VIEWS: 11 PAGES: 24 POSTED ON: 10/5/2011
MICROECONOMICS The study of small events/decisions and their effect on the economy. Ex: Consumer decisions (buying/selling goods & services), Producer decisions (Prices of goods & services) LAW OF DEMAND As price increases, the number of people demanding that product decreases. A PRICE B QUANTITY CHANGE IN QUANTITY DEMANDED WHEN: PRICE CHANGE= QUANTITY DEMANDED CHANGE WHY: 1. Income Effect 2. Substitution Effect 6 PRICE 2 B 2 QUANTITY 6 CHANGE IN TOTAL DEMAND WHEN: CHANGE IN QUANTITY DEMANDED AT EVERY PRICE LEVEL WHY: 1. Consumer Income. 2. Consumer Tastes. 3. Price of related products. (Substitutes & complements) 6 PRICE B 2 QUANTITY CONSUMER INCOME/TASTE TOTAL DEMAND FOR “PREMIUM” PRICE COFFEE? A B QUANTITY PRICE OF RELATED PRODUCTS versus TOTAL DEMAND FOR SUVS? PRICE A B QUANTITY TOTAL DEMAND FOR HYBRID PRICE VEHICLES? A B QUANTITY COCA-COLA SUBSTITUTES??? Pepsi, Jolt Generic Brands COCA-COLA COMPLEMENTS??? Ice Straws, cups Rum? PIZZA SUBSTITUTES??? Calzones, subs, etc. Frozen pizza Homemade pizza PIZZA COMPLEMENTS??? Soda Wings, bread sticks CDs (PRERECORDED) SUBSTITUTES??? Downloads Burned CDs Records, tapes, 8 tracks CDs (PRERECORDED) COMPLEMENTS??? CD player CD case Ear buds, headphones NIKE AIR JORDANS SUBSTITUTES??? Adidas Converse Pay-Less NIKE AIR JORDANS COMPLEMENTS??? Laces Socks Odor-Eaters HUMMER H2 SUBSTITUTES??? Cadillac Escalade Ford Explorer Bicycle HUMMER H2 COMPLEMENTS??? Gas (LOTS OF IT) Rims Sound System LAW OF DIMINISHING MARGINAL UTILITY Does the second slice of pizza taste as good as the first? Does it still taste good? Are you still adding to your total satisfaction? The more you consume of certain product, the less additional satisfaction you get from each additional unit of that product.