Microeconomics

Front 1

Markets

Outline the meaning of the term market

Back 1

The term market has evolved to include any kind of arrangement where buyers and sellers of goods, services or resources are linked together to carry out an exchange.

Front 2

MICRO: Demand

Back 2

The Law of Demand

Front 3

Explain the negative causal and relationship between price and quantity demanded

Back 3

According to the law of demand, there is a negative causal relationship between the price of a good and its quantity demanded over a particular time period, ceteris paribus: as the price pf the good increases, quantity demanded falls and vice versa

Front 4

Describe the relationship between an individual consumer's demand and market demand

Back 4

The demand of an individual consumer indicates the various quantities of a good (or service) the consumer is willing and able to buy at different possible prices during a particular time period, ceteris paribus.

Market demand is the sum of all individual demands for a good. The market demand curve illustrates the law of demand, shown by the negative relationship between price and quantity demanded, the market demand curve is also the sum of consumers' marginal benefits.

Front 5

The Demand Curve

Explain that a demand curve represents the relationship between the price and the quantity demanded of a product, ceteris paribus.

Back 5

An explanation for the shape of the demand curve an be found in the principle of decreasing marginal benefit: since marginal benefit falls as quantity consumed increases, the consumer will be induced to buy each extra unit only if its price falls.

Mark demand is the sum of all individual demands for a good. The market demand curve illustrates the law of demand, shown by the negative relationship between price and quantity demanded. The market demand curve is also the sum of consumers' marginal benefits.

Front 6

The Non-price Determinants of Demand (factors that change demand or shift the demand curve

Explain how factors including changes in income (in the case of normal and inferior goods), preferences, prices of related goods ((in the cases of substitutes and complements) and demographic changes may change demand.

Back 6

The non-price determinants of demand are the variables other than price that can influence demand. They are the variables assumed to be unchanging by use of the ceteris paribus assumption when the relationship between price and quantity demanded was being examined

Front 7

Movements Along and Shifts of the Demand Curve

Distinguish between movements along the demand curve and shifts of the demand curve

Back 7

Changes in the determinants of demand cause shifts in the demand curve: a rightward shift (increase in demand) of the demand curve indicates that more is demanded for a given price; a leftward shift (decrease in demand) indicates that less is demanded for a given price
Any change in price produces a change in quantity demanded, shown as a movement on the demand curve. Any change in a non-price determinant (change in conditions) of demand leads to a change in demand, represented by a shift of the entire demand curve

Front 8

Linear Demand Functions (equations), Demand Schedules and Graphs

Back 8

▪ Explain a demand function of the form QD = a - bP
▪ Plot a demand curve from a linear function (e.g. QD = 60 - 5P)
▪ Identify the slope of the demand curve as the slope of the demand function QD = a - bP, that is -b (the coefficient of P)
▪ Outline why, if the “a” term changes, there will be a shift of the demand curve.
▪ Outline how a change in “b” affects the steepness of the demand curve.

Front 9

MICRO: Supply

Back 9

The Law of Supply

Front 10

Explain the positive causal relationship between price and quantity supplied

Back 10

According to the Law of Supply, there is a positive causal relationship between the quantity of a good supplied over a particular time period and its price, ceteris paribus: as the price of the good increases, the quantity of the good supplied also increases; as the price falls, the quantity supplied also falls, ceteris paribus

Front 11

Describe the relationship between an individual producer’s supply and market supply

Back 11

Market Supply is the sum of all individual firms' supplies for a good. The market supply curve illustrates the law of supply, shown by a positive relationship between price and quantity supplied

Front 12

The Supply Curve

Explain that a supply curve represents the relationship between the price and the quantity supplied of a product, ceteris paribus

Back 12

The supply of an individual firm indicates the various quantities of a good (or service) a firm is willing and able to produce and supply to the market for sale at different possible prices, during a particular time period, ceteris paribus

Front 13

The non-price determinants of supply (factors that change supply or shift the supply curve)

Explain how factors including changes in costs of factors of production (land, labour, capital and entrepreneurship), technology, prices of related goods (joint/competitive supply), expectations, indirect taxes and subsidies and the number of firms in the market can change supply

Back 13

▫ Changes in the determinants of supply cause shifts in the supply curve.

