Microeconomics<br />1<br />
Markets<br />What is a market and how does it work to allocate resources in an economy?<br />How do governments intervene ...
3<br />
Market Structure: Number of Firms<br />Perfect<br />Competition<br />Monopolistic<br />Competition<br />Oligopoly<br />Mon...
Market Structure: Barriers to Entry<br />Perfect<br />Competition<br />Monopolistic<br />Competition<br />Oligopoly<br />M...
Nature of goods: Homogeneous or Heterogeneous<br />Perfect<br />Competition<br />Monopolistic<br />Competition<br />Oligop...
Market Structure: Market Power/Consumer Sovereignty<br />Perfect<br />Competition<br />Monopolistic<br />Competition<br />...
Market Structure: Examples<br />Perfect<br />Competition<br />Monopolistic<br />Competition<br />Oligopoly<br />Monopoly<b...
Monopolistic Competition<br />9<br />
Perfect Competition<br />10<br />
Monopoly<br />11<br />
Oligopoly<br />12<br />
What is a market? <br />Buying and selling is fundamental.<br />A market is any situation or place that enables the buying...
The Supply & Demand Model<br />14<br />The intersection of demand and supply is the goal that every seller want to achieve...
Demand<br />Higher the price less people<br />would buy.<br />A schedule (curve) that shows the quantity of a good that co...
Change in Quantity Demanded<br />Movement along the demand curve<br />16<br />
Law of Demand<br />17<br />
Three important factors<br />To effect demand<br />Why Does Demand Rise when Prices Fall? <br />I am richer!<br />This is ...
Determinants of Demand: Price<br />19<br />
Determinants of Demand: Non-price<br />20<br />
 Determinants of Demand<br />21<br />
Change in Demand<br />22<br />
Movements versus Shifts<br />Change in Quantity Demanded<br />Change in Demand<br />23<br />
Veblen Goods (HL Extension)<br />24<br />
Giffen Goods (HL Extension)<br />25<br />
Expectations (HL Extension)<br />26<br />
Exceptions to the Law of Demand (HL Extension)<br />27<br />
Supply<br />A schedule (curve) showing how much of a product producers will supply at each of a series of prices over a sp...
Law of Supply<br />29<br />
Why Does Supply Rise when Price Rises? <br />I can make a profit!<br />I can make more profit!<br />30<br />
Determinants of Supply: Price<br />31<br />
Change in Quantity Supplied<br />32<br />
Determinants of Supply: Non-price<br />33<br />
 Determinants of Supply<br />34<br />
Change in Supply<br />35<br />
Movements Versus Shift  <br />Change in Quantity Supplied<br />Change in Supply<br />36<br />
Equilibrium Price and Quantity<br />37<br />
Equilibrium<br />38<br />
Functions of Supply and Demand Interactions<br />39<br />
Consumer and Producer Surplus<br />40<br />
Price<br />Consumer Surplus<br />A + B = Maximum Willingness to Pay for Qo<br />What is paid<br />D<br />Quantity<br />Con...
Price<br />Producer Surplus<br />What is paid<br />Minimum Amount Needed to Supply Qo<br />Quantity<br />Producer Surplus<...
Price<br />Quantity<br />Consumer and Producer Surplus<br />S<br />Consumer Surplus<br />Po<br />Producer Surplus<br />D<b...
Price<br />New Consumer Surplus<br />Original Consumer Surplus<br />Loss in Surplus: Consumers paying more<br />P1<br />Lo...
Price Ceilings<br />45<br />
Price Floor<br />46<br />
Price Ceiling & Price Floor<br />47<br />
48<br />
49<br />
Price Support/Buffer Stock Schemes<br />Governments intervene when there are extreme price fluctuations brought about by s...
Price<br />Lost Consumer Surplus<br />New Consumer Surplus<br />Lost Producer Surplus<br />New Producer Surplus<br />Quant...
Price<br />Lost Consumer Surplus<br />New Consumer Surplus<br />Lost Producer Surplus<br />New Producer Surplus<br />Quant...
Commodity Price Agreements<br />A buffer stock scheme involving several countries<br />E.g UNCTAD OPEC<br />53<br />
MicroeconomicsElasticities<br />54<br />
Elasticities<br />How sensitive is a buyer to a change in price?<br />How sensitive is a buyer when another product change...
