I. Markets and Microeconomics

A.  Introduction and Supply and Demand

1.  Introduction

a.  Microeconomics

• Deals with the actions of individual consumers, firms, and industries

• Concerned with prices and quantities of inputs and outputs - deals with strategic and tactical decisions by firms and individuals

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b.  Macroeconomics

• Deals with larger economic environment

• Concerned with overall level of economic activity, interest rates, unemployment, inflation, exchange rates - deals with the setting in which business occurs

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2.  Supply and demand

a. Demand

• Concerned with buyers or consumers of a product

• Relationship between the price of a good or service and the quantity demanded, all else held constant

(1) Demand curve

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(2)  Law of Demand

• Price and quantity demanded are inversely (negatively) related, holding everything else constant (ceteris paribus)

• Due to:

(a) Substitution effect - change in price makes good more or less expensive relative to other goods

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(b) Income effect - change in price affects consumers' purchasing power

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(3)  Changes

(a)  Change in quantity demanded

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(b)  Change in demand

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(4)  Nonprice factors affecting demand

(a)  Tastes and preferences

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(b)  Income

i) Normal good - more of the good is demanded as income or wealth increases

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ii) Inferior good - less of the good is demanded as income or wealth increases

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(c)  Prices of related goods

i) Substitutes - use one good instead of another

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ii) Complements - use goods together

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(d)  Future expectations

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(e)  Number of consumers

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b. Supply

• Concerned with sellers or the producers of a product

• Relationship between the price of a good or service and the quantity supplied

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(1) Supply curve

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(2)  Law of Supply

• Price and quantity supplied are directly (positively) related, holding everything else constant (ceteris paribus)

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(3)  Changes

(a)  Change in quantity supplied

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(b)  Change in supply

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(4)  Nonprice factors affecting supply

(a)  Technology

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(b)  Input prices

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(c)  Prices of related goods

i) Substitute production - produce one good instead of another

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ii) Complementary production - produce goods together

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(d)  Future expectations

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(e)  Number of producers

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c. Equilibrium

• Combine supply and demand

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• Disequilibrium

(1) Shortage

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(2) Surplus

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d. Market changes

(1) Changes in demand

(a) Increase in demand

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(b) Decrease in demand

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(2) Changes in supply

(a) Increase in supply

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(b) Decrease in supply

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(3) Changes in demand and supply

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