What is Micro economics?

Micro economics is the study of the different parts of the economy. Think of it as the function of a microscope. A microscope gets up so close that you can see the different parts of the cell. This is the same thing, but in economics. In studying micro economics we are studying the individual sectors of the economy and how they operate. In macroeconomics, on the other hand, we look at the functioning of the economy as a whole.Believe it or not, if you have been paying attention in class, we have already delved into micro economics. By studying the laws of supply and demand and circular flow we were examining how different parts of the economy worked.

The economy is broken up into five parts known as sectors. These parts are:

1. The Consumer

2. Business

3. Government

4. Labor

5. Agriculture

In studying micro economics, we will cover all of these sectors. NOTE: These are different from our Investment Portfolio Sectors – Same Idea Though!

Demand

• Demand means the willingness andability to pay for a good or service.

• Prices are the tools by which themarket coordinates individualdesires. (The Price System and The Invisible Hand)

The Law of Demand

• Law of demand – there is aninverse relationship between priceand quantity demanded.

– Quantity demanded rises as pricefalls, other things constant.

– Quantity demanded falls as pricesrise, other things constant

The Law Of Demand is based on two phenomena:

1.) At lower prices, existing demanders buy more

2.) At lower prices, new demanders enter the market

The Law of Demand

• What accounts for the law ofdemand?– People tend to substitute for goods whoseprice has gone up.

The Demand Curve

• The demand curve is the graphicrepresentation of the law ofdemand.

• The demand curve slopesdownward and to the right.

• As the price goes up, the quantitydemanded goes down.

A Sample Demand Curve

Types of Goods/Services

• Normal Good – as your income rises, so dose your demand for this good.

• Neutral Good – As income rises and falls, demand will remain relatively unchanged for this good (inelasticity).

• Inferior Good – As your income rises, your demand for this good decreases.

• Substitute Good – A good that can be replaced by another similar good. (Coke and Pepsi)

• Complementary good – A good that need is dependant upon the use of another good. (computers and software)

Shift Factors for Demand

• Change in consumer income• Change in consumer tastes• Change in the price of a substitute good• Change in the price of a complementary good• Change in consumers price expectations• Change in the number of consumer (market size

or share)• ONLY PRICE CHANGES QUANTITY

DEMANDED…NOT DEMAND!

Things To Remember When Considering A Demand Curve

•A demand curve had better follow the law of demand: When prices rise, quantity demanded falls; and vice versa.

•Horizontal axis (x) – Quantity – has a time dimension

•Vertical axis (y) – price – is a relative price.

•Quantities are of the same quality.

•The curve assumes everything else is held constant (cetarus paribus)

•Effects on PRICE changes are shown by movements along the demand curve. Effects of anything else on demand (shift factors) are shown by shifts of the entire demand curve

Other Things Constant(Cetaris Paribus)

• Other things constant places alimitation on the application of the

law of demand.

– All other factors that affect quantity demanded are assumed to remain constant, whether they actually remainconstant or not.