Intro to Business
💼intro to business review
1.6 Microeconomics: Zeroing in on Businesses and Consumers
Last Updated on June 18, 2024
Market dynamics shape the business world through supply and demand. These forces determine prices and quantities of goods and services, creating equilibrium when they balance. Understanding these concepts is crucial for making informed business decisions.
External events like natural disasters, government policies, and economic shocks can disrupt market equilibrium. These factors shift supply and demand curves, leading to price changes and new market conditions. Businesses must adapt to these shifts to remain competitive.
Market Dynamics and Equilibrium
Demand and supply interaction
Top images from around the web for Demand and supply interaction
Supply and demand - Wikipedia View original
Is this image relevant?
File:Supply and demand curves.svg - Wikimedia Commons View original
Is this image relevant?
Consumer Choice – Introduction to Microeconomics View original
Is this image relevant?
Supply and demand - Wikipedia View original
Is this image relevant?
File:Supply and demand curves.svg - Wikimedia Commons View original
Is this image relevant?
1 of 3
Top images from around the web for Demand and supply interaction
Supply and demand - Wikipedia View original
Is this image relevant?
File:Supply and demand curves.svg - Wikimedia Commons View original
Is this image relevant?
Consumer Choice – Introduction to Microeconomics View original
Is this image relevant?
Supply and demand - Wikipedia View original
Is this image relevant?
File:Supply and demand curves.svg - Wikimedia Commons View original
Is this image relevant?
1 of 3
- Demand represents quantity of good or service consumers willing and able to purchase at various prices
- Law of demand states as price increases, quantity demanded decreases; as price decreases, quantity demanded increases
- Demand curve provides graphical representation of relationship between price and quantity demanded, showing downward-sloping curve
- Supply represents quantity of good or service producers willing and able to offer for sale at various prices
- Law of supply states as price increases, quantity supplied increases; as price decreases, quantity supplied decreases
- Supply curve provides graphical representation of relationship between price and quantity supplied, showing upward-sloping curve
- Market equilibrium occurs when quantity demanded equals quantity supplied at given price
- Equilibrium price refers to price at which quantity demanded equals quantity supplied
- Equilibrium quantity refers to quantity bought and sold at equilibrium price
- Disequilibrium occurs when market price above or below equilibrium price
- Surplus happens when market price above equilibrium price, quantity supplied exceeds quantity demanded
- Shortage happens when market price below equilibrium price, quantity demanded exceeds quantity supplied
Factors shifting market curves
- Factors shifting demand curve include:
- Changes in consumer income
- Normal goods see demand increase as income rises (organic food)
- Inferior goods see demand decrease as income rises (instant ramen)
- Changes in prices of related goods
- Substitutes are goods used in place of each other; as price of one substitute increases, demand for other increases (Pepsi and Coca-Cola)
- Complements are goods often used together; as price of one complement increases, demand for other decreases (smartphones and phone cases)
- Changes in consumer preferences and tastes (fashion trends)
- Changes in population size and demographics (baby boomer retirement)
- Changes in consumer expectations about future prices and income (anticipated tax refund)
- Changes in consumer income
- Factors shifting supply curve include:
- Changes in input prices like labor, raw materials (minimum wage increase)
- Changes in technology and productivity (automation in manufacturing)
- Changes in government policies and regulations such as taxes, subsidies (carbon tax)
- Changes in prices of related goods in production (biofuels and corn prices)
- Changes in number of suppliers in market (new entrants or exits)
- Changes in producer expectations about future prices and profitability (anticipated tariffs)
Economic Concepts and Market Behavior
- Scarcity: The fundamental economic problem of limited resources and unlimited wants
- Opportunity cost: The value of the next best alternative forgone when making a choice
- Utility: The satisfaction or benefit a consumer derives from consuming a good or service
- Price elasticity: Measures the responsiveness of quantity demanded or supplied to changes in price
- Profit maximization: The primary goal of firms, achieved by producing at the level where marginal revenue equals marginal cost
- Market structure: The characteristics of a market that influence competition and pricing behavior (e.g., perfect competition, monopoly, oligopoly)
Real-World Applications
External events in market dynamics
- Natural disasters can disrupt supply chains and reduce supply of affected goods, leading to higher prices
- Hurricane damage to oil refineries can decrease gasoline supply, causing prices to rise
- Droughts can reduce agricultural yields, increasing food prices (California almonds)
- Government policies can affect supply, demand, and prices
