(MICROECONOMICS) - Demand + supply

Microeconomics is focused with the behaviour of households, consumers, firms and resource owners, who are the most important economic decision-makers in a market economy.

Any kind of arrangement where buyers and sellers of goods, services or resources are linked together to set quantity and price.

Markets are considered free or competitive to the extent that private individuals and firms can openly attempt to win business away from each other in the hopes of earning greater profits.

An individual or organization that combines the factors of production to create and sell goods and services on the market.

An industry is made up of all the firms engaged in the same market activity.

• perfect competition

• monopolistic competition

• oligopoly

• monopoly

1. The number of firms in the industry.

2. A firm's level of market power.

3. The degree of product differentiation between goods offered by different firms.

4. The ease of exit and entry.

• Many firms in the industry

• No individual influence on market

• Identical products

• Easy exit/entry

• e.g. raw cocoa beans

• Many firms

• No single firm can influence market price

• Relatively differentiated products

• Relatively easy exit/entry

• e.g. restaurants, food trucks,clothing stores

• Handfull of firms

• Significant control over price

• Intyerdependent competition

• High barriers to exit/entry

• e.g; starbucks, dunkin, costa, tim hortons,

• Only 2 firms dominate

• Control most of market

• Similar products

• High barriers to exit or enter

• e.g; boeing + airbus

• Only 1 firm in market

• Controls all output price

• Only 1 type of product

• Almost impossible to enter and exit

• e.g; local monopolies on water & power

• Firm is single buyer in market

• 1 firm provides most employment in small cities

• Hard for smaller suppliers to compete

The demand of an individual consumer indicates the various quantities of a good (or service) the consumer is willing and able to buy at different possible prices during a particular time period, ceteris paribus.

The quantity demanded can be referred to as the consumers’ intent for acquiring a specific amount of goods and services at a particular price.

There is a negative causal relationship between the price of a good and its quantity demanded over a particular time period, ceteris paribus:

as the price of the good increases, quantity demanded falls; as the price falls, quantity demanded increases, ceteris paribus.

• Consumers buy goods and services because these provide them with some benefit, or satisfaction, also known as utility.

• The extra benefit provided by each additional unit increases by smaller and smaller amounts. The extra benefit that you get from each additional unit of something you buy is called the marginal benefit or marginal utility.

• Utility is the extra satisfaction that one receives from consuming a product.

• Marginal means extra.

• Diminishing means decreasing.

• Free Goods.

• Economic Goods.

• Normal Goods.

• Inferior Goods.

• Giffen Goods.

• Veblen Goods.

• Final / Consumer Goods.

• Capital Goods.

• Intermediate Goods.

• Raw Materials

A free good is infinitely abundant and thus does not incur any opportunity costs in its production. e.g. air

An economic good is a good which uses scarce resources in being provided and thus there is an opportunity cost of the alternative goods foregone.

• Affected by level of household income

• As salary increases, consumption increases

• most goods are normal

• Affected by level of household income

• As salary decreases, consumption increases

• e.g. bus tickets, 2nd hand clothing

• Like an inferior good → as income falls, demand rises

• Irreplaceable good (poor people budget)

• Claimes a large portion of consumers’ budget

• as price increases, demand increases

• Bread/rice in poorer areas

• Veblen: ostentatious, showy, flamboyant

• To show purchasing power & status

• higher price = higher demand

• e.g; Birkin bag

• Good purchased to serve a purpose of production/service for company

• Used to produce the good

• e.g; printer to print papers for ads

• Raw materials used to produce another product or service

• Used in the product

• e.g; steel used to make cars

End product that businesses sell directly to consumers

Whenever the price of a good changes, ceteris paribus, it leads to a movement along the demand curve.

If the price falls from P1 to P2, the quantity of the good demanded increases from Q1 to Q2

A fall in price = people demanding are “richer” because their income can buy more of the good → more likely to increase consumption

Fall in price of a good = price of alternative (substitute) good to increase (relatively)

Consumers will substitute other goods with the lower priced good.

• Income in the case of normal goods.

  • increase income = increase demand

• Income in the case of inferior goods.

  • increase income = decrease demand

• Preferences and tastes.

  • when goods become favourable/popular, people want more

• Prices of substitute goods.

  • price of substitute goods increases = demand of initial goods increases

• Prices of complementary goods (Derived Demand).

  • Goods that tend to be used together; e.g smartphone & charger.

  • price of 1 good falls, demand of other increases (mutually affect each other)

• Demographic (population) changes implying changes in the number of buyers.

  • increased # of buyers = increase market demand

• Expectations of Consumers

  • When people predict things

  • If future prices expected to rise, demand now increases

The supply of an individual firm indicates the various quantities of a good (or service) a firm is willing and able to produce and provide to the market for sale at different possible prices, during a particular time period, ceteris paribus.

