Microeconomics

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Microeconomics

• A part of the study of economics that deals with
  behavior and decision making by small units (Ex.
  Individuals and firms)
• Micro concepts help explain how prices are
  determined and how individual economic decisions
  are made.

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Demand

• Most people define demand as a desire to have or
  own a certain economic product.
• In order for there to be demand in the
  marketplace, wanting a product has to coincide
  with the ability and willingness to pay for it.
• The desire, ability, and willingness to buy a
  product

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Introduction to Demand

• Knowledge of Demand is essential to understanding
  how our market economy works

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Why would it be important for sound business
decisions?

• it is also important for making sound business
  decisions
• Have to know where the demand is?
• How would measure the demand for your services?

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III. The Demand Schedule

• Economists want to know the amount of people that
  will demand a product at each and every possible
  price
• The result is the demand schedule

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The Demand Schedule (con t)

• Demand Schedule- a listing shows the quantity
  demanded at all prices that might prevail in the
  market at a given time.
• The information is presented in the form of a
  table.

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V. Demand Illustrated

• The Demand Curve-like the schedule, tells the
  quantity that consumers will demand at each and
  every price.
• It is ALWAYS downward sloping.
• Consumers will demand more at lower prices.

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Section 2

• Law of Demand

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VI. Law of Demand

• Is expressed by a products relationship of demand
  and its price.
• The law states the demand for an economic product
  varies inversely with its price.
• Most command economies have failed because the
  government has ignored consumers demand.

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VII. Changes in the Quantity Demanded

• A change along the demand curve shows a change in
  the Quantity Demanded.
• When the quantity demanded changes, it does so
  because of a change in the price of the product,
• causing movement along the demand curve.

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VIII. Change in Demand

• Sometimes we observe that people are willing to
  buy different amounts at the same price.
• This is known as a change in demand and is
  different from a change in the quantity demanded.

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VIII. Change in Demand (con t)

• When there is a change in demand, the entire
  demand curve shifts.
• The curve shifts to the left to show a decrease
  in demand,
• The curve shifts to the right to show an increase
  in demand.

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VIII. Changes in Demand

• Changes in demand can be explained by either the
  income effect or the substitution effect.

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1. Income Effect

• A change in the quantity demanded due to a change
  in the consumers real income (or disposable
  income) when the price of a commodity changes.

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2. Substitution Effect

• A change in the quantity demanded because of the
  change in the relative price of a product.
• Together the income and substitution effect
  explain why consumers increase consumption when
  the price drops.

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D. Why would demand change?

• Changes in consumer income, consumer tastes, or
  the price of related goods all can cause a change
  in demand.

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D. Changes in Demand

• Consumer incomesAs incomes rise, consumers are
  able to buy more products at each and every
  price.
• Incomes rise and the curve shifts to the right.
• Incomes decline and the curve shifts to the left.
  

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D. Changes in Demand

• Consumer TastesAdvertising, news reports,
  trends, and even seasons can affect consumer
  taste and cause an increase in the products
  popularity.
• If consumers want more of an item, the demand
  curve shifts right.
• If consumers want less of an item, the demand
  curve shifts left.

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D. Changes in Demand

• Prices of related products- a change in the price
  of a related product can cause a change in
  demand.
• Some products are known as substitutes because
  they can be used in place of other products.
• (e.g. Butter and margarine.)

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Prices of Related Products

• Other products are known as complements because
  the use of one product increase the use of the
  other.
• (e.g. Cameras and film)

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Changes in Demand

• When there is a change in demand a new schedule
  and curve must be constructed to reflect the new
  demand at all of the possible prevailing prices.

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IX. Diminishing Marginal Utility

• How do people decide which economic products will
  provide them with the greatest utility.
• RememberUtility Usefulness
• One Answer is Marginal Utilitythe extra
  usefulness or satisfaction a person gets from
  acquiring one more unit of a product.

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IX. Diminishing Marginal Utility

• Consumers generally keep on buying a product
  until they reach a point where the last unit
  consumed gives enough, and only enough,
  satisfaction to justify the price.
• When they reach a point that the marginal utility
  is less than the price you will stop buying
• This is known as diminishing marginal utility

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IX. Diminishing Marginal Utility

• Can be used to explain the downward sloping
  nature of the demand curve.
• In order to get shoppers to buy more of a
  particular item, the price must be lowered in
  order to justify the usefulness of another
  purchase.

