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Microeconomics
Microeconomics is focused with the behaviour of households, consumers, firms and resource owners, who are the most important economic decision-makers in a market economy.
Markets
Any kind of arrangement where buyers and sellers of goods, services or resources are linked together to set quantity and price.
Competitive Markets
Markets are considered free or competitive to the extent that private individuals and firms can openly attempt to win business away from each other in the hopes of earning greater profits.
Firms
An individual or organization that combines the factors of production to create and sell goods and services on the market.
Industry
An industry is made up of all the firms engaged in the same market activity.
Types of market structure
perfect competition
monopolistic competition
oligopoly
monopoly
Four Major Criteria for Market Structure
The number of firms in the industry.
A firm's level of market power.
The degree of product differentiation between goods offered by different firms.
The ease of exit and entry.
Perfect competition
Many firms in the industry
No individual influence on market
Identical products
Easy exit/entry
e.g. raw cocoa beans
Monopolistic competition
Many firms
No single firm can influence market price
Relatively differentiated products
Relatively easy exit/entry
e.g. restaurants, food trucks,clothing stores
Oligopoly
Handfull of firms
Significant control over price
Intyerdependent competition
High barriers to exit/entry
e.g; starbucks, dunkin, costa, tim hortons,
Duopoly
Only 2 firms dominate
Control most of market
Similar products
High barriers to exit or enter
e.g; boeing + airbus
Monopoly
Only 1 firm in market
Controls all output price
Only 1 type of product
Almost impossible to enter and exit
e.g; local monopolies on water & power
Monopsonist
Firm is single buyer in market
1 firm provides most employment in small cities
Hard for smaller suppliers to compete
Demand
The demand of an individual consumer indicates the various quantities of a good (or service) the consumer is willing and able to buy at different possible prices during a particular time period, ceteris paribus.
Quantity demanded
The quantity demanded can be referred to as the consumers’ intent for acquiring a specific amount of goods and services at a particular price.
The demand curve
Law of demand
There is a negative causal relationship between the price of a good and its quantity demanded over a particular time period, ceteris paribus:
as the price of the good increases, quantity demanded falls; as the price falls, quantity demanded increases, ceteris paribus.
Why The Demand Curve Slopes Downward
Consumers buy goods and services because these provide them with some benefit, or satisfaction, also known as utility.
The extra benefit provided by each additional unit increases by smaller and smaller amounts. The extra benefit that you get from each additional unit of something you buy is called the marginal benefit or marginal utility.
Law of diminishing marginal utility
Utility is the extra satisfaction that one receives from consuming a product.
Marginal means extra.
Diminishing means decreasing.
Types of Goods
Free Goods.
Economic Goods.
Normal Goods.
Inferior Goods.
Giffen Goods.
Veblen Goods.
Final / Consumer Goods.
Capital Goods.
Intermediate Goods.
Raw Materials
Free goods
A free good is infinitely abundant and thus does not incur any opportunity costs in its production. e.g. air
Economic good
An economic good is a good which uses scarce resources in being provided and thus there is an opportunity cost of the alternative goods foregone.
Normal goods
Affected by level of household income
As salary increases, consumption increases
most goods are normal
Inferior goods
Affected by level of household income
As salary decreases, consumption increases
e.g. bus tickets, 2nd hand clothing
Giffen goods
Like an inferior good → as income falls, demand rises
Irreplaceable good (poor people budget)
Claimes a large portion of consumers’ budget
as price increases, demand increases
Bread/rice in poorer areas
Veblen goods
Veblen: ostentatious, showy, flamboyant
To show purchasing power & status
higher price = higher demand
e.g; Birkin bag
Capital goods
Good purchased to serve a purpose of production/service for company
Used to produce the good
e.g; printer to print papers for ads
Intermediate goods
Raw materials used to produce another product or service
Used in the product
e.g; steel used to make cars
Consumer/final goods
End product that businesses sell directly to consumers
Effect of price on demand
Whenever the price of a good changes, ceteris paribus, it leads to a movement along the demand curve.
If the price falls from P1 to P2, the quantity of the good demanded increases from Q1 to Q2
Income effect
A fall in price = people demanding are “richer” because their income can buy more of the good → more likely to increase consumption
Substitution effect
Fall in price of a good = price of alternative (substitute) good to increase (relatively)
Consumers will substitute other goods with the lower priced good.
Non-price Determinants of Demand (NPD)
Income in the case of normal goods.
increase income = increase demand
Income in the case of inferior goods.
increase income = decrease demand
Preferences and tastes.
when goods become favourable/popular, people want more
Prices of substitute goods.
price of substitute goods increases = demand of initial goods increases
Prices of complementary goods (Derived Demand).
Goods that tend to be used together; e.g smartphone & charger.
price of 1 good falls, demand of other increases (mutually affect each other)
Demographic (population) changes implying changes in the number of buyers.
increased # of buyers = increase market demand
Expectations of Consumers
When people predict things
If future prices expected to rise, demand now increases
Supply
The supply of an individual firm indicates the various quantities of a good (or service) a firm is willing and able to produce and provide to the market for sale at different possible prices, during a particular time period, ceteris paribus.