Quantity supplied describes the number of goods or services that suppliers will produce and sell at a given market price.

There is a positive causal relationship between the quantity of a good supplied over a particular time period and its price.

As the price of the good increases, the quantity of the good supplied also increases; as the price falls, the quantity supplied also falls, ceteris paribus.

Even as price increases, the quantity supplied cannot increase; it remains constant. There is a fixed quantity of the good supplied because:

• There is no time to produce more of it.

• There is no possibility of ever producing more of it.

Any change in price produces a change in quantity supplied, shown as a movement on the supply curve.

Any change in a determinant of supply (other than price) produces a change in supply, represented by a shift of the whole supply curve.

• Costs of factors of production.

  • Factors of production increase = supply decrease

• Technology.

  • More improved technology = lower cost of production = supply increase

• Prices of related goods: competitive supply.

  • Firms competing for same resources

  • Firm producing more of 1 good = other firm must produce less of other

• Prices of related goods: joint supply.

  • Production of goods derrived from single product, e.g. milk + beef

  • More supply of 1 product = more of other product

• Producer/firm expectations.

  • If prices expected to rise in future, firms will withhold products from market to sell at higher prices later

• Taxes (direct or indirect taxes).

  • Taxes increase = supply decrease

• Subsidies.

  • Subsidies increase = supply increase

• The number of firms.

  • # firms increase = total supply increase

• ‘Shocks’, or sudden unpredictable events.

  • Affected production costs = affect supply

  • e.g. war, pandemic, disaster

When a market is in equilibrium, quantity demanded equals quantity supplied, and there is no tendency for the price to change. In a market disequilibrium, there is excess demand (shortage) or excess supply (surplus), and the forces of demand and supply cause the price to change until the market reaches equilibrium.

If quantity demanded of a good is smaller than quantity supplied, the difference between the two is called a surplus, where there is excess supply.

If quantity demanded of a good is larger than quantity supplied, the difference is called a shortage, where there is excess demand.

Individuals are guided by a price. When consumers act in best self-interest, they benefit the market

Price communicates information to decision-makers: incited consumers to respond accordingly

• high price = shortage of supply = producers need to produce more

Consumer surplus is defined as the highest price consumers are willing to pay for a good minus the price actually paid.

At market equilibrium. The competitive market realises allocative efficiency, producing the combination of goods mostly wanted by society, thus answering the what to produce question in the best possible way.

Productive efficiency is production with the fewest possible resources, thus answering the how to produce question in the best possible way.

The price received by firms for selling their good minus the lowest price that they are willing to accept to produce the good.

governing body has market interventions by controlling prices on non-clearing markets: excess of supply or excess of demand

Price ceiling is a price set down in law that the price of a good may not be set above a certain level.

Often these are imposed to make basic goods & services more affordable for poorer households; e.g. staple foods like bread, rice, & grain, or rent control

• Shortages & Decreased Market Size.

  • Demand > supply

• Rationing.

  • Govt. supplies everyone equally. → barter deals: trade goods for other goods

• Elimination of Allocative Efficiency.

  • maginal benefitt ≠ maginal cost

• Informal/Black Markets.

  • Selling necesities at prices much higher than p1

A price set down in law that the price may not be set below a certain level.

May be supporting employment in a certain way

• Surplus & Reduced Market Size.

  • demand < supply

• Cost Inefficiency.

  • Higher-cost production is inefficient

• Allocative Inefficiency.

• Informal/Black Markets.

  • firms sell surplus at prices below equilibrium

The purpose of a buffer stock scheme is to stabilise and uphold a certain price.

When demand is high, they increase supply; when demand is low, they store excess supply

1. The good has to be storable since it runs the risk of being stored for an indeterminate period.

2. The good is often a commodity, i.e. a primary good such as rubber, sugar, coffee and grain.

3. There are considerable price fluctuations on the market.

• Allow members to use commodity agreements to influence world prices

• Often govt. is very involved

• within countries it’s illegal, intl. is legal

• e.g; rubber, cocoa, petrol, etc.

A group of producers of goods or suppliers of services formed through an agreement amongst themselves, whether or not through a formal agreement in writing, to regulate the supply of goods or services with the basic intent to control the prices illegally or to restrict competition in respect of the said goods or services.

1. price cartels

2. Term cartels: create term agreements to form alliance

3. Customer assignment cartels: each comapny is assigned specific customer demographic

4. Quota cartels: e.g. OPEC, regulate how much each producer can produce

5. Zonal cartels: dividing country into zones so each company only in specific zone

6. Syndicate cartels: Drug cartels: crimes

7. Super cartels: Large cartels