Microeconomics Review -...

Microeconomics Review

Unit Two

Opener

Pick up a Microeconomics Crossword Puzzle and Vocabulary

Flashcards.

Complete your Crossword Puzzle using the flashcards, your notes and textbook.

Coach Reading

Read your assigned pages and answer the questions for each section.

Microeconomics

The economy is a complex area of study – sometimes economists like to look at the

small parts instead of the whole structure

“Zooming in” on the small units that make up the economy is called

microeconomics

The two basic units of microeconomics are:

Producers: those who make goods or provide services for others in the society

They own businesses that provide these outputs

Consumers: those who purchase goods and services

They make up households in the economy

Circular Flow of Economic Activity

Around the Market

Businesses and Households are only half of the circular flow diagram

The rest is made up of markets:

The Product Market is the part of the economy where businesses sell their goods and services and consumers purchases those goods and services

The Factor or Resource Market is the place where businesses buy the resources they need and consumers offer their labor as a resource to businesses

Adding Government…

Money, Money, Money

Money helps the circular flow continue to function – imagine a world without money!

It works as a medium of exchange - not necessarily coins or bills, but anything that buyers and sellers in an economy are willing to accept as payment

It also serves as a standard of value – it allows us to compare the economic value of different goods and services in the economy

For example: If ice cream costs you $2 and a movie ticket costs $10, then you know that you need to give up 5 ice creams to buy a movie ticket – this is an example of the relative prices of goods in the marketplace

Money also has one more job – it acts as a store of value in the economy

This means that you can save it and spend it later!

The Laws that Govern

Supply and Demand interact in the market – but they are trying to accomplish different

things!

Producers want the highest possible prices that consumers are willing the pay! (supply)

Consumers want the lowest possible prices that producers are willing to sell for! (demand)

These two principles are called the Law of Supply and the Law of Demand – they will hold

true for all products/consumers in the marketplace!

Compromise

Eventually, the interaction of supply and demand will reach a compromise - a

price where both consumers and producers are happy

This is called the equilibrium price or the market clearing price (because,

ideally, at this price, all products would be sold)

Predicting where supply and demand will meet helps businesses price their

products in a way that they make a profit

Demand & Supply Curves

Price Ceilings

Price ceilings result in:

• Prices below the equilibrium price

• Consumers want more at that lower

price than producers want to

produce

• Resulting in shortages

Price Floors

Price Floors result in:

• Prices above the equilibrium

price

• Which causes producers to want

to produce MORE

• But consumers want LESS at the

higher price

• Resulting in surpluses

Changes in Demand

Sometimes the demand for goods will change as the condition of people in the

market changes

If people’s incomes change, their demand changes

If a close substitute for a product becomes available, demand for the original

product will change

If two products are complements and demand for one changes, demand for the

other will change also

If the population of an area changes, demand changes

If people’s tastes for certain products or styles change, then the demand for those

products will change

No matter what causes the change, demand will change when consumers change their buying habits

Changes in Supply

Sometimes the way producers produce, or conditions outside of their control, will change the supply of a good or service

The price of the raw materials could go up or down, causing a change in supply

The technology of production could change, causing a change in supply

No matter what the cause, supply changes when the cost of production goes up or down!

Some Good Rules to Know!

• If supply increases, price goes down

• If supply decreases, price goes up

• If demand increases, price goes up

• If demand decreases, price goes down

Change S/D Change Price

Supply

Supply

Demand

Demand

Effects of Changes in S/D

Elasticity, or the measure of how responsive the demand or supply of a good is to a change in its price, is determined by several factors

If a good is found to be elastic, that means that a small change in price will GREATLY affect its S/D

If a good is found to be inelastic, that means that any change in price will have a SMALL impact on its S/D

Elasticity of Demand

Whether or not demand for a product is elastic or inelastic depends

on several factors

First, can the purchase be put off to a later time?

Second, are enough substitutes available for the good?

Third, does the purchase take up a large portion of income?

