Econ unit 2 - Microeconomics

Quantity demand is only caused by

A change in price

Shift in demand curve is only caused by

Non price determinants

Quantity demand logistics

Increase in price = decrease in quantity demand

Decrease in price = increase quantity demand

Relationship between price and quantity demand

Negative causel relationship

What variable is the independent variable and why?

Independent variable is price, because it changes the quantity demand.

Markets

Arrangement where buyers and sellers of goods, services, resources are linked together to carry out exchange.

Competitive market

Composed of large number of sellers/buyers that act independetly, so no individual seller or group of sellers has ability to control price of product being sold. Price of product is set by interaction of many sellers and buyers and the forces of both supply and demand.

Demand

Individual consumers willingness and ability to buy goods or services at different prices during a specific period of time.

Law of demand

States there is a negative causel relationship between a goods price and its quantity demand during a time period.

Why is demand downward sloping?

Law of diminshing marginal utility

Law of diminishing marginal utlility

Consumers derive utility/benefit from goods/services that are bought. The more of a good/service consumed, the less additional benefit we get.

Consumers will only consume additional units of good/service if price falls.

(law of demand assumotion) Substitution effect

As price of this good decreases, consumers switch from other substitute goods to this one as its price is lower, increasing its demand 

(law of demand assumption) Income effect

Real income is adjusted to changes in prices, gives the actual buying power of consumers. As price of good decreases, consumer real income increases, letting them buy more of same good.

Changes in demand (non-profit determinants, shifters of demand)

1. Changes in income (normal and inferior goods) 

2. Tastes and preferences 

3. Future price expectations 

4. Price of related goods (substitutes and compliments) 

5. Size of market (number of consumers) 

Changes in income: Normal and inferior goods

Normal goods - Increase in income (Y) = increase in demand (D)

Inferior goods (lower quality things) - Increase in income (Y) = decrease in demand (D)

(price of related goods) Subs 

When one goods price increases, that quantity demand decreases, and the other goods demand increases. And vice versa for decrease in good.

(price of related goods) Complementry

As price of one good increases, its quantity demand decreaes, and its complementry goods demand will decrease. And vice versa for decrease in good.

Supply

Individual firms willingness and ability to produce various quantities of goods/services at different prices during a specific period of time, is the supply for a particular good/service.

Law of supply

States that there is a positive causel relationship between a goods price and its quantity supplied in a particular time period.

At higher prices prices (for supply)

producers are willing to produce more. The cost of production will be high

At lower prices (for supply)

producers are willing to produce less. The cost of production will be low.

Non price determinants of supply (STORES)

1. Subsidies and taxes

2. Technological advances

3. Other related goods prices (joint and competitive supply)

4. Resource costs

5. Expectation of future prices

6. Size of market (number of producers)

(non price determinant of supply) Competitive/joint

Competitive - production of one over the other (e.g wheat and corn) 

Joint - Can only produce more of one good with the other (e.g butter and milk)

When the supply curve moves to the right

Means more production

When the supply curve moves to the left

Means less production

(taxes and subsidies) Subsidies

Subsidies are from the gov. given to the producers, which lowers cost of production. Producers will produce more.

(subsidies and taxes) Taxes

Taxes increase cost of production. Producers will produce less.

Short term

At least one factor of production is fixed (usually capital)

Long run

All factors of production can be changed (planning period)

Total product (TP)

Total amount of output produced by a firm

Total revenue (TR)

Amount of money received by firms when they sell a good (or service).

Marginal product (MP)

Additional output produced by a firm from one additional unit of variable input (labour). This tells us how much output changes by adding additional labour. MP=deltaTP/delta Units of labour.

Average product (AP)

Total quantity of output per unit variable input. This tells us how much each worker is able to produce on average. AP=TP/ units of labour.

Law of diminshing return (short run problem)

As more and more units of variable inputs (labour) are added to one or more fixed inputs (capital, e.g oven) the marginal product of the variable input initially increases but there comes a point where it will decrease.

When MP is above AP, AP…

Increases

MP is below AP, AP…

Decreases

Margincal cost (MC)

The costs of producing an additional unit of output

When output increases

so does marginal cost, therefore firms are only going to be willing to increase their output if prices they recieve also increases.