Microeconomics Notes

Microeconomics - Unit I

Essential Standards and Questions

• Essential Standards:
  • EPF.E.1.1 Compare how individuals and governments utilize scarce resources in traditional, command, market, and mixed economies
• Essential Question:
  • How does the allocation of resources influence individuals, businesses, and nations in different economic systems
• Learning Objectives:
  • Determine how scarcity causes individuals, businesses, and governments to make informed decisions.
  • Demonstrate how different economic systems are shaped by scarcity.
• Agenda:
  • About You
  • Syllabus
  • Responding to Economic Conditions
  • Homework: Get Syllabus Signed

Class Logistics

• Parliamentary Procedure
• Class Syllabus – Expectations for Economics & Personal Finance
• Getting updates about the class
• Join Remind 101
  • Text @c64679 to 81010

Population Growth

• U.S. states by population growth rate 1950-2016
  • Categorized by:
    • Population growth above 200%
    • Population growth between 100% and 199%
    • Population growth between 1% and 99%
    • Population decrease
  • Examples of states with high growth:
    • Nevada +1,736%
    • Arizona +824%
    • Florida +643%
    • Alaska +477%
    • Utah +343%
    • Colorado +318%
    • California +271%
    • Texas +261%
  • Example of states with population decrease:
    • West Virginia -8%
• Question: How does the continuous growth of the U.S. population affect the U.S. as a nation?

Economics: Dealing with Scarcity

• Economics defined:
  • The study of choices because of scarcity.
• Scarcity:
  • Not enough resources to meet unlimited wants & needs.
• Economy:
  • A system of dealing with production & distribution of goods & services in order to deal with scarcity.
• Scenario:
  • Gas reaches an all time high of $9.59 per gallon & you earn $26,000 per year – How would this impact you?

Focusing Studies

• Economics:
  • The study of how we make choices based on scarcity.
• Branches of Economics:
  • Macroeconomics: Examines how large groups make choices based on scarcity.
  • Microeconomics: Examines how individuals make choices based on scarcity.

Resources: Needs vs. Wants

• Resources:
  • Items used to make goods (physical items) and services (activities) to meet people’s needs & wants.
• Types of Goods:
  • Capital goods: Used to make other goods.
  • Consumer goods: Final products that are purchased.
• Needs:
  • Priority for survival.
• Wants:
  • Secondary – nice to have.

Making the Right Choice

• Every choice has trade-offs (what you get) & opportunity cost (what you give up).
• Trade-offs:
  • What you gain or the advantages of what you chose.
• Opportunity Costs:
  • Opportunity cost is an opportunity lost – what you give up when you choose.
  • Examples:
    • Education vs. Staying in bed
    • Exercising vs. Playing a video game
• Scenario:
  • Should the United States invest in the education of its youth or increase the size of the military?
  • What do I gain and What do I lose?????
• Guns vs. Butter Debate

Cost-Benefit Analysis

• Cost benefit analysis:
  • A tool to evaluate the choices we make.
• Marginal Cost:
  • The COST to produce or do for just one more (DISADVANTAGE).
• Marginal Benefit:
  • The BENEFIT to produce or do for just one more (ADVANTAGE).

The Cost to Do Business

• Evaluating Trade-offs & Opportunity Costs
• TOTAL \COST = fixed \cost + variable \cost
• Fixed Cost:
  • Cost stays the same no whether you use it or not
  • Examples:
    • Stapler
    • Mortgage payment
    • Computer
    • Xbox
• Variable Cost:
  • Cost increases the more you use it
  • Examples:
    • Fleet of trucks
    • Staples
    • Electricity
    • Gas
    • Copies
    • Laundry detergent

Scarcity Simulation: Picture Recreation

• Group activity to recreate pictures using limited materials.
• Time constraints:
  • 3 minutes to plan (no touching materials).
  • 20 minutes to execute.
• Grading:
  • Based on performance compared to other groups.
  • 1st place – grade: A
  • 2nd place (2 winners) – grade B
  • 3rd place (3 winners) – grade C
  • 4th place (2 winners) – grade D
  • 5th place (2 winners) – grade F
• Discussion Points:
  • What were the scarce resources?
  • What things were out of your control in this assignment?
  • What were the resources that the teacher couldn’t control?
  • If groups represented different countries, what did you learn about economics?