The more “yes’s” you get to these questions, the more likely a good

is elastic; the more “no’s” you get, the more likely a good is inelastic

Elasticity of Supply

Having an elastic supply is a little harder: elasticity of supply depends

on how quickly a producer can change their supply to meet changes

in price

They want to produce more as price goes up, and less as price

goes down

If the producer can respond easily and change production, the

supply is elastic

If the company produces the same amount of a good regardless

of its price, or it would take the company a long time to change

production, the supply is inelastic

Equilibrium Shifts

Suppliers’ Costs of Production

Fixed Costs – production costs that hold constant at any

production quantity

Variable Costs – production costs that rise as production

quantities rise

Fixed Costs + Variable Costs = Total

Costs

Additional Supplier Things to Know

Marginal cost is the change in the

total cost that arises when the quantity

produced is increased by one unit

• that is, it is the cost of producing one more

unit of a good.

Inflation is defined as a sustained increase in the

general level of prices for goods and services.

• It is measured as an annual percentage

increase

• As inflation rises, every dollar you own buys a

smaller percentage of a good or service

Sole Proprietorships

This type of business has one owner, who takes all the risks and receives all the profits

These businesses are also easy to start

About 70% of American businesses are this type; but, they only earn about 6% of US revenue

The owner has total control and can make all decisions; however, these businesses are usually

very small with limited capital and the owner has unlimited liability

That means that the owner is personally responsible for all costs of the business, or all of its debts if the business fails!

Sole Proprietorships

Advantages

Ease of entry/start-up

Least regulated form of

business

Sole receiver of profits

Full control

Easy to discontinue

Disadvantages

Unlimited personal

liability

Limited access to

resources

Lack of permanence

Partnerships

These businesses are similar to proprietorships, but they have two or more owners

So, they are usually a little larger and have access to more funds; however,

decision-making is more difficult as it involves more people

Partnerships do allow partners to specialize and offer more products or services;

but, they must also share the profits of the business

All partnerships are different – they may have silent partners, minority partners,

and/or majority partners – it’s all up to the entrepreneurs!

General Partnership

Most common type of partnership

Partners share equally in responsibility and liability

Common examples: doctors, lawyers, accountants and other

professionals

Limited Partnership

Only one partner is required to be a general partner. i.e. only one partner has unlimited liability for the firm’s actions and debts

• Other partners contribute only money and do not actively

manage the business

• Limited partners can lose only the amount of their original

investment.

Limited Liability Partnership (LLP)

A newer type of partnership is recognized in many states.

Functions like a general partnership, except that all partners are

limited from personal liability in certain situations, such as a partner’s

mistakes.

Most states allow professionals such as attorneys, doctors, dentists

and accountants to register as LLPs.

Partnerships

Advantages

Ease of entry/start-up

Shared decision-making &

specialization

Larger pool of capital

Taxes limited to share of

ownership – the business

itself does not pay taxes

Disadvantages

Unlimited liability

Potential for conflict among

partners

Corporations

Most complex form of business

It is it’s own legal entity apart from its owners – the shareholders

Corporations pay taxes, make contracts, sue other parties and get

sued by others

Corporations

Advantages

For Shareholders

Limited liability

More flexibility

Stock is transferable (can be bought & sold)

Corporation Itself

More potential for growth

Selling stock allows them to raise money

Tend to last a lot longer

Disadvantages

Expense and difficulty of

starting up

Double taxation (both

corporation & shareholders

pay taxes)

Potential loss of control by the

founders

More legal requirements and

regulations

Three Main Types of Corporate Mergers

1. Conglomerate – merger between two unrelated firms (ex. Walt

Disney and ABC)

2. Horizontal merger – merger between companies in the same

industry (ex. two cable companies)

3. Vertical merger – merger joins two companies that may not

compete with each other, but exist in the same supply chain (ex.

auto company with parts supplier)

Other Organizations

Business franchise – a semi-independent business that pays fees to a parent company. A franchise usually provides exclusive rights to sell in a geographic area.

