Microeconomics and Macroeconomics FCS 3450 Spring 2015 Unit 2.
Unit 4 microeconomics general
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Supply and Demand
Unit 4: Microeconomics
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I. Demand
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A. Description
1. Demand is the desire to own something and the ability to pay for it.
2. Law of demand:PRICE
As price goes down…
DEMANDQuantity
demanded goes up.
PRICEAs price goes
up…
DEMANDQuantity
demanded goes down.
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B. Changes in Demand1. Substitution Effect: $ , the demand will
be effected by substitutes available.
2. Substitutes are goods used in place of another.
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3. Income effect: Income rises, the demand will be effected in two different ways:
a. Normal goods: If wealthier, they will buy more of.
b. Inferior goods: If wealthier, they will buy less of.
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4. Consumer expectations: Customers know there is a sale, they will not buy this week.
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5. Population: Population changes in age, goods demanded change.
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6. Tastes and advertising: Waves of popularity & advertising will
impact demand.
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7. Related goods: Complements are goods that are bought together.
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C. Extreme Demand
1. Supply shock is when there is a severe shortage.
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2. Government may intervene with rationing
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a. WWII is an example of high demand, rationing rubber, fuel,
nylon, etc.
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b. 1970’s: Gasoline rationing.
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II. Supply
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A. Description1. Production
2. Law of Supply:
Prices go up…
Supply goes up.
Prices goes down…
Supply goes down.
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B. Changes in Supply
1. Rising Costs: Costs of production will cause a decrease in supply.
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2. Technology: Efficiency in production will increase production and supply.
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3. Subsidy: Government financial assistance for producers.
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4. Excise tax: Tax on the production, distribution, sale of
product.
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5. Regulation: Limits on the production will decrease supply.
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III. Supply and Demand Together
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A. Equilibrium
Equilibrium Price
Surplus
Shortage
DemandSupply
Price Floor : Minimum Wage
Price Ceiling: Rent Control
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B. Elasticity
1. Elasticity of demand: Sensitivity of demand of consumers to price change.
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1. Elastic: Items that are highly sensitive to price change.
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2. Inelastic: Items that are not sensitive to price.
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3. Elasticity of supply: Sensitivity of suppliers to price change.
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a. Elastic: Suppliers will be able to produce more or less of a product
due to changes of prices in the market.
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b. Inelastic: Suppliers will not be able to produce more or less of a
product.
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C. Companies and Pricing
• Suppliers must take into account, the bills they have when producing:
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1. Fixed Costs : Same monthly.
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2. Variable Costs: Varies monthly.
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3. Fixed + Variable = Total
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4. Adding labor (more workers is not always good):
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a. At first, each additional worker increases output more. (Increasing
Marginal Returns)
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b. Eventually output will still increase, but more slowly.
(Diminishing marginal returns).
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c. Soon, production will drop with each worker added. (Negative
marginal returns).
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IV. Market Structure
A. Organizational Chart
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BusinessOrganization
Number of Firms
Variety of Goods
Barriers to Entry
ControlOverPrices
Example
Perfect Competition
Monopoly
Monopolistic Competition
Oligopoly
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Business Organization Number of Firms
Variety of Goods Barriers to Entry Control Over Prices
Example
Perfect Competition Many
Monopoly
Monopolistic Competition
Oligopoly
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Business Organization Number of Firms
Variety of Goods Barriers to Entry Control Over Prices
Example
Perfect Competition Many None,Identical
Monopoly
Monopolistic Competition
Oligopoly
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Business Organization Number of Firms
Variety of Goods Barriers to Entry Control Over Prices
Example
Perfect Competition Many None,Identical
None,Easy to start
Monopoly
Monopolistic Competition
Oligopoly
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Business Organization Number of Firms
Variety of Goods Barriers to Entry Control Over Prices
Example
Perfect Competition Many None,Identical
None,Easy to start
None,Supply &Demand
Monopoly
Monopolistic Competition
Oligopoly
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Business Organization Number of Firms
Variety of Goods Barriers to Entry Control Over Prices
Example
Perfect Competition Many None,Identical
None,Easy to start
None,Supply &Demand
Farms,Stocks
Monopoly
Monopolistic Competition
Oligopoly
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Business Organization Number of Firms
Variety of Goods Barriers to Entry Control Over Prices
Example
