MICROECONOMICS: 1
ELEMENTS IN THE
MARKETPLACE
This is the study of how economic actors
(businesses, households and markets) make
decisions and are impacted by the allocation of
resources.
CIRCULAR FLOW OF GOODS AND
RESOURCES
CIRCULAR FLOW OF GOODS AND RESOURCES
DEFINING TERMS
Household-an individual or group of individuals
that occupy a single housing unit and shares
living expenses.
 Business-an individual or group that works to
produce a certain good or service.
 Factor Market (Resource Market)-individual or
group that provides resources to businesses for
the production of goods and services.
 Product Market-individual or group that sells the
finished product.

CIRCULAR FLOW AND ECONOMIC
INTERDEPENDENCE

Each of the actors in the circular flow are
necessary for the economy to function properly.
This is known as economic interdependence.
 “A chain is only as strong as its weakest link.”
 An economy is only as strong as its weakest economic
actor.

ECONOMIC EXCHANGE

Prior to the invention of money it was hard for a
watermelon farmer to buy a chandelier.

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This is because people used the Barter System.
Barter System-one set of goods is exchanged for
another set of goods in some proportion.
The farmer would have to offer to exchange
watermelons for a chandelier.
Chandeliers are expensive so the exchange rate would be
something like 100 melons to 1 chandelier.
 This made buying a chandelier hard because who wants
100 melons.
 The chances of a farmer getting a chandelier was not good
because the barter system did not work to facilitate an
exchange between farmer and chandelier maker.

ECONOMIC EXCHANGE CONT.
Money makes exchange easier.
 Because of money goods have prices.

A chandelier may cost $100 and a watermelon costs
$1.
 The farmer can now sell his product and buy a
chandelier after he sells 100 melons.
 Money is a medium of exchange.

ECONOMIC EXCHANGE CONT.
USES OF MONEY
Medium of Exchange
 Standard of Value-it allows us to understand how
much something is worth in terms of other items.

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We as consumers have a good idea what things
should cost because of their standard of value.
Store of Value-money can be saved and spent
later
Money is a way to store wealth so you can buy things
when you need them.
 Because of this we do not have to work at a grocery
store to get groceries or wash dishes at a restaurant
to eat out.

ECONOMIC EXCHANGE CONT.
FORMS OF MONEY
Currency-this is coins and paper money and is
the most common form.
 Demand Deposits-this is a check or a check card,
the money is there in the bank until you demand
it come out.
 Savings Deposits-savings accounts.
 Certificate of Deposit (C.D.)-allows you to store
money for a period of time and demand it when
the time period runs out.

PRACTICE
Complete Practice 2.1 on pg. 39
 Complete Diagnostic test questions 2, 23, 42, 54,
74 & 76

SUPPLY
This graph shows the
amount of a good the
company is willing
and able to offer at
different prices
 The company however
is only willing to make
enough shoes as are
demanded by the
consumer so they can
make as much money
as possible.

DEMAND


This shows the amount
of goods and services
that consumers are able
and willing to purchase
at different prices.
The curve slopes
downward and shows
the common case of how
the amount of goods
that people demand
declines when the prices
increase.
DEMAND SCHEDULE
This shows a company how many to
produce and at what price.
The point where the supply graph
and Demand graph intersect is
called the equilibrium price or the
market clearing price.
You may also see a demand
schedule as a chart listing the
amount of products the consumers
want at certain prices or in this case
the amount of products supplied at
the different prices.
PRICE DETERMINATION
Prices are rarely stable over a long period of time.
 Many factors can affect the supply and demand
curves within a market, the following are some
factors that can affect the price and quantity of a
good.
 They are called factors affecting determination.

FACTORS AFFECTING DETERMINATION
#1 THE COST OF INPUTS
An input is an ingredient in the production
process.
 Raw materials are inputs, as are labor and
equipment.
 If the cost of an input goes up then it will be more
costly to make the product.

The product then is more expensive.
 The rise in input price will cause the supply curve to
shift to the left and this will cause the price of
production to rise.