Business and Economic Questions

• Three basic economic questions businesses answer:
  1. What to produce?
  2. How to produce?
  3. For whom to produce for?
• Who answers these questions?
  • The people or government or both?
• Depends on the economic system.

Factors of Production

• Factors of Production:
  • LAND (natural resources)
  • LABOR (employees)
  • CAPITAL (Tools & Machines)
  • ENTREPRENEURS
• McDonald’s: Inputs = Factors of production vs. Outputs = the final product.
• Frito-Lays Potato Chips:
  • Watch a video and list all of the FOPs for each category (https://www.youtube.com/watch?v=ws_K9Cxs-uE)

Factors of Production Identification

• Identify the following Factors of Production – L = Land, LB = Labor, C = Capital, & E = Entrepreneur
  1. A fleet of deliver trucks (C)
  2. Steel for the construction of a building (L)
  3. A factory worker who assemblies automobiles (LB)
  4. Chief executive of Nike corporation (E)
  5. Knives, spatulas, and mixtures in a restaurants (C)
  6. Lettuce, chicken, bun & pickle at Chick-fila (L)
  7. Cash register operator (LB)
  8. Wood for building homes (L)
  9. An investor in a business (E)
  10. Computers and copiers at an accountant firm (C)

Investing in FOPS Profits

• Why do entrepreneurs open a business?
  • PROFIT MOTIVE
• INVESTING in BUSINESS (Buying Factors of Production)
  • LAND (natural resources) = RENT
  • LABOR (employees) = WAGES
  • CAPITAL (Tools & Machines) = INTEREST
  • ENTREPRENEURS = PROFIT
• Efficiency is Important to consider with those factors of production

Efficiency = Profit

• Productivity
  • producing goods and services through efficient use of the factors of production
• Why do businesses need to be efficient in their use of the factors of production?
• Techniques:
  • Division of labor = assembly line
  • Automation = robots
  • Specialization = focus on what you do best (Nike = Athletics)
• What factor or term requires businesses to use efficiency techniques to get the most out of each factor of production?
  • SCARCITY

Human Capital

• Human Capital:
  • Improving your workforce to increase productivity
  • Ex. SAS – Treating their workers like ROYALTY

Diminishing Marginal Utility

• Diminishing marginal utility:
  • The point where added resources does not add profit
  • The point at which the cost outweighs the benefits.

Product Timeline

• Select a product you use to develop a Factors of Production timeline
  • Draw or insert an image of your product
  • Create a timeline the illustrate how your product was developed (From ideal, to design, production, to sold to a consumer)
  • Color code or highlight the factors of production that are used to produce the product

Economics in the News

• Evaluate why mass media (news outlet) report on different factors of the U.S. and global economy.
  • What is the importance to you?
  • How can it help you as a consumer, investor, or business owner

Current Event Journal Format

• Format:
  • Your Name:
  • Date:
  • URL (Web address)
  • Title:
  • Summary – 1 paragraph
  • Opinion – 1 paragraph
  • Economic content connections - 1 paragraph
• Big five:
  • Who or What?
  • Where?
  • When?
  • Why?
  • How?
• Summary:
  • Write in complete sentences
  • Avoid short-hand words or text speak
  • Use details from the news
  • Avoid quoting the article
• Opinion:
  • Write about what you think about the issue covered in the news article.
  • Topic:
    • Inflation – rising prices on food, shelter, and gas – evaluate whether the Federal Reserve should raise interest rates at their next meeting.
    • Interest rates – effect the cost to borrow money (if the Federal Reserve raises interest rates and your want to borrow money to buy a car it cost you more money.)

