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Unit 2
Microeconomics
Ch 4 – Demand
Ch 5 – Supply
Ch 6 – Prices and Decision Making
Ch 7 – Market Structures
• Microeconomics • The area of economics that
deals w/ behavior + ______
______ by _________, such
as individuals + firms.
• Micro = ______
Ch 4 – Demand
• Demand
• The _____, _____, + ________ to buy a product.
• It is NOT just the ________ to have a product.
• Ex. We all may desire a $100,000 sports
car, but there isn’t that much of a demand
since we cannot all ____ it or are not willing
to pay the price the dealer is selling at.
• Understanding demand is important to understand
how the economy works + for good __________
___________.
• Ex. Knowing where the demand is to ____ a
business, knowing the competitors’ ______
(or if no competition, to know what people
can + are willing to _____), + knowing who
your ___________ would be (for things like
____________).
• Visualizing
demand
• A demand schedule is a listing that
shows the various ____________
demanded of a particular product at
all ________ prevalent in the market.
Demand Schedule for Shoes at Payless
Price
Quantity Demanded
$100
0
$90
5
$80
10
$70
20
$60
30
$50
35
$40
40
$30
60
• A demand curve is a ______ showing
the ________ demanded at each +
every ______ prevalent in the market.
Demand Curve for Shoes at Payless
100
90
80
70
Price
60
50
40
30
D1
20
10
0
5
10
15
20
30
30
35
Quantity
40
45
50
55
60
• The Law of
Demand
• States that the _________________ of a
good or service _______________ w/ its
_______.
• In other words, the ____ something
costs, the ______ people demand.
• Marginal utility is the ____ usefulness or
satisfaction a person gets from getting 1
_________ of a good or service.
• Ex. 2 Scoops of ice-cream.
• Diminishing marginal utility is when the
extra satisfaction we get from using
____________________ of a product or
service begin ____________.
• Ex. 6 Scoops of ice-cream
End Section 1
• Change in
the quantity
demanded
• A movement along the ___________
that shows a change in the quantity of
the product purchased __________ to
a change in price.
• Causes a ______________ along the
demand curve.
• What causes a change in the quantity
demanded?
- ________________
of the item being
graphed.
the
Sellers start charging
more or less for
product.
• Change in
demand
• A demand curve shifts when consumers
_________ more or less at ________ price.
• Causes a _________ in the demand curve.
• What causes a change in demand?
- _____________________
You make more, you spend more + vice versa
- _____________________
Things go out of style or become popular
- ______________
Ex. Butter + margarine – if the price of one
its substitute
+ vice versa
, demand for
- ______________
Ex. Peanut butter + jelly – If the price of one
for its complement
, demand
- _____________________________
Ex. Forecast predicts a blizzard – more people buy milk.
Ex. AT&T announces a new phone to be released in 6
months, many people wait to buy new phone
- # of ________________
More or less people interested in an item
End Section 2
• Cause-and- • Economics involves the study of _____________
effect +
relationships.
A business owner needs to know the effect a raise in prices
___________
would have on sales.
A corporation needs to know the benefits of diversifying vs.
the benefits of further investing in current production.
An investor needs to know the effect various factors would
have on his/her stock values.
A country’s people need to understand the effects of gov.’t
policies on the economy which could effect their income,
jobs, retirement, entitlement programs, etc…
A gov.’t needs to know the effect a tax increase would have
on the economy (or on their chances of getting re-elected
)
• Elasticity is a _________________________ that
shows how a __________ variable responds to a
change in an ____________ variable.
• It shows how much one thing changes due
to a change in ____________________.
• Demand elasticity is the _____ to which a change
in price causes a change in the __________
___________.
• Elastic ________ • Demand is elastic when a change
in price causes a relatively _____
change in quantity demanded.
• This is a ____________ to a
price change.
• Ex. People demand 20
widgets @ $15, but they
demand 50 widgets @ $10.
• Close to a ________ line on
a graph.
• Inelastic demand
• Demand is inelastic when a
change in prices causes a
relatively _______ change in
quantity demanded.
• This is a ______________
to a price change.
• Ex. People demand 30
whats-its @ $10, but they
only demand 32 whats-its
@ $5.
• Includes things like basic
___________, salt, etc
• Close to a __________ on
a graph.
• __________ • Unit elastic demand is when a product
demand
is __________ b/w elastic + inelastic.
• Change in quantity demanded is
______________ to the change
in price.
• People demand 15
whatchacallits @ $20, but they
demand 30 whatchacallits @
$10.
P
• So if price drops 50%, quantity
demanded increases _____%.
D1
Q
• ___________ • What makes demand elastic or inelastic?
of demand
1. _____________________________?
elasticity
- The more urgent the need, the
more ________ demand tends to
be.
