Unit 2- econ

microeconomics

concerned with the behaviour of consumers, firms and resource owners, who are the most important economic decision-makers in a market economy.

market

any kind of arrangement where buyers ands selllers of goods, services or resources are linked together to carry out an exchange

competitive markets

composed of large numbers of sellers and buyers acting independently, so that no one individual seller or small group of sellers has the ability to control the price of the product sold.

law of demand

there is a negative relationship between the price of a good and its quantity demanded over a particular time period. As the price of the good increases, quantity demanded falls; as the price falls, quantity demanded increases

Market demand

the sum of all individual demands for a good. The market demand curve illustrates the law of demand, shown by the negative relationship between price and quantity demanded.

Non-price determinants

variables that influence demand other than price. These include:

Income in the case of normal goods

Income in the case of inferior goods: some goods are inferior goods which means as consumer income increases, the goods demand falls.

Preferences and taste

prices of substitutes

Price of complementary goods: if they are used together

The number of consumers: if there is an increase in the number of consumers, demand increase

Utility

is the satisfaction that consumers gain from consuming something

Law of diminishing marginal utility

as consumption of a good increase, marginal utility, or the extra utility the consumer receives, decreases with each additional unit consumed.

Substitution effect

if the price of a good falls, the consumer substitutes (buys more) of the now less expensive good.

Income effect

the change in the demand for a good or service caused by a change in a consumer's purchasing power or real income

Substituition and Income effect

Reinforce each other. A fall in price leads to an increase in quantity demanded, both because of the substitution effect and because of the income effect.

Supply

various quantities of good or service a firm is willing and able to produce and supply to the market for sale at different possible prices during a particular time period

Law of supply

there is a positive relationship between the quantity of a good supplied over a particular time period and its price. As the price of the good increase, the quantity of the good supplied also increases; as the price falls, the quantity supplied also falls

Market supply

The sum of all individual firms’ supplies for a good.

Non-price determinants for market supply

Costs of factors of production

Technology

Prices of related goods: competitive supply

Prices of related goods: joint supply

Producer price expectations

Taxes

Subsidies

The number of firms

“Shocks” or sudden unpredictable events

Market equilibrium

quantity demanded equals quantity supplied- no price change

Market share

the percentage of total sales in a market that is earned by a single firm

Growth maximisation

-achieve economies of scale&lower its average costs, thus increasing profitability

-firm can diversify

-larger firm has greater market power and increased ability to influence prices- thus potentially increasing profits

-a larger firm reduces its risks because it may be less affected in an economic downturn and less likely to be taken over

-reconciles with both the interest of the owners and managers

Revenue maximisation

-sales can be identified and measured more easily over the short term than profits- this can also motivate employees

-rewards for managers and employees

-often assumed that revenue from more sales will increase more rapidly than costs

-increased sales give rise to a feeling of success