- Subsidies for renewable energy can increase supply of solar panels and wind turbines, lowering prices and increasing demand
- Taxes on sugary drinks can reduce demand and consumption (Mexico soda tax)
- Economic shocks can impact consumer income and spending, affecting demand for various goods and services
- During recession, demand for luxury goods may decrease as consumers prioritize essential purchases (2008 financial crisis)
- Economic boom can increase demand for high-end products (1990s dot-com bubble)
- Technological advancements can affect supply and production costs, influencing prices and demand
- Improvements in smartphone technology can lower production costs, increase supply, and drive down prices, making smartphones more accessible (iPhone price reductions)
- Development of electric vehicles can increase demand for lithium-ion batteries (Tesla Model 3)
- Changes in global trade patterns and international events can impact supply, demand, and prices
- Trade disputes between countries can lead to tariffs on imported goods, increasing prices and reducing demand for those products in affected markets (US-China trade war)
- Geopolitical events can disrupt global supply chains and affect prices (Suez Canal blockage)
Key Terms to Review (34)
JP Morgan Chase: JP Morgan Chase is a multinational banking and financial services holding company that provides a wide range of services including investment banking, asset management, private banking, and treasury services. It is one of the largest banks in the United States by assets and operates globally.
Supply curve: The supply curve is a graphical representation that shows the relationship between the price of a good and the quantity of that good that suppliers are willing to produce and sell. It typically slopes upward, indicating that higher prices incentivize producers to supply more of the product.
Demand curve: A demand curve is a graphical representation that shows the relationship between the price of a product or service and the quantity demanded by consumers over a period. It typically slopes downward from left to right, indicating that as prices fall, demand increases.
North Face: North Face, in the context of Introduction to Business under the chapter Understanding Economic Systems and Business, can be understood as a brand that exemplifies how businesses operate within microeconomic frameworks, focusing on consumer demands and product differentiation. It is renowned for its outdoor apparel and equipment, catering to consumers seeking quality and durability.
Gore-Tex: Gore-Tex is a waterproof, breathable fabric membrane that is known for its ability to repel liquid water while allowing water vapor to pass through. It is widely used in outdoor clothing and gear to provide protection against wet weather while maintaining comfort.
Equilibrium: Equilibrium in microeconomics is the state where the quantity of goods or services supplied is equal to the quantity demanded by consumers at a particular price. This balance ensures that there is neither a surplus nor a shortage in the market.
Supply: Supply is the total amount of a product or service that is available for consumers to purchase at any given time. It reflects the willingness and ability of producers to offer goods and services for sale.
Price Elasticity: Price elasticity is a measure of how sensitive the demand for a product or service is to changes in its price. It quantifies the relationship between the percentage change in quantity demanded and the percentage change in price, allowing businesses to understand the impact of pricing decisions on consumer behavior.
Opportunity Cost: Opportunity cost is the value of the best alternative forgone when making a decision. It represents the trade-offs involved in choosing one option over another, as every choice comes with an associated cost in the form of the next best opportunity that must be given up.
Demand Curve: The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity demanded of that good or service. It illustrates how the quantity demanded changes as the price changes, assuming all other factors remain constant.
Law of Demand: The law of demand is an economic principle that states that as the price of a good or service increases, the quantity demanded of that good or service decreases, and vice versa. This inverse relationship between price and quantity demanded is a fundamental concept in microeconomics that helps explain consumer behavior.
Equilibrium Quantity: Equilibrium quantity is the quantity at which the supply and demand for a good or service are balanced, resulting in a stable market price. It represents the point where the quantity demanded by consumers equals the quantity supplied by producers, creating an equilibrium in the market.
Substitutes: Substitutes are products or services that can be used in place of one another to satisfy a similar need or desire. In the context of microeconomics, substitutes refer to goods that can be interchanged by consumers based on factors such as price, quality, or personal preference.
Shortage: A shortage refers to a situation where the quantity demanded of a good or service exceeds the quantity supplied at the prevailing market price. Shortages can occur due to various factors and have significant implications for businesses and consumers within the context of microeconomics.