2. _____________________________?
- The fewer substitutes available,
the more __________ demand tends
to be.
(- Also, depends on # of sellers for
a ___________).
3. _______________________________
______________________?
- If the answer to this question is
no, demand tends to be ______.
- You can’t buy something if you
don’t have the $.
End Section 3
Ch 5 – Supply
• Supply
• The amount of a product that would be
______________ at all possible prices.
• The law of supply says that suppliers
will normally offer ____ for sale at ____
prices + _____ at _______ prices.
• In other words, ______ will be
offered at a _____________.
• Visualizing
supply
• A supply schedule is a _______ of the
various ____________ of a particular
product supplied at all possible _____
in the market.
Supply Schedule for Shoes at Payless
Price
Quantity Supplied
$100
60
$90
55
$80
50
$70
40
$60
30
$50
20
$40
10
$30
5
• A supply curve is a ____ showing the
various quantities _______ at each +
every ______ that might prevail in the
market.
Supply Curve for Shoes at Payless
120
S1
100
Price
80
60
40
20
0
5
10
15
20
25
30
35
40
Quantity
45
50
55
60
65
• Change in
the quantity
supplied
• A movement along the ___________
that shows a change in the ______ of
the product _________________ in
response to a change in ________.
• Causes a _____________ along the
supply curve.
• What causes a change in the quantity
supplied?
- _______________ of
the item being
graphed.
Sellers start charging more
or less for the
product.
• Change •
in supply
•
•
A supply curve shift when _____________ more or less
at _____________.
Causes a ________ in the supply curve.
What causes a change in supply?
- _________________
If the cost of inputs , the amount supplied will
NOTE: labor is an input
+ vice versa
- ______________
An in productivity causes an
versa
in the amount supplied + vice
- ______________
New technology causes an in the amount supplied
UNLESS there is an unexpected problem
- _______ + Subsidies (gov.’t payment to an individual, business,
or other group to encourage or protect economic activity)
An
in taxes causes a in the amount supplied + vice versa
An in subsidies causes a in the amount supplied + vice versa
- Change in _______________
If sellers expect the price of their goods to
amount supplied
+ vice versa
in the future, the
- ______________________
An
in regulation causes a
in the amount supplied + vice versa
- # of _____________
An in the # of sellers causes an
versa
in the amount supplied + vice
• Supply
elasticity
• Is a measure of the way in which
______________ responds to a change
in __________.
• The questions that determine demand
elasticity (Substitutes? Delay? Large %
of income?) ___________________!!!!
• What makes supply elastic or inelastic?
• ________________________
_______________________?
• If a firm CAN react fast then
it is ____________.
• If a firm CAN NOT react fast
then it is _____________.
• Types of supply
elasticities
Supply
• Elastic supply – when a
change in price causes a
relatively _________ change in
the ___________________.
• Ex. The price doubles + the quantity
supplied triples.
• Inelastic supply – when a
change in _______ causes a
relatively ________ change in
the quantity supplied.
• Ex. The price doubles + the quantity
supplied only increases by 10%.
P
• Unit elastic supply – when a
change in price causes a
________________ change in
the quantity supplied.
S1
Q
• Ex. The price doubles + the quantity
supplied doubles.
End Section 1
• The Theory of • Deals w/ the ___________ b/w the __________
Production
____________ + the output of goods + services.
• Usually based on the short run, when the
only thing producers can change in input
is ________.
• During the long run producers can adjust
the quantities of ___________________.
• Ex. In the short run, BMW fires 50
employees, but in the long run it
closes down one of its factories.
• The Law of Variable Proportions says that in the
short run, _____ will change as 1 ____ is varied
while the others _______________.
• In other words, if you change only
1 input, the output will ________.
• Ex. Adding more salt to your meal
changes the taste.
• Economists prefer to change only
_____ at a time to better judge the
__________ each input has on the
output.
• The
production
function
• A concept that describes the relationship b/w
changes in output to different amounts of a single
input ______________________________________.
• Illustrates the Law of ___________
Production Schedule for BMW
________________.
# of
Total
Marginal
Workers Product
Product
• It can be illustrated w/ a schedule or
w/ a graph.
0
0
0
• Measures marginal product (the extra
1
7
7
_______ or change in total product by
2
20
13
an addition of 1 more unit of ______).
3
38
18
4
62
24
5
90
28
6
110
20
7
129
19
8
138
9
9
144
6
10
142
-2
11
138
-4
12
129
-9
Current total product – Previous total
product = ____________________
• The 3 stages of ______________ 1.
