Chapter 02 Basics of Microeconomics

1/23/2020
Circular-Flow Diagram
4
Chapter 02
Basics of Microeconomics
Md. Kaysher Hamid
Md. Kaysher Hamid © MKH BUP 2019
1 4
Lesson Outline Production Possibilities Frontier

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o Circular-Flow Diagram • A graph that shows the combinations of output that the economy can
o Production Possibilities Frontier possibly produce given the available factors of production and the
available production technology
o Demand and Supply
o Elasticity
Md. Kaysher Hamid © MKH BUP 2019 Md. Kaysher Hamid © MKH BUP 2019
2 5
Circular-Flow Diagram Production Possibilities Frontier

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o A visual model of the economy that shows how dollars flow through
markets among households and firms
o Two types of “actors”
• Firms
• Households
o Two markets
• Markets for goods and services
• Markets for the factors of production
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Demand Demand
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 Quantity demanded  Shifts in the Demand Curve

o The amount of a good that buyers are willing and able to purchase
o Prices of Related Goods
 Law of demand
 Substitutes-two goods for which an increase in the price of one
o The claim that, other things being equal, the quantity demanded of a good falls when
leads to an increase in the demand for the other
the price of the good rises
 Complements-two goods for which an increase in the price of
 Demand schedule
one leads to a decrease in the demand for the other
o A table that shows the relationship between the price of a good and the quantity
demanded
o Tastes
 Demand curve o Expectations
o A graph of the relationship between the price of a good and the quantity demanded o Number of Buyers
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Demand Supply
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 Quantity supplied
o The amount of a good that sellers are willing and able to sell
 Law of supply
o The claim that, other things being equal, the quantity supplied of a good rises
when the price of the good rises
 Supply schedule
o A table that shows the relationship between the price of a good and the quantity
supplied
 Supply curve
o A graph of the relationship between the price of a good and the quantity supplied
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Demand Supply
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 Shifts in the Demand Curve
o Income
 Normal good-a good for which, other things being equal, an

increase in income leads to an increase in demand
 Inferior good-a good for which, other things being equal, an

increase in income leads to a decrease in demand
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Supply Elasticity
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 Shifts in the Supply Curve  Income elasticity of demand
o Input Prices o A measure of how much the quantity demanded of a good responds to a
change in consumers’ income, computed as the percentage change in
o Technology
quantity demanded divided by the percentage change in income
o Expectations
 Cross-price elasticity of demand
o Number of Sellers
o A measure of how much the quantity demanded of one good responds to
a change in the price of another good, computed as the percentage
change in quantity demanded of the first good divided by the percentage
change in price of the second good
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Equilibrium of Supply and Demand Elasticity

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 Price elasticity of supply
o A measure of how much the quantity supplied of a good responds to

a change in the price of that good, computed as the percentage
change in quantity supplied divided by the percentage change in
price
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Elasticity
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• A measure of the responsiveness of quantity demanded or quantity

supplied to a change in one of its determinants
• Price elasticity of demand
• A measure of how much the quantity demanded of a good responds

to a change in the price of that good, computed as the percentage
change in quantity demanded divided by the percentage change in
price
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Chapter 02 Basics of Microeconomics

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Chapter 02 Basics of Microeconomics

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1/23/2020

Md. Kaysher Hamid

Md. Kaysher Hamid © MKH BUP 2019

Lesson Outline Production Possibilities Frontier

Circular-Flow Diagram Production Possibilities Frontier

o Two types of “actors”

• Markets for goods and services

• Markets for the factors of production

 Quantity demanded  Shifts in the Demand Curve

 Demand curve o Expectations

 Shifts in the Demand Curve

 Normal good-a good for which, other things being equal, an

 Inferior good-a good for which, other things being equal, an

 Shifts in the Supply Curve  Income elasticity of demand

Equilibrium of Supply and Demand Elasticity

 Price elasticity of supply

o A measure of how much the quantity supplied of a good responds to

• A measure of the responsiveness of quantity demanded or quantity

• Price elasticity of demand

• A measure of how much the quantity demanded of a good responds

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