Supply: Supply refers to the amount of a good or service that producers are willing and able to sell at various prices during a given time period. It is a fundamental concept in microeconomics that describes the relationship between the price of a product and the quantity of that product that producers are willing to offer for sale.
Willingness to Pay: Willingness to pay (WTP) refers to the maximum amount a consumer is willing to pay for a good or service. It represents the subjective value a consumer places on a product and is a key concept in understanding consumer behavior and demand.
Market Structure: Market structure refers to the competitive landscape of an industry, which is determined by factors such as the number of firms, the degree of product differentiation, and the ease of entry and exit. It is a key concept in microeconomics that helps analyze how firms behave and interact within a given market.
Market Equilibrium: Market equilibrium is the point at which the quantity demanded of a product or service equals the quantity supplied, resulting in a stable market price. It represents the balance between the forces of supply and demand in a free market economy.
Inferior Goods: Inferior goods are a type of consumer good for which demand decreases as income increases. As a person's income rises, they tend to purchase fewer inferior goods and shift their consumption towards more desirable, or superior, goods. This relationship between income and demand is the opposite of what is observed for normal goods.
Consumer Surplus: Consumer surplus is the difference between the maximum amount a consumer is willing to pay for a good or service and the actual price they pay. It represents the additional benefit consumers derive from a transaction beyond the cost incurred.
Law of Supply: The law of supply is an economic principle that states that, all other factors being equal, as the price of a good or service rises, the quantity supplied of that good or service will increase, and vice versa. In other words, there is a positive relationship between price and quantity supplied.
Production Possibilities Frontier: The production possibilities frontier (PPF) is a graphical model that represents the maximum amount of output that can be produced from a given set of inputs or resources. It illustrates the trade-offs and opportunity costs involved in producing different combinations of goods and services within an economy's productive capacity.
Utility: Utility refers to the satisfaction or benefit that a consumer derives from the consumption of a good or service. It is a fundamental concept in microeconomics that helps explain consumer behavior and the demand for products.
Demand: Demand refers to the quantity of a good or service that consumers are willing and able to purchase at various prices during a given period of time. It is a fundamental concept in microeconomics that describes the relationship between the price of a product and the quantity demanded by consumers.
Normal Goods: Normal goods are a type of consumer good where demand increases as income rises. As a person's disposable income increases, they tend to purchase more of these goods, reflecting a positive relationship between income and demand.
Scarcity: Scarcity is the fundamental economic problem that arises from the fact that the world has limited resources and infinite wants. It refers to the gap between the limited means available to satisfy the unlimited wants of individuals and society.
Equilibrium Price: Equilibrium price is the price at which the quantity supplied and the quantity demanded of a good or service are exactly equal, resulting in a stable market condition where there is no tendency for change. It represents the point where the forces of supply and demand intersect, determining the market-clearing price.
Profit Maximization: Profit maximization is the primary goal of businesses, where they aim to generate the highest possible level of profit by optimizing their operations, pricing, and production decisions. It is a fundamental concept in microeconomics that is closely tied to the behavior of businesses and consumers in a free market.
Marginal Cost: Marginal cost is the additional cost incurred by a business to produce one more unit of a good or service. It represents the change in total cost that arises from a one-unit increase in output, and is a critical concept in microeconomics for understanding how businesses make production decisions.
Supply Curve: The supply curve is a graphical representation of the relationship between the price of a good or service and the quantity supplied of that good or service. It shows how producers are willing to offer different quantities of a product for sale at different prices.
Disequilibrium: Disequilibrium refers to a state of imbalance or lack of equilibrium in a system, often used in the context of economic markets. It describes a situation where the supply and demand for a good or service are not in harmony, leading to an unstable or fluctuating market condition.
Surplus: A surplus refers to the amount of a good or service that exceeds the current demand or need for it. In the context of microeconomics, a surplus can occur when the quantity supplied of a product is greater than the quantity demanded at the current market price.
Elasticity: Elasticity is a measure of how responsive the quantity demanded or supplied of a good or service is to changes in its price or other factors. It is a fundamental concept in microeconomics that helps understand the behavior of consumers and producers in a free market.
Complements: Complements are two or more goods or services that are closely related and tend to be consumed or used together. The demand for one product is dependent on the demand for the other, as they enhance or complete each other's utility or functionality.