Cooperatives(Co-Op)– is a business organization owned and operated by a group of individuals for their shared benefit (ex. Sam’s Club, credit unions)

Non-Profit Organizations – are usually in the business of benefiting society (ex. American Red Cross)

Usually run by a Board of Directors

Perfect Competition

A market with perfect competition is subject only to the laws of supply

and demand

The number of firms is unlimited, and there are no barriers to entering

the market

Businesses become known as price takers because they have no

control over prices – it is solely up to supply and demand

Perfect Competition

Perfect competition is an ideal – it is hard to achieve in real life

Best examples include the market for some farm products, such as wheat and corn and the New York Stock Exchange

Four requirements for perfect competition:

1. Many buyers and sellers participate in the market

2. Sellers offer identical products

3. Buyers and sellers are well informed about products

4. Sellers are able to enter and exit the market freely

Monopolistic Competition

• In this type of market, there are many competing producers, because barriers to entering the market are relatively low

• Offers the most variety of products and price differences

• Each firm makes products that are slightly different from the others – either in reality or in people’s minds• Most of the things we buy everyday are made by companies in this

type of competition: soap, shampoo, toothpaste, jeans, and shoes, for example

• The success of these firms depends on product differentiation – or branding – and then advertising!

Oligopoly

In this case, a few small firms dominate the market instead of just one

– but they still have the ability to influence price like a monopoly

But, they are still independent companies – they make decisions

based on what other firms do

Oligopolies are relatively common – examples: automobiles, soft

drinks, airplanes, and gas

If these companies work together to fix prices, they become known

as a cartel

Otherwise, they compete in price wars to win customers

Monopoly

• The opposite of perfect competition is a monopoly –

one firm that has total control over the price of a

certain good or service

• Thus, monopolies are known as price setter

• All monopolies have one trait in common – a single seller in the

market

• However, different market conditions can create different types

of monopolies

Monopolies

• Because they set prices, monopolies can be seen as corrupt(i.e. bad), but sometimes they actually benefit a society instead of harm it

• In fact, natural monopolies, or a market in which one large company can make products so much more efficiently and cheaply than a lot of smaller companies, are allowed to exist and are regulated by the government

• These include public utilities such as water and power

• Also, patent or technology monopolies allow new inventors to profit from their original idea for a set amount of time without competition

Government Involvement

Sherman Anti-Trust Act – 1890 – outlaws mergers and monopolies that limit trade

between states.

Federal Trade Commission (FTC) – 1914 – independent agency of the U.S.

government Its principal mission is the promotion of consumer protection and the

elimination and prevention of anticompetitive business practices such as illegal monopolies.

Securities & Exchange Commission (SEC) – federal agency responsible for enforcing

federal/national securities laws, proposing new securities rules and general

regulation of the nation’s stock exchanges.

Major Stock Exchanges

New York Stock Exchange (NYSE)

auction exchanges – traders are physically present on the Exchange trading floors

Largest and most prestigious stock exchange

National Association of Securities Dealers Automated Quotations(NASDAQ)

An electronic exchange

Second largest stock exchange in the world

In order to make money in the stock market, it’s a good idea to buy

low and sell high!

Stock Terms to Know

Bull market – describes an overall rise in the stock market, as measured

in market share prices

Bear market – describes an overall decline in the stock market, as

measured by market share prices

Kahoot Review

Log on to Kahoot on your phone’s web browser. Use your first and last name as a signon

name.

Logon the game pin and let’s go!

Test Practice Questions

To wrap up our review today, work with your assigned partner to answer your Test Practice Questions. Put your heads together to figure them out.

Ask for help if you can’t figure it out!

First Block – Student Partners

Denisia Laith Steven Prosperity

Aliyah Ernesto Deshon Denike

Nayeem

Qiara Jared Raneeka

Kysalyn Jhaylon Calyah




Third Block – Student Partners

Desiree Javarri Owen Grayson

Amina Lorenzo Adie Shamari

Geo Megan Javon Claribella

Veer Debora Cory Juliette

Nate Edith Tyson Veer

Sam Chi Ernesto Will

Olivia




Fourth Block – Student Partners

Heitor GuilhermeMariana

Diego Jose Heidi

Misuel

Heber Haddy

Kelvin Ying

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