56<br />
Price Elasticity of Demand (PED)<br />57<br />
Range of PED values<br />58<br />
Range of PED values<br />59<br />
Price Inelastic Demand<br />60<br />
Price Elastic Demand<br />61<br />
Range of PED<br />62<br />
Extreme Cases<br />63<br />
Perfectly Elastic Demand<br />64<br />
Perfectly Inelastic Demand<br />65<br />
Unit Elastic Demand<br />66<br />
 Determinants of PED<br />67<br />
Determinants of PEDIncome<br />68<br />
Determinants of PEDSubstitutes<br />69<br />
Determinants of PEDSubstitutes<br />70<br />
Determinants of PESTime<br />71<br />
Determinants of PESSpare Capacity<br />72<br />
Practical Implications of Elasticity<br />Impact on Total Revenue of Firms<br />Tax Incidence<br />73<br />
Impact on Total Revenue of Firms<br />Total revenue is the amount paid by buyers and received by sellers of a good. TR = P...
Taxation <br />Governments levy taxes to raise revenue for public projects <br />Critics of taxation argue that:<br />Taxe...
Indirect Tax Specific Tax<br />76<br />
Indirect Tax Ad Valorem Tax<br />77<br />
Tax Incidence<br />Tax incidence is the manner in which the burden of a tax is shared among participants in a market.<br /...
Tax and Relatively Inelastic Demand<br />TR = .25 X 200 m<br />     = 50 m<br />
Tax and Relatively Inelastic Demand<br />
Tax and Relatively Inelastic Demand<br />Price for Buyers = .35<br />Price for Sellers<br />= .2<br />(150m X .35)<br />(1...
Tax and Relatively Inelastic Demand<br />Before Tax Buyers paid .25<br />After Tax Buyers pay .35 <br />Buyers contribute ...
The Money Trail<br />
Tax and Relatively Elastic Demand<br />
Tax and Relatively Elastic Demand<br />
Summary<br />The incidence of a tax refers to who bears the burden of a tax.<br />The incidence of a tax does not depend o...
Total Revenue and Price Elastic Demand<br />87<br />
Total Revenue and Price Inelastic Demand<br />88<br />
Some Practical Applications of PED<br />With an elastic demand curve, an increase in the price leads to a decrease in quan...
Market Failure<br />90<br />
Market Failure<br />What is market failure and why does it occur? <br />How effectively can governments intervene to corre...
What is market failure?<br />92<br />
93<br />
94<br />
Negative Production Externality<br />95<br />
Negative Consumption Externality<br />96<br />
Tax and Negative Production Externality<br />97<br />
Tax on Producers and Negative Consumption Externality<br />98<br />
Advertising to Shift Demand and Reduce Negative Consumption Externality<br />99<br />
100<br />
101<br />
Positive Production Externality<br />102<br />
Positive Consumption Externality<br />103<br />
104<br />
105<br />
106<br />
The Environment & Sustainable Development<br />107<br />
What is Sustainable Development?<br />The present use of resources in satisfying the needs of the economy should not lesse...
International Cooperation on Environmental Issues<br />109<br />
Tradable Permits<br />110<br />
111<br />
Public, Merit & Demerit Goods<br />112<br />
113<br />
114<br />
115<br />
116<br />
Typical Examination Question<br />Questions on the Theory of Demand and Supply<br />Explain the function of prices.<br />E...
Typical Examination Question<br />Questions on Elasticity<br />Define cross elasticity of demand (or the other elasticitie...
Typical Examination Question<br />Questions on Market Failure<br />Explain the differences between merit goods, demerit go...
Resources<br />Phil Holden has an excellent set of youtube videos on all aspects of markets.<br />Teaching Tools for Micro...
