Download Price - Ms. Smith`s Government

MICROECONOMICS – UNIT 2
What is Microeconomics?
Small scale economics
Decisions made by individuals and
businesses. This includes household
economics.
We study pricing, markets, supplydemand, monopolies, competition, and
the role of consumers and workers in
economics when we focus on
microeconomics.
Demand
Demand: desire, ability, and willingness to buy a
product
Factors of demand: price & quantity of a specific
good or service at a given point in time
Demand schedule: representation of a good's
demand at various prices
Demand Schedule
Demand Curve
Demand Curve
Take a moment and practice drawing a demand
curve using the information below:
PRICE
QUANTITY
DEMANDED
$30
0
$25
0
$20
1
$15
3
$10
5
$5
8
The Law of Demand
Quantity demanded varies inversely with its price
In other words...when the price of something
increases, the demand of that thing decreases.
Market Demand Curve
Quantity
demanded by
everyone in a
market who is
interested in
purchasing the
product or service
Demand and Marginal Utility
Quantity demanded by everyone in a market
who is interested in purchasing the product or
service
(again, Marginal Utility is the extra usefulness or
satisfaction a person gets from one more of a
good)
Consumers are less willing to pay as much for
more of a good
Factors Affecting QTY Demand
Price – A change in price (when all other factors
remain constant) shifts demand
RESULTS IN
Income Effect: prices decrease, consumer
money increases, consumers have more to spend.
Prices increase, consumer money decreases,
consumers have less to spend and look for
substitute goods.
AND SOMETIMES
Substitution Effect: lower price on one good
causes consumers to substitute costly goods with
less expensive goods
Factors Affecting Demand
Consumer Income: Changes in your income.
Consumer Tastes: Changes in what you buy
(seasonal, advertising, trends, ethics)
Substitutes: butter/margarine; CDs/mp3s
Expectations: What we think will happen
Complements: cell phones/cases; beds/sheets
Number of Consumers: just what it sounds like
Factors affecting demand are also referred to as
“determinants”
Law of supply
As the price of a good or service increases the
supplier will try to capitalize on this and increase
the quantity of the good or service available to the
consumer.
(supply curves always
slope upwards)
Law of Supply and Demand
Are you ready…?
This is really simply and
common sense-ish
Here it is…
If there is a high supply of a
good, price should go down.
If there is a low supply of a
good, price should go up.
Elasticity
Elasticity: The measure of flexibility of
consumers and producers when the price
changes.
Demand elasticity: How much the
quantity demanded changes if another
factor changes.
PEoD= (% Change in QTY Demanded)
(% Change in Price)
Elasticity
Price
QTY Demanded
QTY Supplied
$7
200
50
$8
180
90
$9
150
150
$10
110
210
$11
60
250
Step 1: [Qdemand(NEW) – Qdemand(OLD)] / Qdemand(OLD) = Change QTY
Step 2: [Price(NEW) – Price(OLD)] / Price(OLD) = Change Price
Step 3: Insert values from steps 1 and 2 into original equation
Elasticity
•If PEoD > 1, Demand is price elastic
•If PEoD = 1, Demand is unit elastic
•If PEoD < 1, Demand is price inelastic
•If result is positive: Substitute goods
•If result is negative: Complementary goods
Elasticity
•Determinants of Demand (three more questions!)
• Can the purchase be delayed?
• Are adequate substitutions available?
• Does the purchase use a large portion of
income?
Supply
•Supply: The amount of a product that will be made
available for purchase at various prices
•Law of Supply: suppliers will normally offer more
for sale at high prices and less at lower prices.
•Supply Schedule: same as the demand schedule,
only with quantities supplied instead of quantities
demanded.
Supply Schedule
Supply Curve
Supply
•Change in Quantity Supplied: This is determined
by changes in price
•Change in Supply: quantity supplied changes at
all price levels.
Supply
•Determinants of Supply:
• Cost of Resources
• Productivity
• Technology
• Taxes/Subsidies
• Expectations
• Government regulations
• Number of sellers
Supply Elasticity
•Supply Elasticity: How the supply reacts to
change in price
Production
•Production Function: How total output changes
when the amount of a single variable input changes
while all other inputs remain constant.