Market Structures

• Market Structures:
  • Describes the nature of competition within a market for a product
• Market Characteristics
  • Barrier to Entry: how hard it is to open a business in the market for a product
  • Competition: how many businesses compete in the market for a product
  • Control over price: how much say a business has in setting the price for a good
  • Diversity of product: How different or similar the products sold in the market for a particular good or service
• Market
  • establishes the prices for a particular good or service. (Based on a product – example Fast Food)

Market Structure Examples

• Evaluate examples to determine which market structure they compete in:
  • Oligopoly
  • Monopoly
  • Monopolistic competition
  • Perfect Competition
  • Natural Monopoly

Market Knowledge Evaluation

Market Structure Test

• Identify the characteristics of a product to determine its market structure.
• Barriers to entry:
  • Closed - No other business allowed
  • High - A Few business allowed
  • Low - Many business allowed
  • No Barrier – Anyone can open a business
• Control over price:
  • Total control – business sets the price
  • A lot of control – A lot say in setting the price
  • A little control – a little say in setting the price
  • No control – No say in setting the price
• Competition:
  • None – Only one competitor
  • Few - A few competitors
  • Many – several competitors
  • Everybody – Many competitors (open to anyone)
• Diversity of products:
  • No diversity – only one product
  • A little diversity – a few differences
  • A lot of diversity – products come in a variety
  • All the products exact the same – you cannot tell who made it

Perfect Competition

• Sell homogenous (identical) products
• Everyone can compete
• Price is set by the buyer
• Each firm’s production level does NOT affect price
• No real barriers to entry (easy to open)
• Examples:
  • Agriculture: Strawberries, wheat, corn
  • Gold
  • Milk
  • Stock market

Monopolistic Competition

• Many sellers that sell products that are similar (not identical)
• A lot of competitors
• Differentiated products
• Slight control over price
• Few barriers to entry
• Examples:
  • Shoes
  • Watches

Oligopoly

• Market controlled by a few large profitable firms (3-4 firms control 70%-80% of the market)
• Only 3 to 4 competitors
• Little true price competition
• Firms are interdependent
• Significant barriers to entry (start up cost are high)
• Examples:
  • Airlines
  • Cereal
  • Kellogg’s, General Mills, Post, Quaker Oats- together they make more than 83% of cereal purchased in the U.S.
  • General Motors, Ford, Toyota, Chrysler- 74% of cars sold in the U.S. are produced by these companies
  • Coke and Pepsi make up 71% of the soda market in the U.S.
• Price Controls
  • Collusion: Firms agree to set the price (illegal) – (Cartels)
  • Predatory Prices: Setting price below costs to force competitors out of the market (illegal)

Monopoly

• Only ONE Firm
• Complete control over price
• No competition (illegal)
• Total barriers to entry
• Examples:
  • Standard Oil Company (late 1800s)
  • Today – Natural Monopolies allowed
    • Efficiency of service
    • Don’t control price
    • A LEGAL MONOPLY

Conglomerates

• Conglomerate:
  • A combination of business entities operated by one corporation that are similar or entirely different
  • Example media companies

Market Structure Characteristics Identification

• Identify the market structure based on characteristics:
  • M = Monopoly
  • O = Oligopoly
  • MC = Monopolistic
  • P = Perfect Competition
  1. Businesses have no control over their prices they charge (P)
  2. Product sold in this market structure are very diverse (different colors or designs) (MC)
  3. Only has three to four competitors (O)
  4. Has complete control over the prices the business charges (M)
  5. Products produce all look the same – (You cannot tell what business produced which product) (P)
  6. Very difficult for a new business to start competing in this market structure (M or O)

Economic Systems

• Economic Systems:
  • A structure that addresses what to produce and for whom to produce.
• Pure Economic Systems:
  • Pure Free Market (Capitalist)
  • Planned Economy (Communism)
• Mixed Economies:
  • Socialist Leaning
• Examples of Countries:
  • North Korea (Command Economy/Socialism)
    • GDP Annually: 17.4 \text{ million}
    • GDP per Capita: 1800 \text{ per year}
  • United States (Market Economy/Capitalism)
    • GDP Annually: 20.94 \text{ trillion}
    • GDP per Capita: 63,543 \text{ per year}
• Countries that lean towards mixed economy:
  • China
  • France
  • Venezuela
  • Sweden
  • Japan

Gummy Bear Economic Systems Activity

• Representing an economic system using gummy bears.
• Steps:
  1. Read over your assigned economic system and complete the chart.
  2. Develop a model of how your economic system works using gummies.
  3. Put your names on the paper in the right-hand corner.
  4. Title – List the name of your economic systems at the top.
  5. Build your representation of the system.
  6. Identify at least two advantages and two disadvantages of the system and list them.

