MICROECONOMICS: 1ELEMENTS IN THE MARKETPLACEThis 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 RESOURCESDEFINING 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. 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. 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. The higher price purses, due to increased

demand, may lead to a decrease in the supply of shoes.

FACTORS AFFECTING 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.

FACTORS AFFECTING 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.

FACTORS AFFECTING 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 Inflation-a general rise in prices. Deflation-a general decrease in prices. With perfect inflation, prices will rise but

production will remain the same. 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.

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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).

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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