QUantity supplied
Quantity supplied describes the number of goods or services that suppliers will produce and sell at a given market price.
The supply curve
LAw of supply
There is a positive causal relationship between the quantity of a good supplied over a particular time period and its price.
As the price of the good increases, the quantity of the good supplied also increases; as the price falls, the quantity supplied also falls, ceteris paribus.
Vertical supply curve
Even as price increases, the quantity supplied cannot increase; it remains constant. There is a fixed quantity of the good supplied because:
There is no time to produce more of it.
There is no possibility of ever producing more of it.
Effect of price on supply
Any change in price produces a change in quantity supplied, shown as a movement on the supply curve.
Any change in a determinant of supply (other than price) produces a change in supply, represented by a shift of the whole supply curve.
Non-price Determinants of Supply
Costs of factors of production.
Factors of production increase = supply decrease
Technology.
More improved technology = lower cost of production = supply increase
Prices of related goods: competitive supply.
Firms competing for same resources
Firm producing more of 1 good = other firm must produce less of other
Prices of related goods: joint supply.
Production of goods derrived from single product, e.g. milk + beef
More supply of 1 product = more of other product
Producer/firm expectations.
If prices expected to rise in future, firms will withhold products from market to sell at higher prices later
Taxes (direct or indirect taxes).
Taxes increase = supply decrease
Subsidies.
Subsidies increase = supply increase
The number of firms.
# firms increase = total supply increase
‘Shocks’, or sudden unpredictable events.
Affected production costs = affect supply
e.g. war, pandemic, disaster
Market equilibrium
When a market is in equilibrium, quantity demanded equals quantity supplied, and there is no tendency for the price to change. In a market disequilibrium, there is excess demand (shortage) or excess supply (surplus), and the forces of demand and supply cause the price to change until the market reaches equilibrium.
Surplus VS shortage in a market
If quantity demanded of a good is smaller than quantity supplied, the difference between the two is called a surplus, where there is excess supply.
If quantity demanded of a good is larger than quantity supplied, the difference is called a shortage, where there is excess demand.
Invisible hand in a market
Individuals are guided by a price. When consumers act in best self-interest, they benefit the market
Price Acts as Signals & Incentives
Price communicates information to decision-makers: incited consumers to respond accordingly
high price = shortage of supply = producers need to produce more
Consumer surplus
Consumer surplus is defined as the highest price consumers are willing to pay for a good minus the price actually paid.
Allocative efficiency
At market equilibrium. The competitive market realises allocative efficiency, producing the combination of goods mostly wanted by society, thus answering the what to produce question in the best possible way.
Productive efficiency
Productive efficiency is production with the fewest possible resources, thus answering the how to produce question in the best possible way.
Producer surplus
The price received by firms for selling their good minus the lowest price that they are willing to accept to produce the good.
Price controls
governing body has market interventions by controlling prices on non-clearing markets: excess of supply or excess of demand
Price ceiling
Price ceiling is a price set down in law that the price of a good may not be set above a certain level.
Often these are imposed to make basic goods & services more affordable for poorer households; e.g. staple foods like bread, rice, & grain, or rent control
Effects of price ceiling
Shortages & Decreased Market Size.
Demand > supply
Rationing.
Govt. supplies everyone equally. → barter deals: trade goods for other goods
Elimination of Allocative Efficiency.
maginal benefitt ≠ maginal cost
Informal/Black Markets.
Selling necesities at prices much higher than p1
Price floor
A price set down in law that the price may not be set below a certain level.
May be supporting employment in a certain way
Effects of price floor
Surplus & Reduced Market Size.
demand < supply
Cost Inefficiency.
Higher-cost production is inefficient
Allocative Inefficiency.
Informal/Black Markets.
firms sell surplus at prices below equilibrium
Buffer stocks
The purpose of a buffer stock scheme is to stabilise and uphold a certain price.
When demand is high, they increase supply; when demand is low, they store excess supply
The good has to be storable since it runs the risk of being stored for an indeterminate period.
The good is often a commodity, i.e. a primary good such as rubber, sugar, coffee and grain.
There are considerable price fluctuations on the market.
How buffer stocks work
International Commodity Agreements (ICA)
Allow members to use commodity agreements to influence world prices
Often govt. is very involved
within countries it’s illegal, intl. is legal
e.g; rubber, cocoa, petrol, etc.
Cartel
A group of producers of goods or suppliers of services formed through an agreement amongst themselves, whether or not through a formal agreement in writing, to regulate the supply of goods or services with the basic intent to control the prices illegally or to restrict competition in respect of the said goods or services.
Cartel types
price cartels
Term cartels: create term agreements to form alliance
Customer assignment cartels: each comapny is assigned specific customer demographic
Quota cartels: e.g. OPEC, regulate how much each producer can produce
Zonal cartels: dividing country into zones so each company only in specific zone
Syndicate cartels: Drug cartels: crimes
Super cartels: Large cartels
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