Mr. Dunn, Room 221
90
Economics/Business/Free Enterprise
Periods 3, HONORS
80
70
60
50
East
West
North
40
30
20
10
0
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
MICROECONOMICS
MICROECONOMICS
THE STUDY OF THE INTERACTION
BETWEEN INDIVIDUAL COMPONENTS
OF AN ECONOMY INCLUDING
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INDIVIDUALS (RESOURCE OWNERS)
HOUSEHOLDS (CONSUMERS)
BUSINESSES (FIRMS) (PRODUCERS)
INSTITUTIONS (BANKS, LABOR,
PACS, C of C, ORGS, etc)
SIMPLE CIRCULAR FLOW
COMPONENTS OF SIMPLE
CIRCULAR FLOW
SECTORS
HOUSEHOLDS-RESOURCE SUPPLIERS-CONSUMER
BUSINESSES-RESOURCE DEMANDERS-PRODUCER
MARKETS
FACTOR—EXCHANGE RESOURCES FOR PAYMENTS
PRODUCT—PAYMENTS FOR GOODS/SERVICES
DEMAND
The quantities of a good
or service consumers
are willing and able to
buy at different
possible prices at a
particular time
LAW OF DEMAND
CONSUMERS ARE
WILLING TO BUY
MORE AT LOWER
PRICES.
SHIFTING DEMAND
• PRICE EFFECT/SUBSTITUTION EFFECT
=MOVEMENT ALONG THE CURVE
• CHANGES IN DEMAND
PRICES OF RELATED GOODS
CHANGES IN CONSUMER INCOME
CONSUMER EXPECTATIONS
POPULATION
CONSUMER TASTES AND ADVERTISING
=SHIFT OF ENTIRE DEMAND CURVE
SHIFT RIGHT—INCREASED DEMAND
SHIFT LEFT—DECREASED DEMAND
SUPPLY
The various amounts of
something producers
are willing and able to
sell at different
possible prices at a
particular time
LAW OF SUPPLY
PRODUCERS ARE
WILLING TO
PRODUCE MORE AT
HIGHER PRICES.
SHIFTING SUPPLY
CAUSES FOR SHIFTS IN SUPPLY
INPUT COSTS
CHANGES IN TECHNOLOGY
REGULATORY POLICY
NUMBER OF SUPPLIERS
PRODUCER EXPECTATIONS
ECONOMIC REALITIES
PRICE CEILINGS-SETTING A MAXIMUM PRICE-CAUSE SHORTAGES.
EXAMPLES INCLUDE RENT CONTROL AND OPEN-SPACE LAWS.
PRICE FLOORS-SETTING A MINIMUM PRICE-CAUSE SURPLUSES.
EXAMPLES INCLUDE MINIMUM WAGE AND FAIR TRADE PRICING.
PRICE SYSTEM
• COMPETITION
• COSTS OF PRODUCTION
FIXED-(RENT, MANAGEMENT,
INTEREST, OBLIGATIONS)
VARIABLE-(PRODUCTION-BASED, LABOR
COSTS, SHIPPING COSTS)
• SUPPLYAND DEMAND
• CONSUMER DRIVEN--MARKET FORCES
THE ROLE OF PRICE
• INCENTIVE TO CONSUME/PRODUCE
• INFORMATION FOR BUYERS/SELLERS
• SIGNAL TO CONSUME/PRODUCE
• RATIONS GOODS AND SERVICES
• VOLUNTARY EXCHANGE
PRICE ELASTICITY
• SENSITIVITY OF QUANTITY TO CHANGES IN PRICE
• ELASTICITY = % CHANGE IN QUANTITY DEMANDED
% CHANGE IN PRICE
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NEW NUMBER(y2) – OLD NUMBER(y1) X 100
OLD NUMBER(y1)
To ensure the same percentage whether quantities and prices increase or
decrease, economists use the ARC formula as shown below:
Price elasticity of demand = (Q2-Q1)/[(Q1+Q2)/2] / (P2-P1)/[(P1+P2)/2]
% CHANGE=
IF THE QUANTITY DEMANDED OR SUPPLIED INCREASES OR DECREASES GREATLY
DUE TO MINOR CHANGES IN PRICE, IT IS SAID TO BE RELATIVELY “ELASTIC”
WITH THE ELASTICITY VALUE BEING > 1.
IF THE QUANTITY DEMANDED OR SUPPLIED DOES NOT INCREASE OR DECREASE
SIGNIFICANTLY DUE TO MINOR CHANGES IN PRICE, IT IS SAID TO BE
RELATIVELY “INELASTIC” WITH THE ELASTICITY VALUE BEING < 1.