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Econ ppt 2

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Econ ppt 2

  1. 1. Microeconomics<br />1<br />
  2. 2. Markets<br />What is a market and how does it work to allocate resources in an economy?<br />How do governments intervene in the market?<br />2<br />
  3. 3. 3<br />
  4. 4. Market Structure: Number of Firms<br />Perfect<br />Competition<br />Monopolistic<br />Competition<br />Oligopoly<br />Monopoly<br />One & large<br />Small & many<br />Large & few<br />Relatively<br />Small & many <br />4<br />
  5. 5. Market Structure: Barriers to Entry<br />Perfect<br />Competition<br />Monopolistic<br />Competition<br />Oligopoly<br />Monopoly<br />Relatively low <br />Very High<br />None<br />High<br />5<br />
  6. 6. Nature of goods: Homogeneous or Heterogeneous<br />Perfect<br />Competition<br />Monopolistic<br />Competition<br />Oligopoly<br />Monopoly<br />Similar <br />“Unique”<br />“Identical”<br />Both<br />6<br />
  7. 7. Market Structure: Market Power/Consumer Sovereignty<br />Perfect<br />Competition<br />Monopolistic<br />Competition<br />Oligopoly<br />Monopoly<br />High <br />Very low<br />Very high<br />Low<br />7<br />
  8. 8. Market Structure: Examples<br />Perfect<br />Competition<br />Monopolistic<br />Competition<br />Oligopoly<br />Monopoly<br />Post Office, <br />water & <br />electricity<br />Restaurants,<br />books, <br />clothing <br />Agriculture<br />Cars <br />8<br />
  9. 9. Monopolistic Competition<br />9<br />
  10. 10. Perfect Competition<br />10<br />
  11. 11. Monopoly<br />11<br />
  12. 12. Oligopoly<br />12<br />
  13. 13. What is a market? <br />Buying and selling is fundamental.<br />A market is any situation or place that enables the buying and selling of goods and services and factors of production. A market may be a physical location (a street market), it may also be a virtual one (internet buying and selling) or a national one (the market for teachers or doctors). Triple A <br />Markets exist when buyers and sellers interact. This interaction determines market prices and thereby allocates scarce good and services. <br />13<br />
  14. 14. The Supply & Demand Model<br />14<br />The intersection of demand and supply is the goal that every seller want to achieve.<br />
  15. 15. Demand<br />Higher the price less people<br />would buy.<br />A schedule (curve) that shows the quantity of a good that consumers are able and willing to buy at a certain price during a specified period of time.<br />15<br />
  16. 16. Change in Quantity Demanded<br />Movement along the demand curve<br />16<br />
  17. 17. Law of Demand<br />17<br />
  18. 18. Three important factors<br />To effect demand<br />Why Does Demand Rise when Prices Fall? <br />I am richer!<br />This is cheap!<br />I will switch to this product!<br />18<br />
  19. 19. Determinants of Demand: Price<br />19<br />
  20. 20. Determinants of Demand: Non-price<br />20<br />
  21. 21. Determinants of Demand<br />21<br />
  22. 22. Change in Demand<br />22<br />
  23. 23. Movements versus Shifts<br />Change in Quantity Demanded<br />Change in Demand<br />23<br />
  24. 24. Veblen Goods (HL Extension)<br />24<br />
  25. 25. Giffen Goods (HL Extension)<br />25<br />
  26. 26. Expectations (HL Extension)<br />26<br />
  27. 27. Exceptions to the Law of Demand (HL Extension)<br />27<br />
  28. 28. Supply<br />A schedule (curve) showing how much of a product producers will supply at each of a series of prices over a specific period of time.<br />28<br />
  29. 29. Law of Supply<br />29<br />
  30. 30. Why Does Supply Rise when Price Rises? <br />I can make a profit!<br />I can make more profit!<br />30<br />
  31. 31. Determinants of Supply: Price<br />31<br />
  32. 32. Change in Quantity Supplied<br />32<br />
  33. 33. Determinants of Supply: Non-price<br />33<br />
  34. 34. Determinants of Supply<br />34<br />
  35. 35. Change in Supply<br />35<br />
  36. 36. Movements Versus Shift <br />Change in Quantity Supplied<br />Change in Supply<br />36<br />
  37. 37. Equilibrium Price and Quantity<br />37<br />
  38. 38. Equilibrium<br />38<br />
  39. 39. Functions of Supply and Demand Interactions<br />39<br />
  40. 40. Consumer and Producer Surplus<br />40<br />
  41. 41. Price<br />Consumer Surplus<br />A + B = Maximum Willingness to Pay for Qo<br />What is paid<br />D<br />Quantity<br />Consumer Surplus<br />B<br />Po<br />A<br />Qo<br />