Perfect Competition Many None,Identical
None,Easy to start
None,Supply &Demand
Farms,Stocks
Monopoly One
Monopolistic Competition
Oligopoly
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Business Organization Number of Firms
Variety of Goods Barriers to Entry Control Over Prices
Example
Perfect Competition Many None,Identical
None,Easy to start
None,Supply &Demand
Farms,Stocks
Monopoly One UniqueGood
Monopolistic Competition
Oligopoly
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Business Organization Number of Firms
Variety of Goods Barriers to Entry Control Over Prices
Example
Perfect Competition Many None,Identical
None,Easy to start
None,Supply &Demand
Farms,Stocks
Monopoly One UniqueGood
DifficultTo Start&Hold
Monopolistic Competition
Oligopoly
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Business Organization Number of Firms
Variety of Goods Barriers to Entry Control Over Prices
Example
Perfect Competition Many None,Identical
None,Easy to start
None,Supply &Demand
Farms,Stocks
Monopoly One UniqueGood
DifficultTo Start&Hold
FullControl
Monopolistic Competition
Oligopoly
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Business Organization Number of Firms
Variety of Goods Barriers to Entry Control Over Prices
Example
Perfect Competition Many None,Identical
None,Easy to start
None,Supply &Demand
Farms,Stocks
Monopoly One UniqueGood
DifficultTo Start&Hold
FullControl
City Sewage
Monopolistic Competition
Oligopoly
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Business Organization Number of Firms
Variety of Goods Barriers to Entry Control Over Prices
Example
Perfect Competition Many None,Identical
None,Easy to start
None,Supply &Demand
Farms,Stocks
Monopoly One UniqueGood
DifficultTo Start&Hold
FullControl
City Sewage
Monopolistic Competition Many
Oligopoly
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Business Organization Number of Firms
Variety of Goods Barriers to Entry Control Over Prices
Example
Perfect Competition Many None,Identical
None,Easy to start
None,Supply &Demand
Farms,Stocks
Monopoly One UniqueGood
DifficultTo Start&Hold
FullControl
City Sewage
Monopolistic Competition Many Similar,
Sub-stitutes
Oligopoly
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Business Organization Number of Firms
Variety of Goods Barriers to Entry Control Over Prices
Example
Perfect Competition Many None,Identical
None,Easy to start
None,Supply &Demand
Farms,Stocks
Monopoly One UniqueGood
DifficultTo Start&Hold
FullControl
City Sewage
Monopolistic Competition Many Similar,
Sub-stitutes
Few
Oligopoly
![Page 52: Unit 4 microeconomics general](https://reader035.fdocuments.net/reader035/viewer/2022081413/547a71a35906b5fd348b4742/html5/thumbnails/52.jpg)
Business Organization Number of Firms
Variety of Goods Barriers to Entry Control Over Prices
Example
Perfect Competition Many None,Identical
None,Easy to start
None,Supply &Demand
Farms,Stocks
Monopoly One UniqueGood
DifficultTo Start&Hold
FullControl
City Sewage
Monopolistic Competition Many Similar,
Sub-stitutes
Few Some
Oligopoly
![Page 53: Unit 4 microeconomics general](https://reader035.fdocuments.net/reader035/viewer/2022081413/547a71a35906b5fd348b4742/html5/thumbnails/53.jpg)
Business Organization Number of Firms
Variety of Goods Barriers to Entry Control Over Prices
Example
Perfect Competition Many None,Identical
None,Easy to start
None,Supply &Demand
Farms,Stocks
Monopoly One UniqueGood
DifficultTo Start&Hold
FullControl
City Sewage
Monopolistic Competition Many Similar,
Sub-stitutes
Few Some Clothing,Barbers
Oligopoly
![Page 54: Unit 4 microeconomics general](https://reader035.fdocuments.net/reader035/viewer/2022081413/547a71a35906b5fd348b4742/html5/thumbnails/54.jpg)
Business Organization Number of Firms
Variety of Goods Barriers to Entry Control Over Prices
Example
Perfect Competition Many None,Identical
None,Easy to start
None,Supply &Demand
Farms,Stocks
Monopoly One UniqueGood
DifficultTo Start&Hold
FullControl
City Sewage
Monopolistic Competition Many Similar,
Sub-stitutes
Few Some Clothing,Barbers
Oligopoly Few
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Business Organization Number of Firms
Variety of Goods Barriers to Entry Control Over Prices
Example
Perfect Competition Many None,Identical
None,Easy to start
None,Supply &Demand
Farms,Stocks
Monopoly One UniqueGood
DifficultTo Start&Hold
FullControl
City Sewage
Monopolistic Competition Many Similar,
Sub-stitutes
Few Some Clothing,Barbers
Oligopoly Few Similar,Sub-stitutes
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Business Organization Number of Firms
Variety of Goods Barriers to Entry Control Over Prices
Example
Perfect Competition Many None,Identical
None,Easy to start
None,Supply &Demand
Farms,Stocks
Monopoly One UniqueGood
DifficultTo Start&Hold
FullControl
City Sewage
Monopolistic Competition Many Similar,
Sub-stitutes
Few Some Clothing,Barbers
Oligopoly Few Similar,Sub-stitutes
Many,Ex-pensive
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Business Organization Number of Firms
Variety of Goods Barriers to Entry Control Over Prices
Example
Perfect Competition Many None,Identical
None,Easy to start
None,Supply &Demand
Farms,Stocks
Monopoly One UniqueGood
DifficultTo Start&Hold
FullControl
City Sewage
Monopolistic Competition Many Similar,
Sub-stitutes
Few Some Clothing,Barbers
Oligopoly Few Similar,Sub-stitutes
Many,Ex-pensive
Some
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Business Organization Number of Firms
Variety of Goods Barriers to Entry Control Over Prices
Example
Perfect Competition Many None,Identical
None,Easy to start
None,Supply &Demand
Farms,Stocks
Monopoly One UniqueGood
DifficultTo Start&Hold
FullControl
City Sewage
Monopolistic Competition Many Similar,
Sub-stitutes
Few Some Clothing,Barbers
Oligopoly Few Similar,Sub-stitutes
Many,Ex-pensive
Some Auto,Cereal
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D. Perfect and Monopolistic Competition
1. Perfect competition is tough market
2. Farmers are example, make little profit
3. Monopolistic competition fare better due unique twist they have on product.
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E. Monopolies and Oligopoly
1. Monopolies virtually banned by Anti-trust Laws
2. Natural Monopolies still exista. Geographic – last gas station for milesb. Governmental – only cable company
allowed in townc. Technological – patents for new products
3. Oligopoly companies are forbidden from cooperating with each other (collusion)