IF THE QUANTITY DEMANDED OR SUPPLIED DOES NOT CHANGE DUE TO CHANGES
IN PRICE, IT IS SAID TO BE “UNITARY ELASTIC” AND THE ELASTICITY VALUE = 1
DETERMINANTS OF ELASTICITY
AVAILABILITY OF SUBSTITUTES
NECESSITY OR LUXURY
PRICE AS PERCENTAGE OF INCOME
TIME TO COMPARE OR REACT TO PRICE CHANGES
Lowering the price on elastic goods increases total revenue.
Raising prices on inelastic goods increases total revenue.
NOTE: All products are elastic in demand in the long run.
P
EXAMPLE OF INELASTIC DEMAND
7
5-4/[(5+4)/2)] = .22 / 7-5/[(5+7)/2] = .33
.22 / .33 = .67
.67 < 1 INELASTIC
5
4 5
Q
P
EXAMPLE OF RELATIVELY ELASTIC DEMAND
12-5/[(5+12)/2] = .82 / 5-3/[(3+5)/2] = .50
.82 / .50 = 1.6
1.6 > 1 ELASTIC
5
3
Q
5
12
EXAMPLES OF ELASTICITY
INELASTIC DEMAND (SALT, MEDICINE, etc) < 1
D
ELASTIC DEMAND (CARS, SODA, etc) > 1
D
UNITARY ELASTIC (PERFECTLY ELASTIC) = 1 PERFECTLY INELASTIC (SUPPLY OF TICKETS)
S
D
THE REVENUE BOX
EFFECT OF ELASTICITY OF DEMAND
7
PRICE = 7 TR = 14
3
PRICE = 3 TR =18
2
6
PROFIT: BUSINESS INCENTIVE
BUSINESS INCOME IS REVENUE
BUSINESS SPENDING IS COSTS
INCOME
TR = P x Q (PRICE X QUANTITY=TOTAL REVENUE)
COSTS (EXPENDITURES)
TC = FC + VC (FIXED COSTS + VARIABLE COSTS = TOTAL
COSTS)
Profit = TR – TC(PROFIT = TOTAL REVENUE – TOTAL COSTS)
BOTTOM LINE IN BLACK OR IN RED
PROFIT (+) OR LOSS (-)
BREAK-EVEN POINT MR = MC NO PROFIT/LOSS
TYPES OF BUSINESS ORGANIZATIONS
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SOLE PROPRIETORSHIP (75%/20% $)
--OWNER KEEPS PROFIT/MAKES ALL DECISIONS
--PERSONAL TAX RETURN/NO LEGAL PAPERWORK
--UNLIMITED LIABILITY—LIMITED LIFE
PARTNERSHIP (7%/10% $)
--GENERAL—UNLIMITED LIABILITY FOR PARTNERS
--LIMITED—(SILENT PARTNER(S) CONTRIBUTE(S) $)
--LIMITED LIABILITY (LLP) ALL PARTNERS
--SPECIALIZATION/DIVISION OF LABOR
--PROVIDES LARGER POOL OF CAPITAL
CORPORATION (18%/70% $)
-LIMITED LIABILITY/UNLIMITED LIFE AND $
--DOUBLE TAXATION/CORPORATE TAX RETURN
--BOARD OF DIRECTORS/LEGAL PAPERWORK
BUSINESS FINANCING
• SHORT-TERM LOANS
LESS THAN ONE YEAR
• MEDIUM-TERM LOANS
1-10 YEARS
• LONG-TERM LOANS
MORE THAN TEN YEARS
MARKET STRUCTURE
• PERFECT COMPETITION
• MONOPOLISTIC
• OLIGOPOLY
• MONOPOLY
MARKET STRUCTURE
How businesses compete in a market economy
• PERFECT COMPETITION
--”PRICE TAKERS”-(NO CONTROL OVER PRICE)
--IDENTICAL PRODUCTS/MANY SELLERS
--NO BARRIERS TO ENTRY
• IMPERFECT COMPETITION
– MONOPOLISTIC COMPETITION
--SIMILAR PRODUCTS/MANY SELLERS
--FEW IF ANY BARRIERS TO ENTRY
--DIFFERENTIATED PRODUCTS
– OLIGOPOLY
-- “PRICE SEARCHERS”
--DIFFERENTIATED PRODUCTS/FEW SELLERS
--PRICE LEADERSHIP (A FEW FIRMS DOMINATE INDUSTRY)
– MONOPOLY
--PRICE MAKER-(TOTAL CONTROL OVER PRICE)
--ONLY SELLER
--SIGNIFICANT BARRIERS TO ENTRY
$$ MONEY $$
• MEDIUM OF EXCHANGE
• STORE OF VALUE
• UNIT OF ACCOUNT
$$ MONEY $$
• PORTABLE
• DURABLE
• DIVISIBLE
• RECOGNIZABLE
• ACCEPTED AS PAYMENT
• STABLE