Gross Domestic Product (GDP)

• Measure how much a nation can produce in 1 year's time.
• Total value of all final goods & services.
• Used to measure the health of economies.
• GDP indicates the standard of living
  • The quality of life based on possessions of necessities and luxuries that make life easier.
• Which economic system would create a higher standard of living?
• Why is a higher standard of living important for a nation’s citizens?
• Total GDP Across the world in 2022: 160.2\text{ Trillion}

Types of Economies

• Traditional economies
• Command economies
• Mixed economies
• Market economies

Economic Systems Characteristics Identification

• Identify statements as characteristics of:
  • T – traditional economy
  • MA – market economy
  • MI – mixed economy
  • C – command economy
  1. Government owns all the businesses and the factor of productions (C)
  2. The family teaches you how to survive and get your needs (T)
  3. Government will own some of the resources, but businesses are owned by individuals (MI)
  4. The desire for profit will encourage individuals to open a business (MA)
  5. Technology is not used in this system (T)
  6. Your business can fail, and no one will save it (MA)
  7. Individuals do not get complete say in how things are produced (MI)
  8. These economies often suffer from low quality products and shortages (C)
  9. Competition is important component of this economic system (MA)

Traditional Economies

• Decisions about resources are made by habit, custom, superstition, or religious tradition
• Family controls the factors of production
• Trade and barter
• U.S. example- the Amish or developing nations
• DOES NOT USE TECHNOLOGY
• Advantages:
  • Every person has a role to play so not many worries about unemployment
  • Doesn’t require technology- a simpler way of living
  • Can achieve a relatively equal distribution of goods and services
• Disadvantages:
  • Not a lot of economic growth
  • Low possibility of increasing the standard of living
  • Resisting technology can result in refusal to adopt new things that can improve living conditions- electricity, water purification, etc.
  • There is no economic mobility
  • Typically these societies do not treat everyone equally- like women

Command Economies

• Government control economy – (Government controls factors of production
• Communism- political-economic system under which all resources and businesses are publicly owned and controlled
• Popular around the world until the 1980s
• Examples: the Soviet Union, China, Poland, East Germany
• Advantages – Everybody is equal
  • Provide economic security
  • Guaranteed employment
  • No risk is taken by entrepreneur
  • Government provides- education, housing, medical care, etc.
  • This can eliminate homelessness, illiteracy, and poverty
• Disadvantages:
  • No choices for consumers
  • Can lead to shortages and rationing of goods, this can lead to underground markets
  • Low quality products due to lack of competition

Karl Marx

• 19th-century German economist
• Author of “Communist Manifesto” and “ Das Kapital”
• Government should control the economy and distribute goods and services to the people
• Founder of Command Economy

Market Economies

• Controlled by two factors:
  • Capitalism: any individual can open a business
  • Free Enterprise: business can complete with little to NO government inference
• Advantages: lots of choices
• Index of Economic Freedom:
  • Singapore (89.7)
  • New Zealand (83.9)
  • Australia (82.4)
  • Switzerland (81.9)
  • Ireland (81.4)
  • Taiwan (78.6)
  • United Kingdom (78.4)
  • Estonia (78.2)
  • Canada (77.9)
  • Denmark (77.8)
  • The U.S. was ranked the lowest in our history, at number 20
  • Index of Economic Freedom for 2021 bases its ranking on nine variables, including​ a lack of corruption, low debt levels, and protection of property rights.
• Advantages-
  • These countries tend to have a higher standard of living
  • There are lots of consumer choices
  • People have economic freedom and can start businesses
  • Competition between producers results in better products for less
• Disadvantages-
  • Lack of equity and major gaps between social classes
  • Lack of job security
  • No protections for consumers since products aren’t regulated
  • No safety net exists, so if your business fails, you lose everything