Production Schedule for BMW
# of
Total
Marginal Stage of
Workers Product Product Production
0
0
0
1
7
7
2
20
13
3
38
18
4
62
24
5
90
28
6
110
20
7
129
19
8
138
9
9
144
6
10
142
-2
11
138
-4
12
129
-9
Stage 1
_________________ – The
marginal return grows at an
increasing rate.
-Too many resources per
worker so add a
worker(s) + production
2. ___________________ – The
marginal return grows at a
decreasing rate.
-Production
at a
________ rate.
3. ___________________ – The
marginal return decreases.
-Workers are getting in
Stage 2
the way + production
Stage 3
End Section 2
• Measures
of ______
• To run businesses __________, owners must analyze
the _________________ of costs.
• Fixed cost – the cost of production that _____
_______ when output changes.
• These are costs the business ________
even if they ______________ anything.
• ______________ combined make up a
business’s overhead.
• Ex. Executive salaries, rent, etc
• Variable cost – the cost of production that
__________ when output changes.
• These are the costs the business can
change to ___________________.
• Ex. Labor, raw materials, electricity etc
• ___________ + _____________ = total cost.
• Marginal cost is the ____ cost incurred when a
business produces 1 __________ of a product.
• It is a type of __________ cost.
• Measures • Revenue - $ ___________.
of ______ • Total # of _______ x the ______________ per unit
= total revenue
• All the $ a __________________.
• Ex: 7 units are sold at $15 each
Total Revenue = 105
• Marginal revenue is the ____________ earned w/
the production + sale of 1 ____________ of output.
• Ex: 5 workers produce 90 units and generate
1,350 total revenue. 6 workers produce 110
units (extra 20) and generate 1,650. Total
revenue is increased by $300 by the
additional 20. SO the marginal revenue is 15
dollars. (300 divided by 20).
End Section 3
Ch 6 – Prices and Decision Making
• Price
•
•
•
The ______________ of a product determined
by _____________________.
It communicates info:
• _____ prices are signals for producers to
produce _____ + for buyers to buy ____.
• _____ prices are signals for producers to
produce _____ + for buyers to buy ____.
__________ of prices in a competitive market:
1. _____ – favor neither sellers nor buyers.
2. _________ – can adjust to unpredictable
factors.
3. __________ of administration.
4. _______ + easy to ____________.
• How can
1. Rationing – a system in which an
resources be
agency (usually a ________) decides
__________
everyone’s “_____” share.
w/o ______?
• Often used in ______________.
• Problems: almost everyone
thinks their share is too ______,
high ____________________,
negative impact on people’s
________________ + produce.
2. _________________ – influential,
powerful, member of the __________
in power (ex. Communist), etc…
3. __________
End Section 1
• Economic
________
• B/c transactions in a market economy are _______,
buyers + sellers must _____________.
• An economic model is a set of __________ that can
be listed in a _____ or illustrated w/ a _____ to help
analyze __________ + predict ___________.
• We get an economic model by combining ______ +
______ info.
- Remember the Payless
Economic Model for Shoes at Payless
examples?
Quantity Quantity Surplus/
Price
Demanded
Supplied
Shortage
$100
0
60
60
$90
5
55
50
$80
10
50
40
$70
20
40
20
$60
30
30
0
$50
35
20
-15
$40
40
10
-30
$30
60
5
-55
Economic Model for Shoes at Payless
12 0
10 0
S1
Price
80
60
40
D1
20
0
0
5
10
15
20
25
30
35
Quantity
40
45
50
55
60
• What can we
determine w/
the economic
model?
• The equilibrium price – the price at which
_______________ = _________________.
Economic Model for Shoes at Payless
12 0
Economic Model for Shoes at Payless
Quantity
Demanded
Quantity
Supplied
Surplus/
Shortage
$100
0
60
60
$90
5
55
50
$80
10
50
40
$70
20
40
20
$60
30
30
0
$50
35
20
-15
$40
40
10
-30
$30
60
5
-55
10 0
S1
80
Price
Price
60
D1
40
20
0
0
5
10
15
20
25
30
35
40
45
50
55
60
Quantity
• What is the equilibrium price of the shoes?
$______
• Market
equilibrium
• A situation in which the _______________
is equal to the ______________________.
• ________ = _________
• Surplus
• A situation in which the quantity supplied is
____________ the quantity demanded at a
given ______.
• ________ > _________
• Shortage
• A situation in which the quantity demanded
is ____________ the quantity supplied at a
given price.
• ________ < _________
• So why does
this matter?
• Economists + businesses use economic
models to determine _________________ if
there is a change in _______ or _________.
End Section 2
• __________ • Sometimes we don’t want the market
market
to adjust to the ________________ –
outcomes
so we establish price ceilings + floors.
• Price ceilings – the ______________
______ that can be charged for a
product or service.
• Established by the _____ if they
feel prices are too _______.
