Microeconomics

1
Microeconomics

• The branch of economics that studies decision
  making by a single individual, household, firm,
  industry or level of government.

2
Economics
Economics is the study of society chooses to
allocate its scarce resources to the production
of goods and services in order to satisfy
unlimited wants. (Tucker, 2003)
Scarcity The condition in which human wants are
forever greater than the available supply of
time, goods and resources.
Opportunity Cost The best alternative sacrificed
for a chosen alternative.
Central Issue How to fulfill an unlimited demand
for goods with a limited supply of resources.
3
Opportunity Costs
You are currently enrolled in college. Lets
assume your tuition and all other expenses per
semester add up to 3,500? What are your
total costs for a given calendar year assuming
you dont take any spring or summer classes?
4
So why do people go to college?
5
Ceteris paribus
(ka't?r-is par'?-b?s)

• A Latin phrase that means
• while certain variables change,
• all other things remain unchanged.

6
Three Fundamental Economic Questions
What to produce? (Scarce resources lead to
limited goods) How to produce? (How to mix
technology and scarce resources to produce these
goods) For Whom to Produce? (Who will actually
receive what?)
7
Production Possibilities Curve

• A curve that shows the maximum combinations of
  two outputs an economy can produce in a given
  period of time with its available resources and
  technology.

• Key Assumptions
• Fixed Resources
• Fully Employed Resources
• Technology Unchanged

8
Shifting Curves The Role of Ceteris Paribus
A shift in a curve occurs only when the ceteris
paribus assumption is relaxed and a third
variable not shown on either axis of the graph is
allowed to change.
9
The Law of Demand

• There is an inverse relationship between the
  price of a good and the quantity buyers are
  willing to purchase in a defined period of time,
  ceteris paribus

10
Demand Schedule for College Education(Focus
Buyers)
11
Demand Curve College Education
Price (Tuition, Room and Board, Fees (per year)
in Thousands of Dollars)
20
18
16
14
12
7
9
11
13
15
Quantity (Millions of Students)
12
The Law of Supply

• There is a direct relationship between the price
  of a good and the quantity sellers are willing to
  offer for sale in a defined period of time,
  ceteris paribus

13
Supply Schedule for College Education(Focus
Sellers)
14
Supply Curve College Education
Price (Tuition, Room and Board, Fees (per year)
in Thousands of Dollars)
20
18
16
14
12
11
13
15
17
19
Quantity (Millions of Students)
15
Equilibrium
16
Intersection
Price (Tuition, Room and Board, Fees (per year)
in Thousands of Dollars)
20
18
Equilibrium Price
16
14
12
7
9
11
13
15
Quantity (Millions of Students)
17
Intersection
Price (Tuition, Room and Board, Fees (per year)
in Thousands of Dollars)
20
18
Surplus
16
14
12
7
9
11
13
15
Quantity (Millions of Students)
18
Intersection
Price (Tuition, Room and Board, Fees (per year)
in Thousands of Dollars)
20
18
16
14
12
Shortage
7
9
11
13
15
Quantity (Millions of Students)
19
Demand Curve
Price
The demand curve reflects changes in the quantity
demanded at a particular price.
Quantity
20
Shifting Supply and Demand The Role of Ceteris
Paribus

• A shift in a curve occurs only when the ceteris
  paribus assumption is relaxed and a third
  variable not shown on either axis of the graph is
  allowed to change.

21
Shifting Demand Curve Changes in Overall Demand
Price
Changes in non price factors will affect
demand. Examples Number of Buyers Tastes and
Preferences Income Expectations of Buyers Prices
of Related Goods
P
Qa Q Qb
Quantity
22
Other Business Factors that can Influence Overall
Demand
Advertising Free samples Sales calls Product
enhancements/improvements Income
23
What about our college example?
Unemployment Increase in Population Increased
number of international students
24
Shifting Demand Curve
Price (Tuition, Room and Board, Fees (per year)
in Thousands of Dollars)
20
18
Equilibrium Price
16
14
12
7
9
11
13
15
Quantity (Millions of Students)
25
Supply Curve
Price
The quantity sellers are willing to supply at
different prices.
Quantity
26
Shifting Supply Curve
Price
Non price determinants will also shift the supply
curve.
Examples Prices of Resources Taxes and
Subsidies Expectations of Producers Prices of
Alternative Goods
P
Qa Q Qb
Quantity
27
Macroeconomics

• Examines the economy as a whole

28
Three Important Goals in Macroeconomics
Growth (as measured by GDP) Employment (as
measured by Unemployment) Price Stability (as
measured by Consumer Price Index)
29
Important Economic Measures
GNP (Gross National Product) GDP (Gross Domestic
Product) GNI (Gross National Income) Federal
Deficit Federal Debt Per Capita
Income Disposable Income Discretionary Income
30
Important Economic Measures continued
Purchasing Power Parity Consumer
Confidence Consumer Price Index Unemployment Ho
using Starts Poverty Levels