Download Microeconomic Concepts Describe how households, businesses

GEORGIA
PERFORMANCE
STANDARDS
Microeconomics
Microeconomic Concepts
Describe how households, businesses, and governments are
interdependent and interact through flows of goods, services, and
money.
a. Illustrate by means of a circular flow diagram, the Product market; the
Resource (factor) market; the real flow of goods and services between and among
businesses, households, and government; and the flow of money.
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b. Explain the role of money as a medium of exchange and how it facilitates
exchange.
Money – anything used to buy and sell goods and services. 3
functions of money:
Medium of exchange – generally accepted as a form of payment.
Store of value – retains value over time.
Unit of account – value is measured in units of money.
Explain how the Law of Demand, the Law of Supply, prices, and profits
work to determine production and distribution in a market economy.
a. Define the Law of Supply and the Law of Demand.
Law of Supply – all other factors being equal, as the price of a good or
service increases, the quantity of goods and services offered by
suppliers increases and vice versa.
Law of Demand – all other factors being equal, as the price of a good
or service increases the quantities consumers demand for the good
or service will decrease and vice versa.
b. Describe the role of buyers and sellers in determining market clearing price.
The market clearing price (equilibrium) results in neither shortages
or surpluses. Transactions in a market economy are voluntary so they
must benefit both buyers and sellers.
c. Illustrate on a graph how supply and demand determine equilibrium price and
quantity.
Market Equilibrium
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d. Explain how prices serve as incentives in a market economy.
The price and quantity exchanged are determined by supply and demand,
prices provide incentives for both buyers and sellers. Prices provide
information to consumers and producers about market conditions on
supply and demand.
Explain how markets, prices, and competition influence economic
behavior.
a. Identify and illustrate on a graph factors that cause changes in market supply
and demand.
Factors that cause changes in market supply
Cost of inputs
Productivity
Technology
Taxes and Subsidies
Expectations
Government regulations
Change in the number of sellers
Weather/natural disasters
Price
Price
Increase in Supply
Decrease in Supply
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Factors that cause changes in market demand
Consumer income/wealth
Consumer tastes and preferences (advertising)
Change in the price of substitute goods
Change in the price of complementary goods
Change in expectations
Change in number of consumers
Price
Price
Increase in Demand
Decrease in Demand
b. Explain and illustrate on a graph how price floors create surpluses and price
ceilings create shortages.
Price floor - a legally established minimum priced – examples are farm
products and minimum wage laws. Too much milk produced, too
many workers seeking a higher minimum wage. Designed to help
suppliers, some will not be able to sell their goods because of lack of
demand.
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Price ceiling – legally established maximum price, an example would be
rent control. Too many renters, not enough apartments. Designed to
help consumers, the quantity demanded tends to exceed the quantity
supplied.
c. Define price elasticity of demand and supply.
Price elasticity of demand – a way of measuring how much quantity
demanded will change in response to a change in price.
Price elasticity of supply – a way of measuring how much quantity supplied
will change in response to change in price.
Explain the organization and role of business and analyze the four
types of market structures in the U.S. economy.
a. Compare and contrast three forms of business organization—sole
proprietorship, partnership, and corporation.
Sole proprietorship – a business owned by one person.
Advantages- ease of start-up, ease of management, owner gets all
profits, full control, easy to stop, business itself is exempt from tax
on income.
Disadvantages- unlimited liability, difficulty in raising financial capital,
amount of work, limited life.
Partnership – a business jointly owned by two or more people.
Advantages- ease of start-up, each partner brings a skill, larger pool of
capital, lack of special taxes on partnerships.
Disadvantages- each partner is responsible for the business, unlimited
liability (unless LLP or limited liability partnership), limited life,
potential for conflict.
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Corporation – a business organization that is owned by stock holders
and recognized by law as a separate legal entity having all the
rights of an individual.
Advantages- ease of raising financial capital thru the sale of stock or
bonds, limited liability of owners, unlimited life, ease of transferring
ownership.
Disadvantages- difficult to start, owners/shareholders often have little
or no power to run the corporation, more legal requirements, double
taxation.
b. Explain the role of profit as an incentive for entrepreneurs.
Entrepreneurs are willing to risk their resources in order to
sell them for financial gain or profit, and are successful when
providing goods and services valued by consumers. Successful
entrepreneurs are willing to assume risk, have unique skills,
discipline to work long and hard to earn income, learn skills
valued by others.
c. Identify the basic characteristics of monopoly, oligopoly, monopolistic
competition, and pure competition.
Monopoly – a market structure in which there is a single supplier of a
good or service that there is no close substitute for. Example –
public water.
Oligopoly – a market structure in which a few, relatively large firms
account for all or most of the production or sale of a good or service
in a market, barriers to new producers are high. Examples are cars,
airlines, and movie studios.
Monopolistic competition – a market structure where slightly different
products are sold by a large number of relatively small producers,
barriers to new firms are low. An example would be jeans and gas
stations.
Pure competition – a market structure theory in which a large number of
relatively small firms produce and sell identical products, there are
no barriers to enter the market and it is easy to exit from the
market, the best example would be agricultural products like wheat.
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