• Problems – can lead to
__________, little incentive for
suppliers to be __________,
suppliers may ___________ the
product in favor of something
more _________, etc…
• Ex: Rent control.
• Price floors – the _______________
______ that can be paid for a good or
service.
• Established by the _____ if they
feel prices are too _____.
• Problems – can lead to
_________, not as many people
can ________ to purchase the
goods/services, etc…
• Ex: Minimum wage (another
potential problem w/ minimum
wage is that fewer workers may
be hired).
End Section 3
Ch 7 – Competition, Market Structures,
and the Role of Gov.’t
• Classifying
market
structures
• The nature + _____________________ among
firms operating in the ________________.
• What determines a market structure?
•
•
•
•
•
How many buyers + __________ are there?
How ________ are they?
Does either have any influence over ________?
How much _______________ exists b/w firms?
What kind of ________ is involved (are they exactly the
same or just similar)?
• Is it easy or difficult for new firms to enter the market?
• Economists group industries into 4 different
market structures:
• _____________________
• _____________________
• __________
• ___________
• Perfect
competition
•
•
Characterized by a ____ # of well-informed
independent buyers + sellers who
exchange ____________ products.
Necessary conditions:
1.
2.
3.
4.
Large # of ________________________.
Buyers + sellers deal in identical products.
Each buyer + seller acts _______________.
Buyers + sellers are well-informed about
products + prices (keeps prices _________).
5. Buyers + sellers are free to enter, conduct, or
get out ________________.
•
Few if any perfectly competitive markets
______ (Ex: farmers selling produce out of
their trucks). Imperfect competition is a
market that is _____ one of the necessary
conditions of a perfect competition. _____
businesses in the US are imperfect
competition markets.
• Monopolistic • The market structure that has all the
competition
conditions of perfect competition
except for the __________________.
• The products’ differences may be ___
or ________ or just in ____________.
• Ex: Athletic shoes
• ____________ is VERY important to
inform potential buyers about why
their product is ___________ to the
competition.
• Oligopoly
• A market structure in which a __ very
____________ dominate the industry.
• The product may be _____________
or __________.
• Ex: Coke + Pepsi, automotive
industry, etc…
• Sometimes the businesses may take
part in collusion – the formal
agreement to ____________ or to
otherwise behave in a ____________
manner.
• In these cases, supply + demand
doesn’t determine the _______.
• _______.
• Monopoly
• A market structure w/ only _______ of
a particular product.
• Extremely _______.
• It is a ___________.
• Ex: Utilities – determined by the gov.’t
(Microsoft, DeBeers, etc…).
• Mostly _______.
End Section 1
• ______ in
a market
economy
• A ____________ economy needs 4
conditions:
1. ___________ competition.
2. Buyers + sellers must be
reasonably well-informed about
_________ + ____________ in the
market.
3. _________ must be free to _____
from 1 industry to another.
4. Prices must ______________ the
costs of __________ (includes the
________ for the entrepreneur).
• A market failure can occur when any of
these 4 conditions are ____________
__________.
• Inadequate • Over time, _______ + acquisitions
__________
have led to larger + ____ businesses
dominating various industries. This
has led to a in ___________ which
has several important consequences:
1. ________________________ –
including $ (instead of investing
in the company, executives may
get big bonuses + benefits).
2. Higher _____ + reduced output
– “____________________”
3. Economic + ______________
• Inadequate • W/o knowing the _________ of goods
__________
or services, market prices can be
________ high or low. Also, workers
may be over or under ___. $ may be
invested ________. Stocks could be
priced unnaturally high + the market
could crash causing a __________ or
the housing market may be
overvalued causing it to go bust which
starts a _________ (sound familiar?).
• __________ • If resources don’t ______ to where
immobility
they’re ___________, markets don’t
function __________.
• Ex: A factory closes in Greenville
+ many people are out of jobs.
• Those same employees
refuse to __________ in a
factory in South Dakota
that _________________
workers.
• Ex: A gas shortage in the
southeast causes gas stations to
run out of gas while in other
parts of the country, they’ve got
plenty of gas.
End Section 2
• The role of
the _______
• Laissez-faire – is belief that the ____ should
___________ w/ or regulate industries or the
__________.
• Based on the idea that gov.’t
____________ only interfered w/ the
______________________.
• What are some ways in which the gov.’t
intervenes in the economy?
• __________________ – to prevent
monopolies + promote competition.
• ______________ – allows monopolies
when beneficial (ex: some utilities)
• ________ – protective (ex: tariffs)
• Public disclosure – requires
businesses to make ______________
available to the _____ (ex: food labels,
financial data, credit card agreements,
“truth-in-advertising”, etc…)
• ________ b/w labor disputes End Section 3