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Chapter 4: Micro economics
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What you will learn?
Micro economics
The concept of a market
Demand and supply
Maximum and minimum prices
Competition and restrictive practice
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The micro environment
Definition
Microeconomics attempts to examine how supply and
demand decisions made by individuals affect the selling
prices of goods and services within an industry or market.
Macro
environment
Micro
environment
Input Organisa Outputs Consumpt
tion ion
Suppliers, customers, competitors,
intermediaries, stakeholders
Political forces, economic forces,
social forces, technological forces
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The concept of market
Definition
A market involves the buyers and sellers of a good who
influence its price.
Price theory
Price theory: Market price for goods arrived at through the
interaction of demand and supply.
Utility
Utility is the pleasure or satisfaction or benefit derived by a
person from the consumption of goods.
Customers are rational
• Prefer more to less.
• Substitute one good for another if the price is right.
• Attempt to maximize total utility from a limited income.
• Marginal utility from a good diminishes as consumption of
it increases.
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Demand and supply
Definition
Demand Supply
Quantity of that good or
Quantity of a good that
service that potential
existing suppliers or would-
purchasers:
be suppliers:
• Be willing and able to
• Want to produce for the
buy
market
• Attempt to buy
At a given price.
At any possible price.
Curve
Price Demand curve Price
Supply
curve
Quantity Quantity
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Demand and supply
Shifting the demand and supply curves
A rightward shift in a demand A rightward shift in a supply
curve can be caused by curve can be caused by
• Rise in income
• Rise in the price of • Fall in cost of production
substitutes • Fall in the price of other
• Rise in the expected price goods
of the product • Technology changes
• Reduction in the price of • Improved efficiency
complements • Subsidies
• Change in tastes • Lower taxes
• Population increase
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Demand and supply
Elasticity
Demand Supply
• Price elasticity of demand • Price elasticity of supply
% change in quantity demanded % change in quantity
% change in price supplied
% change in price
• Income elasticity of demand
% change in quantity demanded
% change in price
• Cross elasticity of demand
% change in quantity
demanded of good A
% change in price of good B
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Demand and supply
Factors determining
Demand Supply
• Price of good
• Costs of making the good
• Size of households’ income
• Prices of other goods
(income effect)
• Expectations of price
• Price of substitute goods
changes
(substitution effect)
• Changes in technology
• Tastes and fashion
• Other factors (weather,
• Expectations of future price
natural disasters,
changes
industrial disruption)
• Distribution of income
Equilibrium
Supply Demand
Price
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Maximum and minimum price
Factors determining
Maximum price Minimum price
Ensure suppliers earn
Prevent rising in at least minimum
Aim
prices of goods price for each unit of
output sold
Creates excess Creates excess supply
Impact
demand Misallocation of
when
Misallocation of resources
imposed
resources. Waste of resources.
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Types of market
Perfect competition
• Large numbers of customers and suppliers – none of
whom have the power to dominate the market.
• The products or services sold by all suppliers are identical
(homogenous).
• There is perfect information – all customers and suppliers
have complete information on the prices that goods and
services are being sold at elsewhere in the market.
• No barriers to entry to, or exit from, the market – that is,
competitors can easily enter and exit the market.
Monopoly
• Only one major supplier in the market
• No close substitutes are available for this supplier’s
products
• The supplier is therefore free to set prices due to the lack
of competition.
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Types of market
Monopolistic competition
• Each business makes independent decisions about the
products it offers and the price it charges
• There are no major barriers to entering or leaving the
market
• Products are differentiated between each business,
meaning that they can charge more or less than their
competitors
• Due to the large amount of competition in the market,
there is typically
• Significant advertising expenditure by all the businesses in
the market.
Oligopolies
• Only one major supplier in the market
• No close substitutes are available for this supplier’s
products
• The supplier is therefore free to set prices due to the lack
of competition.