•Short Run vs. Long Run
Production
•Marginal Product: Extra output or change in total
product caused by adding one more unit of variable
input (usually labor)
Production
•Stages of Production: increasing, diminsing,
negative
• Increasing marginal returns: as more
workers are added, they contribute and work
together to make better use of resources.
• Decreasing marginal returns: output
increases at a diminishing rate as more variable
inputs are added.
• Negative marginal returns: output
decreases as more workers are added.
Cost
•Fixed Cost: costs incurred even with little or no
activity. (sometimes referred to as overhead)
•Variable Cost: costs that change depending on
rate of operation and/or output changes.
•Total Cost: sum of the fixed and variable costs.
•Marginal Cost: cost of producing one more unit.
Cost
•Grab an economics
text book and turn to
page 134.
Cost
•Fixed Cost: costs incurred even with little or no
activity. (sometimes referred to as overhead)
•Variable Cost: costs that change depending on
rate of operation and/or output changes.
•Total Cost: sum of the fixed and variable costs.
•Marginal Cost: cost of producing one more unit.
Cost
•If a firm’s total output
increases, will the fixed
costs increase?
Cost
•What would be the
benefit of owning a webbased business as opposed
to a business with a
physical store space?
Cost
•Break-Even Point: when a firm is making just
enough total revenue to “break-even”
•Looking at the chart on page 134, where
would the firm find the break-even point?
Cost
•Profit-Maximizing Quantity of Output:
marginal cost and marginal revenue are equal.
•Looking at the chart on page 134, where does
this occur?
Pri¢e$
•What is price? Think of how you would
define price and prepare to share with the
class.
Pri¢e$
•Price: the monetary value of a product which is
determined by supply and demand.
• Prices are ultimately determined by the seller,
but demand greatly influences the seller’s
pricing decision.
• Prices act as signals, indicating when buyers
and sellers should perform their market duties.
Price$
•Why we need prices:
•1. Flexibility: respond to events which impact the
market.
•2. Familiarity: free market economies are familiar
with pricing systems (easy).
•3. No cost: no special entity is required to set a
price.
•While these are benefits to how things are bought
and sold in a market economy…they only work
because the market is a “living” thing.
Pri¢e$
•In a world…where prices don’t matter or do
not exist…rationing occurs.
•Rationing: government decides how much of a
good each person or household should receive.
•Ration Coupon: ticket that entitles the holder to
procure a certain amount of a product.
Pri¢e$
•Think back through your knowledge of
history…way back there in sophomore and
junior years.
•Where have we seen rationing before? What
led to the rationing? What were the
ramifications?
•What would be a situation today where we
might see rationing?
Pri¢e$
•Rationing Problems:
•1. Satisfaction shortage
•2. Expensive to implement and maintain
•3. Diminishing incentive to produce.
Market Efficiency
•Price Ceilings: maximum price that can be
charged for a good.
• Government regulates ceilings
• Typically implemented at a local level
• Changes how resources are allocated
Market Efficiency
•Price Floors: lowest price that can be charged for
a good.
• Eliminates the market determining an
equilibrium price.
• Minimum Wage is our most prominent example
of a price floor.
Competition
•Laissez-faire: essentially, the government should
play as small a role as possible in economic affairs
(Adam Smith)
•Market Structure: nature and degree of
competition among firms doing business in the same
industry.
Types of Markets
•Perfect Competition: large number of wellinformed independent buyers and sellers who
exchange identical products.
• Necessary Conditions:
• Must be large number of buyer & sellers
• Identical products
• Each buyer and sellers acts independently
• EDUCATED SELLERS AND BUYERS
• Buyer and Seller Freedom
Types of Markets
•Monopolistic Competition: Similar products with
subtle differences.
•Product Differentiation: real or perceived
differences between competing products in the same
industry
•Nonprice Competition: methods of enticing
customers to buy one product over another without
price incentive
Types of Markets
•Oligopoly: few, very large sellers dominate the
industry
•Personal Computers
•Cellular Phones
•Fast Food
Types of Markets
•Oligopoly (cont)
•When one firm in an oligopoly makes a move, the
rest of the firms usually follow.
•Collusion: agreement among firms to behave in a
cooperative manner.
•Price-Fixing: agreement among firms to charge
the same or similar prices.
Types of Markets
•Monopoly: market in which there is only one
seller of a product.
•Natural Monopoly: