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ECONOMICS chapter 4

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Title: ECONOMICS chapter 4


1
ECONOMICS chapter 4 5
  • Chapter 4- Understanding Demand
  • Chapter 5- Understanding Supply

2
MICROECONOMICS
  • Microeconomics is a branch of economics that
    studies how the individual parts of the economy,
    the household and the firms, make decisions to
    allocate limited resources,1 typically in
    markets where goods or services are being bought
    and sold.

3
FYI
  • Microeconomics examines how these decisions and
    behaviors affect the supply and demand for goods
    and services, which determines prices, and how
    prices, in turn, determine the supply and demand
    of goods and services.23

4
How does Microeconomics Differ from
Macroeconomics? 
  • Microeconomics examines the behavior of
    individual economic entities firms and
    consumers. How do individuals make consumption
    decisions? How do firms make profits and price
    their goods and services? The focus of
    microeconomics is markets wage markets, the
    market for gasoline, rent markets, etc. 
  •  

5
FYI
  • Macroeconomics is the study of the economy as a
    whole. Macroeconomics asks questions like Why
    does the U.S. economy generally experience higher
    rates of growth than European economies? What
    causes inflation? What effect does the national
    debt have on economic growth? etc.

6
Law of Demand
  • What Does Law Of Demand Mean?A microeconomic law
    that states that, all other factors being equal,
    as the price of a good or service increases,
    consumer demand for the good or service will
    decrease and vice versa. 
  •  

7
FYI
  • Investopedia explains Law Of DemandThis law
    summarizes the effect price changes have on
    consumer behavior. For example, a consumer will
    purchase more pizzas if the price of pizza falls.
    The opposite is true if the price of pizza
    increases.

8
UTILITY
  • In economics, utility is a measure of relative
    satisfaction. Given this measure, one may speak
    meaningfully of increasing or decreasing utility,
    and thereby explain economic behavior in terms of
    attempts to increase one's utility.

9
FYI
  • Utility is often modeled to be affected by
    consumption of various goods and services,
    possession of wealth and spending of leisure
    time.

10
SUBSTITUTE GOODS
  • Substitute goods can be used in place of each
    other, so that as the cost of one rises,
    everything else the same, people will buy more of
    the other. For example, Coke and Pepsi.

11
substitute good
  • A substitute good, in contrast to a complementary
    good, is a good with a positive cross elasticity
    of demand. This means a good's demand is
    increased when the price of another good is
    increased. Conversely, the demand for a good is
    decreased when the price of another good is
    decreased.

12
FYI
  • If goods A and B are substitutes, an increase in
    the price of A will result in a leftward movement
    along the demand curve of A and cause the demand
    curve for B to shift out. A decrease in the price
    of A will result in a rightward movement along
    the demand curve of A and cause the demand curve
    for B to shift in.

13
LAW OF SUPPLY
  • A microeconomic law stating that, all other
    factors being equal, as the price of a good or
    service increases, the quantity of goods or
    services offered by suppliers increases and vice
    versa.

14
FYI
  • Investopedia SaysAs the price of a good
    increases, suppliers will attempt to maximize
    profits by increasing the quantity of the product
    sold.

15
ELASTICITY
  • In economics, elasticity is the ratio of the
    percent change in one variable to the percent
    change in another variable. It is a tool for
    measuring the responsiveness of a function to
    changes in parameters in a unit-less way..

16
FYI
  • Frequently used elasticity's include price
    elasticity of demand, price elasticity of supply,
    income elasticity of demand, elasticity of
    substitution between factors of production and
    elasticity of intertemporal substitution

17
LAW OF DIMINISHING MARGINAL UTILITY
  • What Does Law Of Diminishing Marginal Utility
    Mean?A law of economics stating that as a person
    increases consumption of a product - while
    keeping consumption of other products constant -

18
LAW OF DIMINISHING MARGINAL UTILITY
  • This is the premise on which buffet-style
    restaurants operate. They entice you with "all
    you can eat," all the while knowing each
    additional plate of food provides less utility
    than the one before.