  42. 42. Price<br />Producer Surplus<br />What is paid<br />Minimum Amount Needed to Supply Qo<br />Quantity<br />Producer Surplus<br />S<br />Po<br />Qo<br />
  43. 43. Price<br />Quantity<br />Consumer and Producer Surplus<br />S<br />Consumer Surplus<br />Po<br />Producer Surplus<br />D<br />Qo<br />
  44. 44. Price<br />New Consumer Surplus<br />Original Consumer Surplus<br />Loss in Surplus: Consumers paying more<br />P1<br />Loss in Surplus: Consumers buying less<br />Po<br />D<br />Qo<br />Q1<br />Change in Consumer Surplus: Price Increase<br />Quantity<br />
  45. 45. Price Ceilings<br />45<br />
  46. 46. Price Floor<br />46<br />
  47. 47. Price Ceiling & Price Floor<br />47<br />
  48. 48. 48<br />
  49. 49. 49<br />
  50. 50. Price Support/Buffer Stock Schemes<br />Governments intervene when there are extreme price fluctuations brought about by seasons factors (agricultural products) and/or economic factors (commodities).<br />50<br />
  51. 51. Price<br />Lost Consumer Surplus<br />New Consumer Surplus<br />Lost Producer Surplus<br />New Producer Surplus<br />Quantity<br />Loss in Efficiency Too High a Price (Price Floor)<br />S<br />PH<br />Price Floor<br />Po<br />D<br />Qo<br />QL<br />
  52. 52. Price<br />Lost Consumer Surplus<br />New Consumer Surplus<br />Lost Producer Surplus<br />New Producer Surplus<br />Quantity<br />Loss in Efficiency Too Low a Price (Price Ceiling)<br />S<br />Po<br />PL<br />Price Ceiling<br />D<br />Qo<br />QL<br />
  53. 53. Commodity Price Agreements<br />A buffer stock scheme involving several countries<br />E.g UNCTAD OPEC<br />53<br />
  54. 54. MicroeconomicsElasticities<br />54<br />
  55. 55. Elasticities<br />How sensitive is a buyer to a change in price?<br />How sensitive is a buyer when another product changes price?<br />How sensitive is a buyer to changes in their own income?<br />How sensitive is a supplier to a change in price?<br />55<br />
  56. 56. 56<br />
  57. 57. Price Elasticity of Demand (PED)<br />57<br />
  58. 58. Range of PED values<br />58<br />
  59. 59. Range of PED values<br />59<br />
  60. 60. Price Inelastic Demand<br />60<br />
  61. 61. Price Elastic Demand<br />61<br />
  62. 62. Range of PED<br />62<br />
  63. 63. Extreme Cases<br />63<br />
  64. 64. Perfectly Elastic Demand<br />64<br />
  65. 65. Perfectly Inelastic Demand<br />65<br />
  66. 66. Unit Elastic Demand<br />66<br />
  67. 67. Determinants of PED<br />67<br />
  68. 68. Determinants of PEDIncome<br />68<br />
  69. 69. Determinants of PEDSubstitutes<br />69<br />
  70. 70. Determinants of PEDSubstitutes<br />70<br />
  71. 71. Determinants of PESTime<br />71<br />
  72. 72. Determinants of PESSpare Capacity<br />72<br />
  73. 73. Practical Implications of Elasticity<br />Impact on Total Revenue of Firms<br />Tax Incidence<br />73<br />
  74. 74. Impact on Total Revenue of Firms<br />Total revenue is the amount paid by buyers and received by sellers of a good. TR = P x Q<br /> With an inelastic demand curve, an increase in price leads to a decrease in quantity that is proportionately smaller. Thus, total revenue increases.<br />With an elastic demand curve, an increase in price leads to a increase in quantity that is proportionately smaller. Thus, total revenue decreases. <br />
  75. 75. Taxation <br />Governments levy taxes to raise revenue for public projects <br />Critics of taxation argue that:<br />Taxes discourage market activity.<br />When a good or service is taxed, the quantity sold is smaller. <br />
  76. 76. Indirect Tax Specific Tax<br />76<br />
  77. 77. Indirect Tax Ad Valorem Tax<br />77<br />
  78. 78. Tax Incidence<br />Tax incidence is the manner in which the burden of a tax is shared among participants in a market.<br />How this burden is shared depends on elasticity. <br />
  79. 79. Tax and Relatively Inelastic Demand<br />TR = .25 X 200 m<br /> = 50 m<br />
  80. 80. Tax and Relatively Inelastic Demand<br />
  81. 81. Tax and Relatively Inelastic Demand<br />Price for Buyers = .35<br />Price for Sellers<br />= .2<br />(150m X .35)<br />(150m X .2)<br />(150m X .15)<br />
  82. 82. Tax and Relatively Inelastic Demand<br />Before Tax Buyers paid .25<br />After Tax Buyers pay .35 <br />Buyers contribute 15 m to Revenue (150 X .1) <br />Price for Buyers = .35<br />Price for Sellers<br /> = .25<br />
  83. 83. The Money Trail<br />
  84. 84. Tax and Relatively Elastic Demand<br />
  85. 85. Tax and Relatively Elastic Demand<br />
