Microeconomics

• Types of Economies


  • Free market economy
  • Command economy
  • Mixed economy
• Economists


  • Adam Smith
  • Friedrich Hayek
  • Karl Marx
• Rational decision making
• Demand


  The quantity of a good or service that consumers are willing and able to buy at any given price, in a period of time
• Demand curve data


  • Price (£) 100 90 80 70 60 50 40 30 20

  Quantity 0 3 7 15 25 40 60 85 120
• Conditions that could cause a shift in demand curve

  • Substitute goods
  • Complementary goods
  • Personal income
  • Tastes and preferences
  • Population size
  • Advertising
• Shift of the demand curve
• Factors affecting demand
• Elasticity of demand


  Responsiveness of consumers to a change, for example in price
• Types of elasticity to study

  • Price elasticity of demand
  • Income elasticity of demand
  • Cross elasticity of demand
• Calculating Elasticity


  • A farmer increases the price of eggs by 10% the quantity bought falls by 2% - calculate PED

  The selling price increases from £40 to £60, as a result quantity bought falls from 60 to 50 - calculate PED

  Calculate YED if income rises by 40% and demand increases by 20%
• Have a go at quick questions
• Factors determining the PED

  • Substitutability
  • Percentage of income spent on the good/service
  • Necessity or luxury?
  • Time
• Income elasticity of demand

  Normal or inferior goods

  Necessities or luxuries

  Calculations
• Cross elasticity of demand


  Substitutes or complementary goods

  Calculations
• Supply


  Definition - quantity of goods and services that sellers are prepared to sell at any given price over a period of time
• Supply curve data


  • Price 10 8 6 4 2

  Quantity supplied 25 20 15 10 5
• Movement along the supply curve and a shift of the supply curve
• Price Elasticity of Supply


  Definition and formula
• Equilibrium or market clearing price


  Where demand is exactly equal to supply
• Demand and Supply Schedule

  • Price 2 4 6 8 10

  Quantity demanded 12 9 6 3 1

  Quantity supplied 2 4 6 8 10
• Changes in Demand and Supply

  Draw four diagrams each starting with the market equilibrium, move ONLY the curve numbered and mark on the resultant price and quantity:

  1. Showing a shift outwards of demand

  2. Showing a shift inwards of demand

  3. Showing a shift outwards of supply

  4. Showing a shift inwards of supply
• Impact of Elasticity on Market Equilibrium

  Draw an elastic demand curve, add a supply curve. Now shift the elastic demand curve outwards - what is the resultant impact on price and quantity.

  Now do the same for an inelastic demand curve.
• Shortage and Surplus


  • price 30 20 10

  Quantity demanded 20 50 80

  Quantity supplied 70 50 30