MICROECONOMICS Study guide 1
The decision making process of a firm including various variables is at the heart of the class. We
look at demand and supply in various markets.
Buyers and sellers exchange goods here. It used to be a literal exchange (bartering), but currency
helps facilitate it. Anything that happens in a market is transaction, whether you sell, work and get paid,
or buy. When we analyze markets, we’re looking at
(cost/ amt paid) and
( amt sold).
is a set of prices and corresponding quantities at which buyers are willing and able to afford a
good or service.
It does not change due to price.
is a list of prices and corresponding quantities a buyer is buyer is willing and able to
pay for a list of quantities of a good or service.
Law of Demand:
If the price of a good increases, the associated
decreases. Vice Versa. (applies
to markets and to individuals) Since it’s inverse, the demand curve is
market demand schedule
is the sum of all individual demand schedules. ( since markets are large, we
can usually only statistically estimate the sum)
We assume everything is infinitely divisible so we can make smooth lines, rather than points.
Determinants of Demand:
Change a buyers willingness or ability to buy goods, causing a shift in the demand curve, not
(Increase right, decrease left) Some determinants are income (also wealth), change in
preferences, expectations, and prices of other things.
When income increases, the demand a
increases (direct relationship). However, if income
increases and the demand for a good decreases, it is an
there is no effect on the demand of the good. Whether a good is inferior or normal, is something based
on preferences, so we have to make an assumption.
If the price of good B increases, and the demand for good A decreases, the goods are
Hot dogs and buns); If The price of good B increases and the demand for good A increases, on the other
hand, the goods are
(i.e. Coke and Pepsi). If there is no effect, the goods are
There are some other determinants for specific products; weather would be one for ice cream, for
is a unique set of prices and corresponding quantities at which firms are willing to make goods
available for sale.
schedule, Market supply schedule(
Law of Supply:
If the price of a good increase, the quantity supplied also increases. (Direct relationship causes
Supply can’t start at the origin because sellers would not be willing to supply any quantity of a
good at a zero price.