Traditional Economic Theory – LAISSEZ FAIRE (Market Economy)

• Founder: Adam Smith, “Wealth of Nations”
• Argument: the economy is controlled by four natural forces, which adjust to deal with market irregularity
• Forces:
  • SUPPLY
  • DEMAND
  • PRICE
  • COMPETITION
• The Invisible Hand
• No Government

Principles of Capitalism

• Free enterprise- competition is allowed to flourish
• Free markets- where goods and services are sold
• Competition- more businesses means lower prices and higher quality
• Voluntary exchange- businesses and consumers must be free to buy or sell what they want
• Private property- owning things the government can’t control
• Consumer sovereignty- consumers make free choices

Mixed Economies

• Combines elements of command, market, and traditional economies
• Most resources are still privately owned while the government makes key decisions about public services
• Government can own some key industries and manage social welfare programs
• Advantages-
  • Consumers have lots of choices
  • The government watches out for and protects the consumer
• Disadvantage-
  • There is oversight and control over business- this can create divisions between those that support a free market and those that don’t

The Social Safety Net

• “Mixed Economy” idea that says the government should NOT allow people to suffer in economic crisis (natural part of Capitalism’s “Business Cycle”), but provide security instead
• Social Security, Unemployment Insurance, etc.

Economic Systems Challenge

Demand

• Demand = consumers willingness to purchase
• Demand Curve Factors
  • Driven by the price of the product
• LAW of DEMAND:
  • The demand curve slopes downward (price & demand move in opposite directions)
• What happens to the demand of a product when the prices increases?
• Demand proves the economic concept of DIMINISHING MARGINAL UTILITY

Supply

• SUPPLY = Business willingness to produce goods and services
• Supply Curve Factors
  • Driven by PROFIT MOTIVE
• LAW of SUPPLY:
  • Supply curve slopes upward (Price & Quantity of Supply move in the same direction)
• What happens to the supply of a product when the prices increases?

Interactions of Supply & Demand Curves

• Surplus:
  • Quantity supplied by businesses is greater than quantity demanded by consumers
• Shortage:
  • Quantity demanded by consumers is greater than quantity supplied by businesses
• Equilibrium Point:
  • Quantity supplied = quantity demanded (profit)

Determinants of Demand

• Factors that cause the DEMAND curve to shift or move:
  • (Right shift) Demand increases
  • (Left shift) Demand decreases
  • Change in the number of consumers
    • - Ex: More consumers = greater demand
  • Change in consumers expectations
    • - Ex: If consumers think that prices will rise they will buy now and create more demand
  • Change in consumers tastes
    • - Ex: People want IPODs instead of CDs
  • Changes in substitutes
    • - Ex: If the price rises for chocolate chip cookies than consumers will buy sugar cookies
  • Changes in income
    • - Ex. When employees get Christmas bonuses they buy more
  • Changes in complimentary goods
    • Peanut butter and jelly – if a change happens to one it will effect the other.

Elasticity

• Most goods & service have elastic demand (change in price = change in quantity demanded)
• Inelastic Demand:
  • Change in price will have little effect on the quantity demanded Ex.
    • Gas
    • Cigarettes (addictive)
    • NO Competition (Monopolies)

Determinants of Supply

• Factors that shift SUPPLY curves
  • (Left Shift) Supply decreases
    • Changes to government policies
      • Ex. New laws requiring businesses to pollute less has forced businesses to redo their production causing supplies to decrease
    • Changes in taxes or subsidies (government money paid to producers to get them to act)
      • Ex. If the federal government pay a subsidy to farmers to grow less corn the supply of corn decreases
    • Change in competition
      • Ex. More sellers more supply
  • (Right shift) Supply increases
    • Changes in the cost of resources or inputs
      • Ex. If the price of raw materials increases business will supply less
    • Technology Advances
      • Ex. If a business can use a new machine to produce a good or service faster
    • Change in Sellers Expectations
      • Sellers expects higher prices in the future they will produce more now

Supply Inelasticity

• What is the reason why the supply of housing is inelastic in the scenario?
• Not enough land to build more houses, but a high demand for houses = increase in price