Unit 4 microeconomics general

Supply and Demand

Unit 4: Microeconomics

I. Demand

A. Description

1. Demand is the desire to own something and the ability to pay for it.

2. Law of demand:PRICE

As price goes down…

DEMANDQuantity

demanded goes up.

PRICEAs price goes

up…

DEMANDQuantity

demanded goes down.

B. Changes in Demand1. Substitution Effect: $ , the demand will

be effected by substitutes available.

2. Substitutes are goods used in place of another.

3. Income effect: Income rises, the demand will be effected in two different ways:

a. Normal goods: If wealthier, they will buy more of.

b. Inferior goods: If wealthier, they will buy less of.

4. Consumer expectations: Customers know there is a sale, they will not buy this week.

5. Population: Population changes in age, goods demanded change.

6. Tastes and advertising: Waves of popularity & advertising will

impact demand.

7. Related goods: Complements are goods that are bought together.

C. Extreme Demand

1. Supply shock is when there is a severe shortage.

2. Government may intervene with rationing

a. WWII is an example of high demand, rationing rubber, fuel,

nylon, etc.

b. 1970’s: Gasoline rationing.

II. Supply

A. Description1. Production

2. Law of Supply:

Prices go up…

Supply goes up.

Prices goes down…

Supply goes down.

B. Changes in Supply

1. Rising Costs: Costs of production will cause a decrease in supply.

2. Technology: Efficiency in production will increase production and supply.

3. Subsidy: Government financial assistance for producers.

4. Excise tax: Tax on the production, distribution, sale of

product.

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5. Regulation: Limits on the production will decrease supply.

III. Supply and Demand Together

A. Equilibrium

Equilibrium Price

Surplus

Shortage

DemandSupply

Price Floor : Minimum Wage

Price Ceiling: Rent Control

B. Elasticity

1. Elasticity of demand: Sensitivity of demand of consumers to price change.

1. Elastic: Items that are highly sensitive to price change.

2. Inelastic: Items that are not sensitive to price.

3. Elasticity of supply: Sensitivity of suppliers to price change.

a. Elastic: Suppliers will be able to produce more or less of a product

due to changes of prices in the market.

b. Inelastic: Suppliers will not be able to produce more or less of a

product.

C. Companies and Pricing

• Suppliers must take into account, the bills they have when producing:

1. Fixed Costs : Same monthly.

2. Variable Costs: Varies monthly.

3. Fixed + Variable = Total

4. Adding labor (more workers is not always good):

a. At first, each additional worker increases output more. (Increasing

Marginal Returns)

b. Eventually output will still increase, but more slowly.

(Diminishing marginal returns).

c. Soon, production will drop with each worker added. (Negative

marginal returns).

IV. Market Structure

A. Organizational Chart

BusinessOrganization

Number of Firms

Variety of Goods

Barriers to Entry

ControlOverPrices

Example

Perfect Competition

Monopoly

Monopolistic Competition

Oligopoly

Business Organization Number of Firms

Variety of Goods Barriers to Entry Control Over Prices

Example

Perfect Competition Many

Monopoly


Oligopoly



Example

Perfect Competition Many None,Identical

Monopoly


Oligopoly



Example


None,Easy to start

Monopoly


Oligopoly



Example


None,Easy to start

None,Supply &Demand

Monopoly


Oligopoly



Example


None,Easy to start

None,Supply &Demand

Farms,Stocks

Monopoly


Oligopoly



Example


None,Easy to start

None,Supply &Demand

Farms,Stocks

Monopoly One


Oligopoly



Example


None,Easy to start

None,Supply &Demand

Farms,Stocks

Monopoly One UniqueGood


Oligopoly



Example


None,Easy to start

None,Supply &Demand

Farms,Stocks


DifficultTo Start&Hold


Oligopoly



Example


None,Easy to start

None,Supply &Demand

Farms,Stocks



FullControl


Oligopoly



Example


None,Easy to start

None,Supply &Demand

Farms,Stocks



FullControl

City Sewage


Oligopoly



Example


None,Easy to start

None,Supply &Demand

Farms,Stocks



FullControl

City Sewage

Monopolistic Competition Many

Oligopoly



Example


None,Easy to start

None,Supply &Demand

Farms,Stocks



FullControl

City Sewage

Monopolistic Competition Many Similar,

Sub-stitutes

Oligopoly



Example


None,Easy to start

None,Supply &Demand

Farms,Stocks



FullControl

City Sewage


Sub-stitutes

Few

Oligopoly



Example


None,Easy to start

None,Supply &Demand

Farms,Stocks



FullControl

City Sewage


Sub-stitutes

Few Some

Oligopoly



Example


None,Easy to start

None,Supply &Demand

Farms,Stocks



FullControl

City Sewage


Sub-stitutes

Few Some Clothing,Barbers

Oligopoly



Example


None,Easy to start

None,Supply &Demand

Farms,Stocks



FullControl

City Sewage


Sub-stitutes


Oligopoly Few



Example


None,Easy to start

None,Supply &Demand

Farms,Stocks



FullControl

City Sewage


Sub-stitutes


Oligopoly Few Similar,Sub-stitutes



Example


None,Easy to start

None,Supply &Demand

Farms,Stocks



FullControl

City Sewage


Sub-stitutes



Many,Ex-pensive



Example


None,Easy to start

None,Supply &Demand

Farms,Stocks



FullControl

City Sewage


Sub-stitutes



Many,Ex-pensive

Some



Example


None,Easy to start

None,Supply &Demand

Farms,Stocks



FullControl

City Sewage


Sub-stitutes



Many,Ex-pensive

Some Auto,Cereal

D. Perfect and Monopolistic Competition

1. Perfect competition is tough market

2. Farmers are example, make little profit

3. Monopolistic competition fare better due unique twist they have on product.

E. Monopolies and Oligopoly

1. Monopolies virtually banned by Anti-trust Laws

2. Natural Monopolies still exista. Geographic – last gas station for milesb. Governmental – only cable company

allowed in townc. Technological – patents for new products

3. Oligopoly companies are forbidden from cooperating with each other (collusion)