Ch3&4 Microeconomics Year 2 Term 1

Firm

An organization that transforms resources (inputs) into products (outputs). ___ are the primary producing units in a market economy.

Entrepreneur

A person who organizes, manages, and assumes the risks of a firm, taking a new idea or a new product and turning it into a successful business.

Households

The consuming units in an economy.

Product or Output Markets

The markets in which goods and services are exchanged.

Input or Factor Markets

The markets in which the resources used to produce goods and services are exchanged.

Labor Market

The input/factor market in which households supply work for wages to firms that demand labor.

Capital Market

The input/factor market in which households supply their savings, for interest or for claims to future profits, to firms that demand funds to buy capital goods.

Land Market

The input/factor market in which households supply land or other real property in exchange for rent.

Factors of Production

The inputs into the production process. Land, labor, and capital are the three key factors of production.

Firms determine…

the quantities and character of outputs produced and the types and quantities of inputs demanded.

Households determine…

the types and quantities of products demanded and the quantities and types of inputs supplied.

Quantity Demanded

The amount of goods and service that a consumer is willing and able to purchase at a given price in a given period of time. It’s the amount (number of units) of a product that a household would buy in a given period if it could buy all it wanted at the current market price.

A household’s decision about what quantity of a particular output, or product, to demand depends on a number of factors, including…

▪ The price of the product in question.

▪ The prices of other products available to the household

▪ The income available to the household.

▪ The household’s amount of accumulated wealth.

▪ The household’s tastes and preferences.

▪ The household’s expectations about future income, wealth, and prices.

▪ Population

▪ Weather condition

The most important relationship in individual markets is that…

between market price and quantity demanded.

Changes in the price of a product affect the ____ per period.

quantity demanded (fill)

Changes in any other factor, such as income or preferences, affect ____.

demand (fill)

Demand Schedule

the table that shows how much of a given product a household would be willing and able to buy at different prices for a given time period.

Demand Curve

A graph illustrating how much of a given product a household would be willing to buy at different prices.

The relationship between price (P) and quantity demanded (q) presented graphically is called a…

demand curve (fill)

Demand curves have a ____ slope

negative

demand in product markets is determined by ____.

household choice

Law of Demand

The negative relationship between price and quantity demanded: As price rises, quantity demanded decreases; as price falls, quantity demanded increases.

It is reasonable to expect quantity demanded to fall when price rises, ____, and to expect quantity demanded to rise when price falls, ____.

ceteris paribus (fill)

Properties of Demand Curves

1. They have a negative slope.

2. They intersect the quantity (X) axisa result of time limitations and diminishing marginal utility.

3. They intersect the price (Y) axis, a result of limited income and wealth.

The actual shape of an individual household demand curve—whether it is steep or flat, whether it is bowed in or bowed out…

depends on the unique tastes and preferences of the household and other factors.

Income

The sum of all a household’s wages, salaries, profits, interest payments, rents, and other forms of earnings in a given period of time. It is a flow measure.

Wealth or Net Worth

The total value of what a household owns minus what it

owes. It is a stock measure.

Normal Goods

Goods for which demand goes up when income is higher and for which demand goes down when income is lower. e.g Movie tickets, restaurant meals, telephone calls, and shirts are all normal goods.

Inferior Goods

Goods for which demand tends to fall when income rises. e.g People who can afford to fly are less likely to take the bus long distances

Substitutes

Goods that can serve as replacements for one another; when the price of one increases, demand for the other increases.

Perfect Substitutes

Identical products. e.g mango juice and orange juice.

Complements, complementary goods

Goods that “go together”; a decrease in the price of one results in an increase in demand for the other and vice versa e.g cars and gasoline; electric/gas cooker and pots.

Three Factors that Determine the Combinations of Goods & Services that a Household is Able to Buy

Income, wealth, and prices of goods available

Changes in preferences ____ manifest themselves in market behavior.

can

When the price of a good changes, we ____ for that good.

move along the demand curve

When any other factor that influences demand changes (income, tastes, and so on), the relationship between price and quantity is different; there is a ____.

shift of the demand curve

Gasoline is a(n) ____ good.

normal

Shift of a Demand Curve

The change that takes place in a demand curve corresponding to a new relationship between quantity demanded of a good and price of that good. The shift is brought about by a change in the original conditions.

Movement along a demand curve

The change in quantity demanded brought about by a change in price.

Change in price of a good or service leads to

Change in quantity demanded (movement along a demand curve).

Change in income, preferences, or prices of other goods or services leads to

Change in demand (shift of a demand curve).

When income increases, the demand for inferior goods shifts to the __.

left

When income increases, the demand for normal goods shifts to the __.

right

Market Demand

The sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service.

Total demand in the marketplace is

the sum of the demands of all the households shopping in a particular market.

Profit

The difference between revenues and costs.

Quantity Supplied

The amount of a particular product that a firm would be willing and able to offer for sale at a particular price during a given time period.

Supply Schedule

A table showing how much of a product firms will sell at alternative prices.

Law of Supply

The positive relationship between price and quantity of a good supplied: An increase in market price will lead to an increase in quantity supplied, and a decrease in market price will lead to a decrease in quantity supplied.

Supply Curve

A graph illustrating how much of a product a firm will sell at different prices.

The slope of a supply curve is ____.

Negative

A producer will supply more when the price of output is ____.

higher

Cost of Production

depends on a number of factors, including the available technologies and the prices and quantities of the inputs needed by the firm (labor, land, capital, energy, and so on).

Assuming that its objective is to maximize profits, a firm’s decision about what quantity of output, or product, to supply depends on:

1. The price of the good or service.

2. The cost of producing the product, which in turn depends on:

- The price of required inputs (labor, capital, and land).

- The technologies that can be used to produce the product.

3. The prices of related products.

4. War

5. Weather condition

6. Time and festive of the year

Movement along a supply curve

The change in quantity supplied brought about by a change in price.

Shift of a supply curve

The change that takes place in a supply curve corresponding to a new relationship between quantity supplied of a good and the price of that good. The shift is brought about by a change in the original conditions.

When the price of a product changes, we ____ for that product; the quantity supplied rises or falls.

move along the supply curve

When any other factor affecting supply changes, ____.

the supply curve shifts.

Change in price of a good or service leads to

Change in quantity supplied (movement along a supply curve).

Change in costs, input prices, technology, or prices of related goods and services leads to

Change in supply (shift of a supply curve).

Market Supply

The sum of all that is supplied each period by all producers of a single product.

Total supply in the marketplace

is the sum of all the amounts supplied by all the firms selling in the market. It is the sum of all the individual quantities supplied at each price.

Equilibrium

The condition that exists when quantity supplied and quantity demanded are equal. At equilibrium, there is no tendency for price to change.

Excess Demand or Shortage

The condition that exists when quantity demanded exceeds quantity supplied at the current price.

Excess Supply or Surplus

The condition that exists when quantity supplied exceeds quantity demanded at the current price.

Price ceiling

A maximum price that sellers may charge for a good, usually set by government. This arises as setting the price at the equilibrium could be perceived as

unfair. ____ is usually set below the market equilibrium; and at this point quantity demanded is higher than quantity supplied which may lead to black market

Price floor

This is a minimum price below which exchange is not permitted. For instance, when the government set the minimum wage to be paid to labour by any employer in the country. ____ is usually set above the market equilibrium; and at this point quantity supplied is higher than quantity demanded

inputs are traded in the…

factor market

wealth is a…

stock measure