A rightward shift (increase in supply) indicates that more is supplied for a given price; a leftward shift (decrease in supply) indicates that less I supplied for a given price

Front 14

Cost Determinants

Back 14

§ Costs of factors of production
§ Technology
§ Related goods/competitive supply
§ Related goods/joint supply
§ Producer (firm) expectations

Front 15

Movements along and shifts of the Supply Curve

Distinguish between movements along the supply curve and shifts of the supply curve

Back 15

Any change in price produces a change in quantity supplied, shown as a movement on the supply curve.

Any change in a determinant of supply (other than price) produces a change in supply, represented by a shift of the whole supply curve

Front 16

Linear Supply Function, Equations and Graphs

Back 16

▪ Explain a supply function (equation) of the form Qs = c + dP.
▪ Plot a supply curve from a linear function (eg, Qs = –30 + 20 P).
▪ Identify the slope of the supply curve as the slope of the supply function Qs = c + dP, that is d (the coefficient of P).
▪ Outline why, if the “c” term changes, there will be a shift of the supply curve.
▪ Outline how a change in “d” affects the steepness of the supply curve.

Front 17

MICRO: Market Equilibrium

Back 17

Equilibrium and Changes to Equilibrium

Front 18

Explain, using diagrams, how demand and supply interact to produce market equilibrium

Back 18

[insert diagram here]

Front 19

Analyse, using diagrams and with reference to excess demand or excess supply, how changes in the determinants of demand and/or supply result in a new market equilibrium

Back 19

If quantity demanded of a good is smaller than quantity supplied, the difference between the two is called a surplus, where there is excess supply; if quantity demanded of a good is larger than quantity supplied, the difference is called a shortage, where there is excess demand. The existence of a surplus of a shortage in a free market will cause the price to change so that the quantity demanded will be made equal to quantity supplied.

In the event of a shortage, price will rise; in the event of a surplus, price will fall

Front 20

Excess Supply

Back 20

[insert diagram here]

Front 21

Excess Demand

Back 21

[insert diagram here]

Front 22

Calculating and Illustrating Equilibrium using Linear Equations

Back 22

▪ Calculate the equilibrium price and equilibrium quantity from linear demand and supply functions
▫ QS = QD
▪ Plot demand and supply curves from linear functions, and identify the equilibrium price and equilibrium quantity.
▪ State the quantity of excess demand or excess supply in the above diagrams.

Front 23

MICRO: The Role of the Price Mechanism

Back 23

Resource Allocation

Front 24

Explain why scarcity necessitates choices that answer the "what to produce?" question

Back 24

The condition of scarcity forces societies to make choices about the what to produce economic question, which is a resource allocation question

Front 25

Explain why choice results in an opportunity cost

Back 25

Choices involve an opportunity cost because of foregone (or sacrificed) alternatives that could have been chosen instead

Front 26

Explain, using diagrams, that price has a signalling function and an incentive function, which result in a reallocation of resources when prices change as a result of a change in demand or supply conditions

Back 26

The key to the market's ability to allocate resources can be found in the role of prices as signals and prices as incentives. As signals, prices communicate information to decision-makers. As incentives, prices motivate decision-makers to respond to the information

Front 27

MICRO: Market Efficiency

Back 27

Consumer Surplus

Front 28

Explain the concept of consumer surplus

Back 28

Consumer surplus is defined as the highest price consumers are willing to pay for a good minus the price actually paid (usually determined at the market equilibrium)

It represents the difference between total benefits consumers receive from buying a good and the price paid to receive them

Front 29

Producer Surplus

Explain the concept of producer surplus.

Back 29

Producer surplus is defined as the price received by firms for selling their good minus the lowest price that they are willing to accept to produce the good.

The lowest price that the firm is willing to accept must be just enough to cover its cost of producing each extra unit; this cost is known as marginal cost, MC)

Front 30

Allocative Efficiency

Explain that the best allocation of resources from society’s point of view is at competitive market equilibrium, where social (community) surplus (consumer surplus and producer surplus) is maximized (marginal benefit = marginal cost)

Back 30

At the point of competitive market equilibrium, social surplus (community surplus), defined as the sum of consumer and producer surplus, is maximum