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Microeconomics
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Study of individual markets (e.g. OIL)
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Market
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A place where buyers and sellers exchange goods and services for money
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Laws of Demand
answer
As a price of a good increases (P), quantity demanded (Qd) decreases
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Positive Shifts in demand [factors]
answer
Shift to right
- Increase in Fashion + Taste
- Increase in Income
- Increase in Population
- Increase in Price of substitute
- Decrease in Price of compliment
- Increase in Fashion + Taste
- Increase in Income
- Increase in Population
- Increase in Price of substitute
- Decrease in Price of compliment
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Negative Shifts in demand [factors]
answer
Shift to left
- Decrease in Fashion + Taste
- Decrease in Income
- Decrease in Population
- Decrease in Price of substitute
- Increase in Price of compliment
- Decrease in Fashion + Taste
- Decrease in Income
- Decrease in Population
- Decrease in Price of substitute
- Increase in Price of compliment
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Supply (for producers)
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The willingness and ability to produce a quantity of a good/service at a given price over a time period
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Laws of Supply
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As price of a good/service increases (P), the quantity supplied (Qs) increases
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What producers and consumers want
answer
Producers - at higher prices, producers want to produce more because they will MAXIMISE PROFITS
Consumers - at lower prices, consumers want to buy more because they will MAXIMISE UTILITY
Consumers - at lower prices, consumers want to buy more because they will MAXIMISE UTILITY
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Positive Shifts in Supply [factors]
answer
Shift to right
- Decrease in cost of production
- Decrease in tax on profits
- Increase in technology
- Increase in subsidies
-decrease in regulations
- Decrease in cost of production
- Decrease in tax on profits
- Increase in technology
- Increase in subsidies
-decrease in regulations
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Negative Shifts in Supply [factors]
answer
Shift to left
- Increase in cost of production
- Increase in tax on profits
- Decrease in technology
- Decrease in subsidies
-increase regulations
- Increase in cost of production
- Increase in tax on profits
- Decrease in technology
- Decrease in subsidies
-increase regulations
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Excess Demand
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Quantity Demanded > Quantity Supplied = Excess Demand
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Excess Supply
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Quantity Supplied > Quantity Demanded = Excess Supply
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Government Intervention
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when allocating scarce resources societies can use the Free markets (using price mechanism to allocate (Signals/Incentives) => (Problem) Sometimes markets fail. the solution is.
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Price Controls: Price Ceiling
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A maximum price set by the government, where producers can only sell their products to- usually lower than desired
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Price Controls: Price Floor
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A minimum price set by the government where the consumers have to buy their products - usually higher than desired
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Market Failure
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Situations where the price mechanism does not lead to an efficient allocation resources (Not allocative efficiency)
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Why does market failure happen?
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- Externalities
- Lack of public goods (street lights)
- Common access resources (a resource anyone can use)
- Asymmetric information (one party has more info on market)
- Abuse of monopoly (one business rules market)
- Lack of public goods (street lights)
- Common access resources (a resource anyone can use)
- Asymmetric information (one party has more info on market)
- Abuse of monopoly (one business rules market)
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Externalities
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Spillover effects of consumption on 3rd Parties
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Scarcity
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Scarcity is the basic economic problem. Something is scarce when it is limited but desired.
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Determinants of demand
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Non price variables that influence the demand for a product.
1.Income: people tend to spend more when their income improves. (normal goods, inferior goods)
2. Price of related goods (substitute goods, complementary goods)
3. Taste and preferences
4. Expectation fo future prices
5. Number of potential buyers
1.Income: people tend to spend more when their income improves. (normal goods, inferior goods)
2. Price of related goods (substitute goods, complementary goods)
3. Taste and preferences
4. Expectation fo future prices
5. Number of potential buyers
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The law of demand
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As the price of a particular good falls the quantity demanded increases and as the price for a particular good increases the demand for it decreases.
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Normal good
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A good for which demand increases as consumers income increases and demand decreases as consumers income decreases. e.g: restaurant meals, cinema tickets, automobiles
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Inferior good
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A good for which demand decreases as consumers income increases and demand increases as consumers income decreases. e.g: bus tickets
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Substitute good
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Demand will increase when price of another good increases and demand will decrease as the price of another good falls.
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Complementary good
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Typically consumed together, so the demand for one is decreased by the price increase of another.
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Supply
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Quantity of goods and services that producers are willing and able to offer to sale at a given price during a specific time period.
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Determinants of supply
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Non-price variables that influence the supply of a product.
1. Cost of production
2. Productivity
3. Government intervention (regulations, taxes, subsidies)
4. Price of related goods
5. Supply shocks
1. Cost of production
2. Productivity
3. Government intervention (regulations, taxes, subsidies)
4. Price of related goods
5. Supply shocks
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Market equilibrium
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Occurs at a price where quantity demanded and quantity supplied are equal.
QD=QS
QD=QS
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Perfect competition
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A market is perfectly competitive if there are a large number of firms producing identical products facing identical costs and in which there are no barriers to entry.
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Monopoly
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A market where one firm dominates the market for a good that has no substitutes and where significant barriers to entry exist.
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Natural monopoly
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Occurs in a market where the lowest cost can be achieved when only one firm sells to the market. It is typically associated with large fixed start-up costs.
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Monopolistic competition
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A market is monopolistically competitive if there are many firms producing differentiated products and there are no barriers to entry.
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Oligopoly
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A market where a few sellers dominate the market for an identical or differentiated good and where there are significant barriers to entry.
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Collusion
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An agreement, whether formal or informal, between competitive parties to limit competition and raise prices
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Sole Proprietorship
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A business owned and managed by a single person
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Partnership
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A business owned and managed by more than one person.
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Corporation
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A business owned by stockholders who share in its profits but are not personally responsible for its debts
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Disadvantages of Sole Proprietorship
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Limited to life of owner
Equity capital limited to owner's personal wealth
Unlimited liability
Difficult to sell ownership interest
Equity capital limited to owner's personal wealth
Unlimited liability
Difficult to sell ownership interest
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Disadvantages of Partnership
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Unlimited liability
Management disagreements
Lack of continuity
profits are shared
Management disagreements
Lack of continuity
profits are shared
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disadvantage of corporation
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double taxation,
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Advantages of Sole Proprietorship
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Easiest to start
Least regulated
Single owner keeps all the profits
Taxed once as personal income
Least regulated
Single owner keeps all the profits
Taxed once as personal income
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Advantages of a corporation
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Limited liability
Unlimited life
Separation of ownership and management
Transfer of ownership is easy
Easier to raise capital
Unlimited life
Separation of ownership and management
Transfer of ownership is easy
Easier to raise capital
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Advantages of a Patnership
answer
easy to start
not as many government regulation(s)
allow for owners to combine skills
not as many government regulation(s)
allow for owners to combine skills
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market clearning price
answer
when the price of a good or service at which quantity supplied is equal to quantity demanded, also called the equilibrium price.
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