Microeconomics: Principles

• Microeconomics examines choices made by individuals and firms regarding production, consumption, and distribution of goods and services, given limited resources.
• Microeconomics studies economic concepts like supply and demand, prices, costs, production, market structures, consumer behavior, and resource allocation.

Key Principles of Microeconomics

• Scarcity means resources are limited, requiring individuals and firms to make choices.
• Supply represents the quantity of a good or service producers offer.
• Demand represents the quantity consumers are willing to buy at a given price.
• Interaction of supply and demand determines market prices and quantities
• Elasticity measures the responsiveness of supply or demand to changes in price or other factors.
• Price elasticity of demand shows how much the quantity demanded changes when the price changes.
• Costs of production include fixed, variable, and marginal costs.
• Market structures include perfect competition, monopoly, oligopoly, and monopolistic competition.
• Market structures affect prices, output levels, and market behavior.
• Efficiency involves optimally allocating resources.
• Equity refers to fairness in the distribution of resources.
• Microeconomics explores the trade-off between efficiency and equity.

Law of Demand

• An increase in the price of a product or service leads to a decrease in the quantity demanded, assuming other factors remain constant.
• The relationship between price and quantity demanded is typically negative.
• Higher prices tend to reduce consumer demand.

Law of Supply

• As the price of a product or service increases, the quantity supplied by producers also increases, assuming all other factors remain constant.
• The relationship between price and quantity is typically positive.
• Higher prices encourage producers to supply larger quantities of product or service.

Equilibrium Price

• It is the point where supply and demand intersect, determining the market price and quantity of a product or service.
• When demand exceeds supply, it creates a shortage, and prices tend to rise.
• When supply exceeds demand, it creates a surplus, and prices tend to fall.
• Also known as market equilibrium.
• It is the point at which the quantity demanded by consumers matches the quantity supplied by producers in a market.
• It is the price and quantity combination where there is neither a shortage nor a surplus of goods or services.

Factors Influencing Demand

• Own Price
• Other Prices (substitute and complimentary goods)
• Income/Wealth
• Tastes and Preferences
• Advertising
• Health and Nutrition
• Food Safety
• Population
• Expectation of future price change
• Demographics

Shift vs. Movement Along the Demand Curve

• A movement along a demand curve is referred to as a change in the quantity demanded and is caused by a change in price.
• A shift in the demand curve is referred to as a change in demand.
• Movement from one demand curve to another represents a change in demand.
• Movement along the same demand curve represents a change in the quantity demanded.

Factors Influencing Supply

• Costs of production - the higher the cost of production, the less profit will be made at any price
• Change in input prices
• Change in technology
• Government policy - Taxes and Subsidies
• Organizational changes
• Expectations of future price change
• Number of Firms/suppliers
• Profitability of substitute products
• Profitability of goods in joint supply(peanut butter and jam)
• Nature (weather)

Shifts vs Movement Along the Supply Curve

• Movement along a supply curve is referred to as a change in the quantity supplied and is caused by a change in price.
• A shift in the supply curve is referred to as a change in supply and happens determinants other than price changes cause a shift.

Factors Increasing Supply

• Favorable natural conditions for production
• A fall in input prices
• Improved technology
• Lower product taxes/less costly regulations

Factors Decreasing Supply

• Poor natural conditions for production
• A rise in input prices
• A decline in technology (not common)
• Higher product taxes/more costly regulations

Price Equilibrium

• Also known as market equilibrium.
• It is the point at which the quantity demanded by consumers matches the quantity supplied by producers in a market.
• It is the price and quantity combination where there is neither a shortage nor a surplus of goods or services.
• When the price is below the equilibrium level, there is excess demand or a shortage.
• Consumers want to purchase more goods or services than producers are willing to supply at that price.
• Competition among buyers drives the price up towards the equilibrium level.
• When the price is above the equilibrium level, there is excess supply or a surplus.
• Producers are willing to supply more goods or services than consumers demand at that price.
• To sell their excess supply, producers reduce prices, leading to a decrease in the price towards the equilibrium level.
• The market tends to move towards equilibrium by adjusting prices.
• The adjustment of prices is determined by the interaction of supply and demand factors, such as:
• production costs
• consumer preferences
• market competition
• external influences
• Changes in supply or demand factors can shift the equilibrium point, resulting in changes in price and quantity.