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Unit 2: Microeconomics How households and businesses are interdependent and interact through flows of goods, services, resources, and money. Within an economy, there are sectors The Circular Flow of the Economy

Circular Flow Diagram The Circular Flow Diagram: is a model economist use to show the characteristics of and relationships that exist between households and businesses in an economy.

The Resource Market Also known as the Factor Market Households: Owners of Productive Resources (Factors of Production) Sell their land, labor, capital, and entrepreneurship to businesses (firms) in exchange for income payments. Businesses (Firms):

Consumers of the Productive Resources (Factors of Production) Purchase the land, labor, capital, and entrepreneurship from households using the revenue they earned in the Product Market (Factor Market). Wages, interest, rent, and profit flow from businesses to the resource market, becoming the flow of income from the resource market to the households. The Product Market

Households: Consumers of Goods and Services Buy Goods and Services from Businesses (firms) using the income they earned in the Resource Market (Factor Market) Households use their income for spending or expenditures in the product market. Consumer expenditures is a fancy word for spending

Businesses (Firms): Producers of Goods and Services Sell goods and services to households and they earn revenue in exchange for their goods and services. Remember... Households and Businesses are located opposite each other on the

diagram The Resource and Factor Market are also going to be located opposite each other. The arrows on the inside of the diagram all flow in the same direction, making a circle. This is true on the outside as well, except those arrows flow in the

opposite direction as the inside arrows. The inside circle represents the flow CIrcular Flow Simulation Males = Households Start with Resources Sell your resources to a business for as high a prices

as you can Use this money to buy as many ECONOS from the business as you can The male with the most goods and services (ECONOS) wins! Females = Businesses (Firms) Start with Money

Buy complete sets of resources for as low as you possibly can Turn in complete sets of resources to me in exchange for ECONOS Sell these Goods and Services (ECONOS) to the households The female with the most

money ($) at the end wins! Demand The law, graphing, and shifting! What is Demand? Demand is the quantity a consumer is willing and able to purchase at each price.

In order for there to be a demand for a product people must be willing and able (can afford) to purchase it Law of Demand Law of demand states that as the price of a good rises the quantity of the good consumers are willing and able to buy

will decrease. *This is an INVERSE relationship* Law of Demand The Market Demand Curve Market demand curve refers to all the quantities of a

good, service, or resource buyers are willing and able to buy at Quantity Demanded Quantity demanded is the amount of a good, service, or resource buyers are willing and able to buy at one SPECIFIC

price. What is the quantity demanded at the price of $1 on the previous graph? Quantity demanded will ALWAYS Demand Schedule The table below is an example of a demand schedule and provides the data you use to create a demand curve.

Changes in Quantity Demanded Changes in price cause a change in quantity demanded This is illustrated by moving from one point to another on the line Shifting Demand: Determinants Determinants of demand describe the types of

changes in a market that will cause the entire demand curve to move to the right or the left. What does this mean? All consumers of a good, service, or productive resource will be willing and able to purchase more or less of a product at all prices in the market. Shifting Demand

Increase in demand means the entire curve will shift to the RIGHT Decrease in demand means the entire curve will shift to the LEFT Shifting Demands: Determinants Price of Related Goods Consumer Income

Consumer Expectations Consumer Taste/Preferences Change in Number of Consumers Price of Related Goods Complementary goods are the items we buy together. Example: peanut butter and jelly

If the price of peanut butter increases, then the demand for peanut butter AND jelly will decrease Price of Related Goods Substitute goods are items that could take the place of another product due to its similarity.

Example: Coke and pepsi If the price of coke rises, then consumers who normally purchase coke will purchase pepsi Consumer Incomes When consumer income increases then demand increases.