FACTORS AFFECTING DETERMINATION
#2 CHANGES IN TECHNOLOGY
Advances in technology often make it easier and
cheaper to produce goods or services.
 This reduction in the cost of inputs, due to
technology, causes the supply curve to shift to the
right and therefore causes the price of goods to go
down.

FACTORS AFFECTING DETERMINATION
#3 CHANGES IN THE PRICE OF OTHER GOODS
Suppose your business can produce both shoes
and purses. (think production possibilities curve)
 If the demand for purses skyrockets you may
shift your production to produce more purses and
less shoes.

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The higher price purses, due to increased demand,
may lead to a decrease in the supply of shoes.
DETERMINATION
#4 CHANGES IN THE PRICE OF
SUBSTITUTE GOODS
Substitute Good-a good that satisfies most of the
same needs as the original good.
 Polyester cloth would be a substitute for cotton
cloth.

If cotton becomes very expensive many people may
buy the cheaper polyester clothes made from the
cloth.
 This could cause the demand for cotton clothes to
decrease.

DETERMINATION
#5 CHANGES IN THE PRICE OF
COMPLEMENTARY GOODS
Complementary Good-goods that are used
together and compliment each other
 Complementary goods tend to be used together so
supply and demand for each good tends to move
in unison.
 Suppose cotton and polyester are cheaper
together than one by itself.


If the demand for cotton goes up so would the
demand for polyester.
FACTORS AFFECTING
DETERMINATION
#6 CHANGES IN INCOME

A change in a person’s income can change the
amount demanded by the person.
An income increase often leads consumers to buy
more goods and visa versa.
 An increase in income therefore could cause the
demand curve to shift to the right while a decrease in
income will shift it to the left.

DETERMINATION
#7 CHANGES IN PREFERENCE OR
CONSUMER TASTES
Sometimes what is fashionable determines the
demand for a good.
 Suppose your favorite athlete or singer says they
will only wear cotton clothes, this may cause the
fans of that person to demand more cotton.

FACTORS AFFECTING
DETERMINATION
#8 INFLATION
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Inflation-a general rise in prices.
Deflation-a general decrease in prices.
With perfect inflation, prices will rise but production
will remain the same.
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This should lead to higher employment and wages because
businesses are making more money.
The opposite is true of perfect deflation; prices will
fall but production will remain the same.
Inflation and deflation are rarely perfect however.
B/c inflation increases prices it directly affects supply and
demand.
 When prices rise people tend to save their money which
leads to lower demand of goods which in turn leads to less
supply.

FACTORS AFFECTING
DETERMINATION
#9 INTEREST RATES
Interest Rate-amount of money a borrower pays a
lender in exchange for the use of that lender’s
money.
 When interest rates are high, consumers are
more likely to save rather than spend. Adversely
if rates are low people want to buy at the low
rate.
 If rates are high demand is lower and prices tend
to fall to encourage consumers to spend money
they otherwise would have been inclined to save.
 If rates are low, demand and prices tend to rise
as consumers are inclined to spend.

FACTORS AFFECTING
DETERMINATION
#10 GOVERNMENT REGULATIONS

Minimum wage-This is the amount that
producers must pay their workers.
The intent of this is to ensure a decent standard of
living for all.
 In reality minimum wage creates a surplus of labor
that leaves a lot of people unemployed.

#10 GOVERNMENT REGULATION CONT.
Price Floor-the
minimum price
that a product
can be sold for.
Without the price
floor equilibrium
would be reached
at P(e) and Q(e).
The price floor
causes producers
to supply amount
Q(S) Even
though demand
is Q(D). This
creates a
surplus of the
good that is
equal to the
amount Q(S)Q(D).
#10 GOVERNMENT REGULATION CONT.
Price Ceiling-the
maximum price
that a product
can be sold for.
With no price
ceiling
equilibrium
would be reached
at Pe and Q2.
The ceiling limits
prices to Pc and
leads to a
demand of Q4
units with only
Q1 units being
supplied.
This leads to a
shortage of goods
equal to the
amount Q4-Q1.
PRACTICE
Practice 2.2 on page 45
 Diagnostic Test Questions 6,7,14,46&75
