Microeconomics focuses on individual consumers and businesses.
Economics is the study of how to distribute scarce resources among competing ends.
Humans wants and needs are unlimited, but Earths resources are scarce and limited.
- Simplify economic reality - Relationships between dependent variables to independent variables - Inverse or direct relationships
- Economic decision makers maximize their own utility -
Based on three assumptions: 1. Economy only makes two products 2. Resources and technology are fixed 3. All resources are employed to their fullest potential
The Production Possibilities Curve, Law of Increasing Costs
What to produce? How to produce? Whom to produce for?
Traditional - non economic concerns and have tight social constraints Market - consumer centered and innovative but create inequality and instability Command - equalizes incomes but lacks in freedom
Seven Major Economic Goals: 1. Economic efficiency 2. Income equity 3. Price stability 4. Full employment 5. Balance of payments 6. Economic growth 7. Environmental stability
Complimentary and Conflicting
- explained how the division of labour increases production - argued that self interest is transformed by the invisible hand of competition so that it creates significant economic benefits - stressed the principle of laissez faire, which means that governments should not intervene in economic activity
relationship between products price and quantity demanded.
Law of Demand
Changes in Demand
Changes in Quantity Demanded
relationship between a products price and quantity supplied
Law of SUpply
Changes in Supply
Changes in Quantity Supplied
Surplus - excess in supply - price is decreased Shortage - excess in demand - price pushed up
Changes in Equilibrium, Demand Changes in Equilibrium, Supply Changes in Equilibrium
Utility Maximizing Point
- Price elasticity of demand shows how responsive consumers are to price changes - elastic demand means % change in quantity demanded is more than % change in price - inelastic demand means % change in quantity demanded is less than % change in price - unit-elastic demand means % change in quantity demand equals % change in price
Perfectly Elastic and Perfectly Inelastic Demand
Determinants of the Price Elasticity of Demand
Calculating Price Elasticity of Demand
- Price elasticity of supply measures the responsiveness of quantity supplied to price changes - elastic supply means % change in quantity supplied is more than % change in price - inelastic supply means % change in quantity supplied is less than % change in price
Perfectly Elastic and Perfectly Inelastic Supply
Time and the Price Elasticity of Supply
Calculating Price Elasticity of Supply
ei = ΔQd ÷ average Qd ___________________ ΔI ÷ average I
exy = ΔQd ÷ average Qd _________________________ ΔPy ÷ average Py
Price Controls, Shortages, Surpluses
Spillover, Spillover Costs, Spillover Benefits
Economic Role of the Government