Example: If the government decides to lower income tax rates, consumers will have more disposable income to spend on goods and service and demand will increase Consumer Expectations If consumers expect the price of a product to rise in the future, they will demand more in the present before the

price rises causing the demand to increase and shift to the RIGHT Example: If consumers expect producers to charge higher prices for candy during Halloween, some consumers will purchase Consumer Expectations If consumers expect the price of a product to fall in the future, they will demand less in the present

while the market price is higher causing the demand to decrease and shift to the LEFT Example: If consumers expect prices for airline tickets to fall in September when families are less likely to travel due to the school calendar, consumers will demand fewer tickets and shift the curve to the LEFT Consumer Taste/Preference

If consumers in a market for a good or service have an increase in their taste for that product, then the demand for the product in this market will rise and shift to the RIGHT Example: If researchers publish a study concluding that eating grapefruit every day causes people to lose weight, there will be an

Consumer Taste/Preference If consumers in a market for a good or service have a decrease taste for a product, then the demand for the product in this market will decrease and shift to the LEFT Example: A series of airplane crashes will decrease consumer taste for air travel and demand will decrease.

Number of Consumers If consumers leave the market for a product, then the demand for the product in this market will fall and shift to the LEFT Example: as ride and room sharing apps have expanded, the number of consumers in the traditional taxi and hotel markets has

decreased, decreasing demand for these Number of Consumers If more consumers enter the market for a product, then the demand for the product in this market will rise and shift to the RIGHT Example: As the number of Americans connected to the internet has risen, the number

of consumers in the market for online retail has increased and demand has increased Supply Notes The law, graphing, and shifting! What is Supply? Supply is the quantity a seller is willing and able to sell at each price.

Law of Supply The law of supply says that as price rises the quantity a seller is willing and able to sell will increase. DIRECT RELATIONSHIP Law of Supply

The Market Supply Curve The market supply curve refers to all the quantities of a good, service, or resource sellers are willing and

Quantity Supplied The quantity supplied is the amount of a good, service, or resource sellers are willing and able to sell at one specific price. Changes in quantity supplied result from a change in price. Changes in quantity supplied

Supply Schedule The table below is an example of a supply schedule and provides the data you use to create a supply curve Shifting Supply Determinants

Cost of Productive Resources Government Regulation Number of Sellers Producer Expectations Technology

Education Cost of Productive Resources If the resources needed to produce a product become less expensive, sellers will produce more and the supply will increase (shift to the RIGHT). Example: If the cost of cotton decreases, what happens to the

supply of T-shirts? Cost of Productive Resources If the resources needed to produce a product become more expensive, sellers will produce less and the supply will decrease (shift to the LEFT). Example: If the cost of peanuts rise, what happens to the supply of peanut

butter? Government Regulation If the government decreases regulation on sellers in a market, sellers will produce more products and supply will increase (shift to the RIGHT) Example: The U.S. stops controlling fares and routes for air travel, what

happens to the supply of flights? Government Regulation If the government increases regulation on sellers in a market, sellers will produce less products and supply will decrease (shift to the LEFT) Example: If the government requires factories to reduce pollution, what will happen to supply

of goods made in factories? Number of Sellers If the number of sellers in the market increase, there will be more producers of the product and supply will increase (shift RIGHT). Example: The demands for pecans in China has increased. What happens to

the market for pecans? Number of Sellers If the number of sellers in the market decrease, there will be less producers of the product and supply will decrease (shift LEFT). Example: The demand for DVDs has decreased due to streaming movies,

what happens to the supply of DVDs? Producer Expectation If producers expect the price of their product to fall in the future, they will supply more right now while the price is higher. This will cause supply to increase (shift RIGHT) Example: If J.Crew expects to have a

sale at the end of the summer Producer Expectations If producers expect the price of their product to rise in the future, they will supply less right now and wait for the price to rise. This will cause supply to decrease (shift LEFT) Example: If consumers are willing to pay a high price for wrapping paper during Christmas,

what will happen to the supply of wrapping paper during December? Technology If producers implement new, more efficient technology in the production process, supply will increase (shift RIGHT) Example: Brandon and Trent buy an

electric juicer for their lemonade stand. What happens to supply? Technology If producers lose the benefits of production technology, supply decreases (shift to LEFT) This is unusual and typically occurs because of a natural or cyber disaster.

