Microeconomics: Supply and Demand

• Economics studies how societies allocate scarce resources in order to satisfy unlimited wants and needs
• This involves the analysis of the production, distribution, and consumption of goods and services

Microeconomics

• Microeconomics is centered on individual economic agents' behavior, including households, firms, and markets
• Supply and demand are fundamental concepts
• Demand is the quantity of a good or service consumers are willing and able to purchase at different prices during a period
• The law of demand states that as the price of a good or service increases, the quantity demanded decreases, with all other factors held constant
• Consumer income, tastes, expectations, and prices of related goods impact demand
• Supply refers to the quantity of a good or service that producers are willing to offer for sale at various prices during a specific period
• The law of supply says that as the price of a good or service increases, the quantity supplied increases, all else being equal
• Supply is subject to input costs, technology, expectations, and the number of sellers

Market Equilibrium

• Market equilibrium occurs when quantity demanded equals the quantity supplied, establishing an equilibrium price and quantity
• Downward pressure on price is caused by a surplus, which happens if quantity supplied exceeds quantity demanded
• Upward pressure on price results from a shortage, which happens if quantity demanded exceeds quantity supplied
• Price elasticity of demand measures the change of quantity demanded in response to a change in price
• Elastic demand is when a small change in price leads to a relatively large change in quantity demanded
• Inelastic demand is when a change in price results in a relatively small change in quantity demanded
• Price elasticity of supply measures the change of quantity supplied in response to a change in price
• Elastic supply is when a small change in price results in a relatively large change in quantity supplied
• Inelastic supply is when a change in price leads to a relatively small change in quantity supplied

Market Structures

• Many buyers and sellers, homogeneous products, free entry/exit, and perfect information characterize perfect competition
• Many buyers and sellers, differentiated products, and relatively easy entry/exit characterize monopolistic competition
• An oligopoly is dominated by a few large firms with homogeneous or differentiated products, as well as barriers to entry
• A single seller of a unique product and significant barriers to entry characterize a monopoly
• Markets fail when they fail to properly allocate resources
• Externalities are costs or benefits to parties not directly involved in a transaction
• Public goods are non-excludable and non-rivalrous, meaning that it is difficult to prevent consumption and one person's consumption does not reduce another's

Macroeconomics

• Macroeconomics focuses on the behavior of the economy as a whole
• Gross Domestic Product (GDP) is the total market value of all final goods and services produced within a country’s borders during a period
• GDP can be calculated using the expenditure approach (sum of consumption, investment, government spending, and net exports)or the income approach (sum of wages, profits, rents, and interest)
• Real GDP is GDP adjusted for inflation, providing a more accurate measure of economic output over time
• Nominal GDP is GDP measured in current prices, without adjusting for inflation
• Inflation is a sustained increase in the general price level of goods and services in an economy
• The Consumer Price Index (CPI) measures the average change over time in prices paid by urban consumers for a basket of consumer goods and services
• Unemployment rate is the percentage of the labor force that is unemployed and actively seeking employment
• Frictional unemployment occurs when workers are unemployed because of the time it takes to find a job matching their skills/preferences
• Structural unemployment stems from a mismatch between worker skills and available job requirements
• Cyclical unemployment results from fluctuations in the business cycle
• Fiscal policy involves government spending and taxation to influence the economy
• Expansionary fiscal policy involves increasing government spending or decreasing taxes to stimulate economic activity
• Contractionary fiscal policy involves decreasing government spending or increasing taxes to slow down economic activity
• Monetary policy refers to actions taken by a central bank to manipulate the money supply and credit conditions to influence the economy
• Expansionary monetary policy involves increasing the money supply or lowering interest rates to stimulate economic activity
• Contractionary monetary policy involves decreasing the money supply or raising interest rates to slow down economic activity

International Economics

• International trade involves the exchange of goods and services between countries
• Comparative advantage is the ability of a country to produce a good or service at a lower opportunity cost than another country
• Absolute advantage is the ability of a country to produce a good or service using fewer resources than another country
• Tariffs are taxes imposed on imported goods
• Quotas are restrictions on the quantity of goods that can be imported
• Exchange rates are the price of one currency in terms of another
• Fixed exchange rates happen when a country’s currency value is fixed against another currency
• Floating exchange rates see a country’s currency value is determined by market forces of supply and demand
• The balance of payments is a record of all economic transactions between a country and the rest of the world

Economic Growth and Development

• Economic growth refers to an increase in the production of goods and services in an economy over time, typically measured by the percentage change in real GDP
• Economic growth is influenced by increases in the labor force, capital stock, and technological progress
• Economic development sees the improvement of living standards, including income, health, education, and other indicators of well-being
• Human capital is the skills, knowledge, and experience possessed by workers that contribute to economic productivity
• Productivity is the amount of output produced per unit of input

Financial Markets

• Financial markets facilitate the transfer of funds between savers and borrowers
• Stocks represent ownership in a company
• Bonds represent debt instruments issued by governments or corporations
• Interest rates are the cost of borrowing money
• Central banks regulate the money supply

Labor Economics

• Labor economics studies the determinants of wages, employment, and unemployment
• Minimum wage laws set a floor on the wage rate that employers can pay workers
• Labor unions are organizations that represent workers and bargain with employers over wages, benefits, and working conditions

Game Theory

• Game theory analyzes strategic interactions between individuals or firms
• In a Nash equilibrium no player can improve their outcome by unilaterally changing their strategy, given other players' strategies

Behavioral Economics

• Behavioral economics incorporates psychological insights into economic models, recognizing that people are not always rational decision-makers
• Cognitive biases are systematic patterns of deviation from norm or rationality in judgment

Public Economics

• Public economics studies the role of the government in the economy, including taxation, public spending, and regulation
• Progressive taxes take a larger percentage of income from higher-income earners
• Regressive taxes take a larger percentage of income from lower-income earners
• Proportional taxes take the same percentage of income from all income earners

Microeconomics focuses on individual economic behavior. It covers supply and demand, where demand is what consumers will purchase at different prices. Supply is the quantity producers offer at various prices.