Econ 12 Unit 2, microeconomics

What is Microeconomics?

Microeconomics is the study of smaller parts of the economy, such as individual consumers, businesses, and specific markets.

For example:

• Why does McDonald's increase its burger prices?

• Why do people buy fewer products when prices increase?

• How do businesses decide how much to charge?

Remember: Micro = small parts of the economy.

What is a Market?

A market is where buyers and sellers interact to exchange goods or services.

Your notes mention three important ideas:

1. Physical markets: Places where people buy and sell products, such as grocery stores.

2. Buyers and sellers: A market involves people who want to buy and people who want to sell a particular product, such as baseball cards.

3. Goods and services: Markets can exist for physical products (houses, cars) or services (haircuts, plumbing).

A market doesn't always need a physical location. For example, Amazon is an online marketplace.

What Determines Prices in a Market?

The market, Prices are determined by supply and demand.

• Sellers (supply): Generally prefer higher prices because they can earn more money.

• Buyers (demand): Generally prefer lower prices because they can afford more.

• Equilibrium price: The price where the quantity buyers want to purchase equals the quantity sellers want to sell.

What is Demand?

Quantity of good purchased at a various prices over a set time

Demand is the quantity of a good or service that consumers are willing and able to buy at different prices during a specific period.

There are three important parts:

• Willing: You actually want the product.

• Able: You have enough money to purchase it.

• Price: How much the product costs affects how many units people want to buy.

Example

You want to buy a $100 pair of shoes.

• If you want them but only have $20, you cannot afford them.

• If you have $100 but don't want them, you're not willing to buy them.

• If you want them and have $100, you are both willing and able to buy them.

This is why economists say demand requires both willingness and ability to pay.

5. The Law of Demand

This is one of the most important concepts in microeconomics.

Law of Demand: When the price of a product increases, the quantity demanded generally decreases, assuming everything else stays the same.

And when the price decreases, quantity demanded generally increases.

5. Why do people buy more when prices decrease?

Your notes mention two important reasons.

A. Substitution effect

When a product becomes cheaper, people may buy it instead of a more expensive alternative.

Example:

• Coca-Cola costs $3.

• Pepsi costs $2.

You might choose Pepsi because it's cheaper.

Now imagine Coca-Cola decreases its price to $1.

You might switch to Coca-Cola.

This is called the substitution effect.

B. Income effect

Consumers have limited incomes, meaning they cannot buy everything they want.

When a product becomes cheaper, their money can purchase more.

Example:

You have $20 to spend on burgers.

• At $10 each, you can buy 2 burgers.

• At $5 each, you can buy 4 burgers.

Your income hasn't changed, but your purchasing power has increased.

This is the income effect.

what is Supply

Quantity supplied at various prices over set period of time

Supply is the quantity of a product that sellers are willing and able to offer at different prices during a certain period.

Law of supply

The law of supply states:

• When prices increase, quantity supplied increases.

• When prices decrease, quantity supplied decreases.

This is the opposite of demand!

What are the 5 factors for Demand?

Factor	Simple explanation	Example
1. Income	More income often increases demand for normal goods.	Higher salary → more restaurant meals
2. Population	More potential buyers can increase demand.	More people move to a city → higher housing demand
3. Tastes and preferences	Trends, fashion, and preferences influence what people want.	A celebrity promotes a shoe → demand increases
4. Expectations	Beliefs about future prices or income affect current demand.	Expect phone prices to rise → buy now
5. Substitutes vs. Complements	Prices of substitutes and complements affect demand.	Pepsi becomes more expensive → demand for Coke may rise

What are 5 factors of Supply

Factor	Simple explanation	Example
1. Production costs	Higher costs make production less profitable, decreasing supply.	Flour becomes more expensive → bakeries supply less bread
2. Number of sellers	More sellers generally increase market supply.	More pizza restaurants open → pizza supply increases
3. Nature/environment	Weather and natural disasters affect production.	Drought destroys crops → wheat supply decreases
4. Technology	Better technology makes production faster or cheaper, increasing supply.	New machines allow factories to produce more cars
5. Price of related outputs	Producers may switch between products they can make.	Tomatoes become more profitable → farmers grow more tomatoes instead of cucumbers