  86. 86. Summary<br />The incidence of a tax refers to who bears the burden of a tax.<br />The incidence of a tax does not depend on whether the tax is levied on buyers or sellers.<br />The incidence of the tax depends on the price elasticities of supply and demand.<br />The burden tends to fall on the side of the market that is less elastic.<br />
  87. 87. Total Revenue and Price Elastic Demand<br />87<br />
  88. 88. Total Revenue and Price Inelastic Demand<br />88<br />
  89. 89. Some Practical Applications of PED<br />With an elastic demand curve, an increase in the price leads to a decrease in quantity demanded that is proportionately larger. Thus, total revenue decreases.<br />89<br />
  90. 90. Market Failure<br />90<br />
  91. 91. Market Failure<br />What is market failure and why does it occur? <br />How effectively can governments intervene to correct market failure?<br />91<br />
  92. 92. What is market failure?<br />92<br />
  93. 93. 93<br />
  94. 94. 94<br />
  95. 95. Negative Production Externality<br />95<br />
  96. 96. Negative Consumption Externality<br />96<br />
  97. 97. Tax and Negative Production Externality<br />97<br />
  98. 98. Tax on Producers and Negative Consumption Externality<br />98<br />
  99. 99. Advertising to Shift Demand and Reduce Negative Consumption Externality<br />99<br />
  100. 100. 100<br />
  101. 101. 101<br />
  102. 102. Positive Production Externality<br />102<br />
  103. 103. Positive Consumption Externality<br />103<br />
  104. 104. 104<br />
  105. 105. 105<br />
  106. 106. 106<br />
  107. 107. The Environment & Sustainable Development<br />107<br />
  108. 108. What is Sustainable Development?<br />The present use of resources in satisfying the needs of the economy should not lessen or limit future generations’ use of resources in satisfying needs.<br />108<br />
  109. 109. International Cooperation on Environmental Issues<br />109<br />
  110. 110. Tradable Permits<br />110<br />
  111. 111. 111<br />
  112. 112. Public, Merit & Demerit Goods<br />112<br />
  113. 113. 113<br />
  114. 114. 114<br />
  115. 115. 115<br />
  116. 116. 116<br />
  117. 117. Typical Examination Question<br />Questions on the Theory of Demand and Supply<br />Explain the function of prices.<br />Explain the function of markets.<br />The basic economic problems is scarcity. Explain how a market economy (or command economy) allocates resources.<br />Evaluate the consequences of price controls.<br />Evaluate the view that it is best to allow primary commodity prices to be determined purely through the free interaction of market forces.<br />117<br />
  118. 118. Typical Examination Question<br />Questions on Elasticity<br />Define cross elasticity of demand (or the other elasticities ) and using diagrams, explain its impact.<br />Explain why price elasticity of demand and the price elasticity of supply tends to be low on primary commodities and how this impacts price stability.<br /> <br />118<br />
  119. 119. Typical Examination Question<br />Questions on Market Failure<br />Explain the differences between merit goods, demerit goods and public goods.<br />Evaluate the view that governments should always intervene in markets for such goods as cigarettes and alcohol.<br />With the aid of a diagram, explain how the application of a flat rate tax (a specific/fixed amount) could reduce pollution. <br />Using an appropriate diagram, explain how negative externalities (or positive externality) are a type of market failure.<br />Evaluate the measures that a government might adapt to correct market failure arising from negative (or positive) externalities.<br />119<br />
  120. 120. Resources<br />Phil Holden has an excellent set of youtube videos on all aspects of markets.<br />Teaching Tools for Microeconomics from John Stosel is a little dated but still another excellent source of video clips on markets. This is produced by ABC News.<br />Paul Solman has produced a series of video clips designed to accompany Economics by Paul Samuelson. They are excellent for the IB Course. The DVD can be obtained from McGraw-Hill.<br />The National Council on Economic Education has produced a two volumes of student activities: Advanced Placement Economics: Microeconomics Student Activities Workbook, 3rd Edition, and Advanced Placement Economics: Macroeconomics Student Activities Workbook, 3rd Edition. Though they are designed for Advanced Placement students many of the data sets helps IB students understand key concepts. These activities are especially good for students who are more mathematically minded. <br />120<br />

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