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IX. Diminishing Marginal Utility

• The more units of a certain economic product a
  person acquires, the less eager that person is to
  buy still more.
• As more people become more satisfied they become
  less willing to spend more money.

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X. Elasticity of Demand

• We know from the law of demand if prices go down
  demand will increase. If prices go up, sales
  will go down Right?
• Ok, but how much?
• The answer is found in the concept of demand
  elasticity

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X. Elasticity of Demand

• Demand Elasticityis a term used to indicate the
  extent to which changes in price cause changes in
  the quantity demanded.

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XI. Elastic vs. Inelastic Demand

• Demand is Elastic
• When a relatively small change in price causes a
  relatively large change in the quantity demanded
• e.g.Porterhouse steak vs. Seafood

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XI. Elastic vs. Inelastic Demand

• Inelastic Demandis when a given change in price
  causes a relatively smaller change in the
  quantity demanded
• e.g.gasoline or local telephone calls

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XI. Elastic vs. Inelastic Demand

• Specific vs. General MarketsWhen determining the
  elasticity of demand for a certain product it is
  necessary to define the market being studied.
• e.g.
• Gas at different gas stations demand is very
  elastic
• The price of gas in general is relatively
  inelastic

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XII. Determinants of Demand Elasticity

• You can estimate the elasticity of a need by
  considering 3 factors
• Urgency of need
• Availability of adequate substitutes
• Amount of income required to buy the item.

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XII. Determinants of Demand Elasticity

• Urgency of Needa consumers need for insulin or
  cigarettes cannot be put off for too long.
• Would this demand be elastic or inelastic?

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XII. Determinants of Demand Elasticity

• Urgency of Need
• A consumers ability to postpone the purchase is
  one of the factors of elasticity
• The basic essentials of life will have higher
  urgency
• If the purchase cannot be delayed, demand would
  be inelastic
• if the purchase can be delayed, demand is said to
  be elastic.

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XII. Determinants of Demand Elasticity

• Are substitutes available?
• If a product has many substitutes, the demand
  tends to be elastic.
• The fewer substitutes, the more the demand
  becomes inelastic.

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XII. Determinants of Demand Elasticity

• Does the purchase use a large amount of income
• When the products require a large portion of
  income the demands tend to be elastic.
• When they require a small amount of income the
  demand tends to be inelastic.

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XIII. Demand Elasticity Mathematically

• ? Q X Pnew
• ? P Qnew

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XIV. Total Receipts Test

• It is useful to look at the impact of a price
  change on total receipts to help determine a
  products elasticity
• This analysis is sometimes called the Total
  Receipts Test

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XIV. Total Receipts Test

• How to determine total receipts or total revenues
• by multiplying the price of a product by the
  quantity sold.

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XIV. Total Receipts Test

• When the demand for a product is elastic, the
  amount consumers will buy will go up sharply when
  the price is lowered only a little.

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XIV. Total Receipts Test

• When demand is inelastic, the increase is not
  enough to increase total receipts
• There are three possible results for the total
  receipts test.
• Increase in revenues elastic
• Decrease in revenues inelastic
• No change in revenues unit elastic

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XIV. Total Receipts Test

• Elasticity is something that reveals how price
  changes affect revenues
• Whether demand is elastic, inelastic, or unit
  elastic depends upon the price ranges and the
  product being considered.

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XV. Elasticity and Pricing Policies

• It is important for business to understand how
  elasticity helps determine pricing policies that
  can be used to increase revenues.

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XV. Elasticity and Pricing Policies

• Example of inelastic demandhas to raise prices
  to increase revenues
• e.g. a doctor
• Elastic demand would be lowering prices to raise
  revenues.

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XV. Elasticity and Pricing Policies

• Demand elasticity can also explain why our
  government taxes products with relatively
  inelastic demand.
• High taxes are placed on utilities, services,
  tobacco, and alcohol because the demand for these
  products is relatively inelastic.