Microeconomics

Demand

The quantity of a good or service that buyers will purchase at various prices during a given period of time

Consumer Demand for products depends on certain factors:

Desire

Consumers must desire the product in order for the products demand to be high

Financial Resources

Consumers must have enough income and financial stablity to freely be able to purchase the product/ service

Low Income decreases demand

High income increases demand

Price of Product or Service

High prices decreases consumer demand as consumers do not want to spend such a high amount

Moderate/Low prices keep demand stable and increases demand as consumers find the price within their budget and find spending affordable

Law Of Demand: The quantity demanded varies inveserly with price, as long as other things do not change

Substitution Effect: As the price of a particular good rises, consumers start to Substitute similar goods for it

Example: If the price of a well known branded pasta such as PRIMO were to rise, consumers would start to substitute and purchase a pasta that is a different brand such as compliments as it's price is lower and more affordable. This would decrease the demand of the branded pasta and increase demand for the no brand pasta.

Income Effect: Change in demand of a good or service due to a consumers discretionary income

Example: The money consumers would save from buying non branded pasta would represent the consumers extra income. Some consumers would use that extra income to purchase another box of the same pasta, thus, increasing its demand.

Changes In Demand May Occur due to different factors:

Income: A change in consumer income could affect demand for products and services

Population:

Increased population would increase demand for products as more people are present to purchase

Decrease in population would decrease demand on products and services as left people are present to purchase

Taste and Prefrences

Prices of Substitute goods/complement goods

Increase in the price of goods would decrease demands as consumers wouldn't want to spend that much

Decrease in the price of goods would increase demand as consumers could purchase more in less of an amount than usual

Supply

Quantities sellers will offer for sale at various prices during a given period of time

Law of Supply: The quantity supplied will increase if price increases and fall if price falls, as long as other things do not change

Supply for products depend on certain factors:

Cost Of Production

An increase in production costs would decrease the quantity supplied as owners do not want to have high production costs

Example: Suppliers would decrease supply for a product when they realize production costs are exceeding the market price of the product

Price

The price of a product and the supply of the product are directly related (direct relationship). If prices of a product increases, so does its supply.

Government Policies

Different government policies such as fiscal policies would have a great impact on the supply of products

Example: Increasing taxes would decrease supply

Prices of related goods

Refers to substitute goods. If prices of substitue goods is lower, consumers would want more of those increasings its demand, eventually increasing supply.

Government Intervention

Ceiling Prices: Restriction placed by a government in order to prevent the price of a product from rising above a certain level

3 possible outcomes may occur with ceiling prices

Shortages may cause long line ups for the product

Example: When/if a government were to have ceiling prices on gasoline, it would cause gasoline shortages and long line ups. This would continue to occur until prices were allowed to be lifted once again causing supply and demand to remerge at the equibilarium

May create an "underground economy"

Occurs when a shortage of a product would cause certain consumers to buy a big stock of the product so that they could later sell it to people for a higher price.

Can cause quality of products to suffer/cevrease

Suppliers would want to lower down their productio costs, hence, they would try to find ways ot save their costs and could use cheaper materail for products meaning product quality would suffer

Example: Rent Control

Floor Prices: A government restriction that prevents a price from falling below a certain level

Floor price set above equilibrium creates surplus

Maintaing these floor prices can cause two problems:

First problem is; what to do with the surplus

Surplus is usually bought by government to ensure floor prices are kept

Sometimes, Surplus can be sold on the world market or distributed to less developed cpountries

Second problem; Consumers pay a higher price but receive less

Example: Minimum wage

Subsidies and Quotas

Subsidy: A grant of money made to a particular industry by rhe government

Subsidies have some advantages:

Allows more of a product to be exchanged between buyers and sellers

Has the advantage of Benefitting buyers with lower prices and sellers with extra revenue

Subsidies also have some drawbacks:

Taxpayers pay for the progran

Subsidies may keep inefficient producers in business

Subsidies are seen as a barrier in free trade in the global economy

Quotas: Restriction placed on the amount of product that individual producers are allowed to produce

Marketing Boards

Organization who administer these quota restrictions

Composed of representaties from the government and from the producers

Elasticity

Elasticity Of Demand

Price elasticity of demand

Formula to measure the actual change in quantity demanded for a product whose price has changed

Coefficient of demand elasticity=

% Change in quantity demanded
% Change in price

Inelastic Coefficient: Any coefficient for a product between zero and one

These goods are tended to be neccessities

Givern per cent change in price causes a smaller per cent change in quantity demanded

Elastic Coefficient: Any coefficient for a product that is greater than one

Given per cent change in price causes a greater per cent change in quantity demanded

These goods tend to be wants

Unitary Coefficient: A coefficient for a product that is equal to one

Given per cent change in price causes an equal per cent change in quantity demanded

Important for business people to know whether total revenues will rise or fall

There are 4 main factors that may affect demand elasticity:

Availability of substitues

Goods who have substitutes tend to be more elastic than goods that do not

Nature of the Item

Goods that are neccessities tend to be more inelastic than goods that are considered luxuries/a want

Fraction of Income spent on the item

Goods that are expensive and take up a large amount of a family budget are elastic

Amount of time available

Some goods may become elastic as consumers start to find substitutes for them

The responsiveness of quanities demanded and supplied to changes in price

Elasticity of Supply

Measures how responsive the quantity supplied by a seller is to a rise or fall in price

Coefficient of supply elasticity=

% change in quantity supplied
% Change in price

There are 3 factors that affect supply elasticity

Time

The longer the time period a seller has to increase production, the more elastic the supply will be

Ease of Storage

Sellers have two options when the price of a product drops

Sell the product at a new and lower price

Keep aside some inventory into storage, and sell it when prices rise again

Cost Factors

Increasing output (supply) may be costly depending on the industry

Utility Theory

Marginal Utility Theory of consumer choice

Created by Alfred Marshall, also known as "the father of supply and demand"

Known as utility theory for short

Utility: the ecoomic term for "satisfaction" or "usefulness"

Util: Numerical values, or units of satisfaction

Utility Maximization Formula

Marginal Utility = Marginal Utility
Price of product A Price of Product B

Helps calculate which combination of products could give a consumer the most satisfaction

State of balance achieved by an end user of products

Refers to the amount of goods and services they can purchase given their present level of income and current level of prices

Applications of Utility Theoruy

Marginal utility theory supports this idea

Theory states that as people consume more, the extra satisfaction they receive declines

Theory states that as people receive less satisfaction while consuming more of a product, they will want to pay less for the product (the more you buy, the less you want to pay)

Adam Smith's paradox

Known as paradox of value

States/Explains that the goods critical for survival are cheaper than the goods that have no bearing on human existence

Example: Water is critical to survvival however is much cheaper than diamonds which are a luxury and not needed to survive

Consumer Surplus

Difference between the price that consumers are willing to pay for a product and what they actually pay