19
FYI
  • And despite their enticement, most people will
    eat only until the utility they derive from
    additional food is slightly lower than the
    original.

20
LAW OF DIMINISHING MARGINAL UTILITY
  • For example, say you go to a buffet and the first
    plate of food you eat is very good. On a scale
    of ten you would give it a ten. Now your hunger
    has been somewhat tamed, but you get another full
    plate of food.

21
FYI
  • Since you're not as hungry, your enjoyment rates
    at a seven at best. Most people would stop before
    their utility drops even more, but say you go
    back to eat a third full plate of food and your
    utility drops even more to a three.

22
FYI
  • If you kept eating, you would eventually reach a
    point at which your eating makes you
    sick, providing dissatisfaction,
    or 'dis-utility'.

23
EQUILIBRIUM PRICE
  • The market price at which the supply of an item
    equals the quantity demanded.

24
COMPLEMENTARY GOODS
  • Material or good whose use is interrelated with
    the use of an associated or paired good such that
    a demand for one (tires, for example) generates
    demand for the other (gasoline, for example).

25
FYI
  • If the price of one good falls and people buy
    more of it, they will usually buy more of the
    complementary good also whether or not its price
    also falls.

26
FYI
  • Similarly, if the price of one good rises and
    reduces its demand, it may reduce the demand for
    the paired good as well. Also called
    complementary product.

27
complementary good  
  • Goods that usually are consumed together demand
    for one falls when the other's price rises
    demand for one increases when the price of the
    other decreases.

28
FYI
  • VCRs and videotapes are complementary goods if
    VCRs become cheaper, people will buy more of
    them, and, consequently, demand for videotapes
    will increase.

29
SURPLUS
  • Being more than or in excess of what is needed or
    required surplus grain. See synonyms at
    superfluous.An amount or a quantity in excess
    of what is needed.
  • Accounting.
  • Total assets minus the sum of all liabilities.

30
SHORTAGES
  • A deficiency in amount an insufficiency.Economic
    shortage is a term describing a disparity
    between the amount demanded for a product or
    service and the amount supplied in a market.
    Specifically, a shortage occurs when there is
    excess demand!

31
SHORTAGES
  • Economic shortages are related to pricewhen the
    price of an item is "too low," there will be a
    shortage. In most cases, a shortage will compel
    firms to increase the price of a product until it
    reaches market equilibrium..

32
  • Sometimes, however, external forces cause more
    permanent shortagesin other words, there is
    something preventing prices from rising or
    otherwise keeping supply and demand unbalanced

33
SHORTAGE
34
SHIFT IN SUPPLY
  • an increase/decrease in government purchases -a
    reduction/increase in taxes -an increase/decrease
    in investor confidence -

35
FYI
  • foreigners develop/lose a taste for American
    goods or aMericans develop/lose their taste for
    foreign goods -increase/decrease in money supply

36
COST OF PRODUCTION
  • production cost - combined costs of raw material
    and labor incurred in producing goods cost - the
    total spent for goods or services including money
    and time and labor.

37
FACTS
  • The Demand CurveIntroduces the demand curve and
    lists some factors that may cause a shift in
    demand.
  • Price Elasticity of DemandAn introduction to the
    price elasticity of demand. Defines price
    elasticity, its significance, and factors that
    influence it.

38
FYI
  • The Supply CurveIntroduces the supply curve with
    an example and a brief discussion of some factors
    that may cause a shift in supply.

39
FYI
  • Supply and DemandDescribes how the price level
    is determined by the crossing of the supply and
    demand curves, and how a shift in supply or
    demand will influence the equilibrium price and
    quantity.

40
FACTS
  • Opportunity CostIntroduces the concept of
    opportunity cost and relative price. Provides
    simple examples.

41
FYI
  • The Production Possibility FrontierIllustrates
    the effect of limited resources on the
    possibilities for production, and how the law of
    increasing cost influences the shape of the
    production possibilities curve.

42
FYI
  • Comparative AdvantageIntroduces David Ricardo's
    principle of comparative advantage. By means of
    example, shows how specialization and trade
    result in more output.
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