Notes Domain II Microeconomics

# Notes Domain II Microeconomics - Circular Flow Model The...

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Circular Flow Model: The Flow of Inputs and Outputs vs. The Flow of Money MM Expenditures: Money Payments Revenue Wages, Interest, Rent, Profit and Non-Profit Contributions Resources Product Markets : Markets for Goods and Services Firms Sell Households Buy Factor Markets : or Resource Markets Households sell Firms Buy Firms : or Businesses Produce and Sell Goods and Services Hire and use Factors of Production Households : Buy and Consume Goods and services Own and Sell the Factors of Production Products Productive Resources : Land, Labor, Capital, Entrepreneurship Income Goods and Services

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The Law of Demand: The quantity demanded is typically inversely proportional to its price, all other things being equal (Ceteris Paribus). In other words, the amount of goods demanded decreases as the price of these goods increase. Demand -is the amount of goods and services that consumers are willing and able to buy in a market place. It is always downward sloping in the graph. Reasons for the Change in Demand: These reasons cause the demand curve to shift either to the right (gain) or to the left (loss). Change in Consumer taste Change in the Number of Substitutes (Substitute Effect) Change in the Income Available to purchase goods and services (Income Effect) Expectations of Consumers Price of Related goods Consumer Knowledge of Product (Informed Consumer) See Graphs Below: Reason for the Change in Quantity Demanded: This reason causes the demand to move along the demand curve that has been established for this good or service. If it moves along the curve to the right, it’s a (gain). If it moves along the curve to the left, it’s a (loss). Change in Price Quantity D 1 D 2 D 2 D 1 P Q Pric e
See the Graphs Below: The Law of Supply: It states that the quantity supplied is directly proportional to the price, all other things held constant (Ceteris Paribus). In other words, as the price of goods and services increase, so does the quantity supplied of these goods and services. Sellers and firms want to cash in on the opportunity to sell more at higher prices. Supply - is the quantity of goods or services that the firm is able and willing to supply at different prices. The supply curve is always upward sloping. Reasons for the Change in Supply: These reasons cause the supply curve to shift to the right (gain) or to the left (lose). Technology (inventions) Costs of Inputs (Factors of Production) The Number of Firms in the Market Expectations of future Prices Government Regulation (Taxes, Subsidies, etc.) See the Graphs Below: Reason for the Change in Quantity Supplied: This reason causes the supply to move along the supply curve that has been established for this P Q P Q S 2 S 1 S 1 S 2 P Q D D Q .

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• Fall '15

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