & 200 Sellers
Market
Demand
200 Buyers
$5
6
Qd
2,000
4
4,000
3
7,000
2
11,000
1
16,000
6,000 Bushel
Surplus
5
Price (per bushel)
P
Market
Supply
200 Sellers
S
P
Qs
$5
12,000
4
10,000
3
7,000
$2 Price Ceiling 2
4,000
1
1,000
$4 Price Floor
4
3
2
7,000 Bushel
Shortage
1
0
2
4
6 7 8
10
D
12
14
16
18
Bushels of Corn (thousands per week)
Government-Set Prices

Price Ceilings on Gasoline


Rationing Problem
Black Markets
Rent Controls
 Price Floors on Wheat
 Optimal Allocation of Resources

3.2
Why is it that some industries have a small number of
business firms that dominate the industry and other industries
have many firms with no one firm that dominates? Economists
have been able to classify different industries into 4 broad
categories or structures based on how much competition there
is in an industry:
United States only
(2011)
US Auto Market Share
2011 TV Global
Market Share
August 2014
Spectrum of Market Structures
MOST COMPETITIVE----------------------------LEAST COMPETITIVE
100%/ Total Competition---------------------------0%/No Competition
Number
of firms
in the
industry
Perfect
Competition
Monopolistic
Competition
Oligopoly
Monopoly
1. Many
Buyers
and
Sellers
1. Many
Buyers
and
Sellers
1. A few
firms
dominate
the
industry
1. One
seller
dominates
the
industry
Spectrum of Market Structures
MOST COMPETITIVE----------------------------LEAST COMPETITIVE
100%/ Total Competition---------------------------0%/No Competition
Perfect
Competition
Type of
Product
Sold
Monopolistic
Competition
Oligopoly
2.
2. Slightly
2. Very
Homogeneous Differentiated Differentiated
/ Same/
Identical
Monopoly
2. Unique/ One
of a kind
Spectrum of Market Structures
MOST COMPETITIVE----------------------------LEAST COMPETITIVE
100%/ Total Competition---------------------------0%/No Competition
Ease of
Entry and
Exit from
the
Industry
Perfect
Competition
Monopolistic
Competition
3. Easiest
3. Easy
Oligopoly
Monopoly
3. Difficult
because of high
cost of capital
or marketing
costs
3. Entry can be
blocked by
government
protections
Spectrum of Market Structures
MOST COMPETITIVE----------------------------LEAST COMPETITIVE
100%/ Total Competition---------------------------0%/No Competition
Control
firms
have over
the price
they
charge
Perfect
Competition
Monopolistic
Competition
4. None; firms
must accept
the market
price
4. A little;
firms can
charge more
for a special
service or
feature they
might have
Oligopoly
4. A lot; price
can be set
higher than
other nondifferentiated
products
Monopoly
4. Complete;
business is a
“price setter” at
the price where
profits are
maximized
Spectrum of Market Structures
MOST COMPETITIVE----------------------------LEAST COMPETITIVE
100%/ Total Competition---------------------------0%/No Competition
Perfect
Competition
Non-price
5. None, all of
competition/
the products
product
are the same
differentiationcompetition
based on things
other than price
(ads, brand
names, color,
taste, quality,
features,
packaging, etc.)
Monopolistic
Competition
5. A little;
firms offer
special
services or
features they
might have
but most can
be easily
copied
Oligopoly
5. A lot; large
amounts of
advertising;
emphasis on
branding,
design, style,
quality, etc.
Monopoly
5. Little or none
since entry can
be controlled;
ads focus on
building
goodwill
towards the
company or
product
superiority
Banking consolidation/ mergers creates an oligopoly dominated by
4 banks: Citigroup, JPMorgan Chase, BofA, and Wells Fargo
Media Family Tree: Top 15 Media Companies
Spectrum of Market Structures
MOST COMPETITIVE----------------------------LEAST COMPETITIVE
100%/ Total Competition---------------------------0%/No Competition
Examples
Perfect
Competition
Grain farming
Monopolistic
Competition
Doctors,
Lawyers,
Dry Cleaning,
Real Estate
Agents, Sit
down
restaurants,
Fruits and
Vegetables,
Oligopoly
Monopoly
Soda, Beer,
Airlines, Fast
Food, Soap,
Shampoo
Computers,
Cereal,
Groceries,
Coffee,
Diapers,
Entertainment,
Banking
4 types of legal
monopolies;
allowed by
government b/c
they benefit
society in some
way
1. Patents
2. Copyrights
3. Trademarks
4. Public
UtilitiesElectricity,
Cable, Nat Gas,
Phone, H2O
Total Revenue Test- If Price (P) ↑ and Total Revenue (TR) ↓ ,
then Elastic; If Price (P) ↑ and Total Revenue (TR) ↑ , then
Inelastic. Why?
Price
Price
P1
P1
Price Effect
P0
P0
Q1
Q Effect
D0
Quantity
Effect
0
Price Effect
Q0
Quantity
Price Effect- Increase in P of
the ONE item increases TR
Elastic products: Quantity effect
is greater than Price effect
0
Q1 Q0
D0
Quantity
Quantity Effect- Increase in P
reduces the # of units sold and
decreases TR
Inelastic products: Price effect
is greater than Quantity effect
The Total Revenue Test

W 18.2
Total Revenue (TR)
TR = P x Q
Elastic Demand
P
$3
a
2
1
b
D1
0
10
20
30
40
Q
The Total Revenue Test

Total Revenue (TR)
TR = P x Q
Inelastic Demand
P
c
$4
3
2
d
1
D2
0
10
20
Q
W 18.2
The Total Revenue Test

W 18.2
Total Revenue (TR)
TR = P x Q
Unit-Elastic
P
e
$3
2
1
f
D3
0
10
20
30
Q