Example: A tornado hits Brandon and Trents lemonade stand Education If workers in a market improve their education, knowledge, and skills related to the production process, their labor productivity will increase and as a result supply will increase (shift RIGHT). Example: Workers train on a new software

package to increase productivity. What happens to supply? Education If the education, knowledge, and skills of many workers in a market decline, their labor productivity will decrease and as a result supply will decrease (shift LEFT).

Example: High school drop out rate increases. Combining Supply and Demand Equilibrium, Surplus, and Shortage! Equilibrium Price and Quantity The market clearing or equilibrium price is the

point of intersection between the market demand curve and the market supply curve. This is the point where the quantity demanded by consumers is equal to the quantity supplied by consumers. Graphing Equilibrium Price Equilibrium

What is the equilibrium price? What is the equilibrium quantity? Price Floor A price floor is when the price is set above the equilibrium price. Since they are set above equilibrium, there will

be a larger quantity supplied then there is quantity demanded. Price Floor and Surplus When the quantity supplied is greater than the quantity demanded there is a surplus of the

product. Price Floor and Surplus The government sets the price floor of Lemonade to $3. What is the amount of surplus?

Price Ceiling A price ceiling is when the price is set below the equilibrium price. Since price ceilings are below equilibrium, there will be a larger quantity demanded then there is quantity supplied. Price Ceiling and Shortage When quantity

supplied is less than quantity demanded, there is a shortage of the product in the market. Price Ceiling and Shortage The government sets the price ceiling of

Lemonade to $1. What is the amount of shortage? Business Organizations and Market Structures SSEMI3 Three Forms of Business Organization

Sole proprietorships are firms legally owned by only one person. Partnerships are firms legally owned by two or more people. Corporations are firms legally owned by stockholders who purchased shares of the company in hope that the value of the shares will increase overtime and they will make money.

How do they compare? Important Terms Liability refers to the responsibility for paying the debts of the business. Unlimited liability means if a business is unable to meet its financial obligations, the owner is personally responsible Limited liability means the responsibility of

debts is restricted to the ownership stake (shares of stock) the business owner owns. Important Terms Lifespan of the business refers to what happens to the business when an owner leaves or dies. Limited life means the business will close or reorganize if it switches owners. Unlimited life means the business passes to

new owners through the sale of shares without ending the business. Important Terms Decision making refers to the entity responsible for the day to day operating decisions of the business. Owner Board of Directors

Important Terms The way a business is organized affects taxation on the profits of the business. Single tax means the amount of income they earn from their business will determine the income tax rate they charge. Double tax means that corporations must pay corporate income tax on profits along with a tax

on all dividends from shareholders. Four Types of Market Structures Pure (Perfect) Competition is a market structure characterized by a large number of buyer and sellers of an identical product. Example: crude oil Monopolistic Competition is a market structure characterized by a large number of buyers and

sellers of products that are similar to one another but can be differentiated by brand, quality, etc. Example: restaurants and retail clothing Four Types of Market Structures Oligopoly is a market structure characterized by only a few sellers of a product who dominate the market. Example: Breakfast cereals and natural gas

Monopoly is a market structure characterized by only one seller of a product dominating the market Example: electrical power companies and cable tv companies Basic Characterisitics Basic Characteristics

Market Structure Characteristics Number of sellers: Are there many, few, or one seller of a product? The more sellers there are the more competitive the market. Barriers to entry: Are there any obstacles that prevent other firms from entering the market for the good? If barriers are weak or absent from the market, the market will be more competitive.

Market Structure Charactersitics Price control: Can the individual firms in the market for a product exercise any control over the price they charge? The weaker the control over price, the more competitive the market. Product differentiation: Is there any difference between the products sold by the sellers in the market for the good? If the products sold by the firms in the market are identical, there is no reason for sellers to engage in non-price competition which refers to methods other than

price used to attract customers.

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