Introduction to Microeconomics

We are starting a new unit today. Make sure that you have your new Microeconomics Study guide downloaded or printed and are ready to take notes. What is microeconomics?

MICROECONOMICS is the study of producers and consumers within a single market.

There’s 3 key concepts in this one deﬁnition that we need to understand in order to understand the rest of microeconomics.

PRODUCER CONSUMER MARKET

this refers to the this refers to the people this is the physical or businesses that make that buy goods and/or virtual place where goods and/or services services exchanges happen Key Players

Everything in our study of microeconomics will trace back to the two key players (producers and consumers) and their interactions in markets. To give you an overview, within our study of microeconomics we will examine:

• Circular Flow Diagram - model showing how producers and consumers interact in markets • Supply and Demand - economic model showing how producers and consumers interact to determine prices • Business Organizations - different ways that businesses can be structured • Market Structures - different ways that markets can be structured Circular Flow Model Remember… we said that economists like to use models (imitations or representations) to illustrate economic concepts. Today we are going to dive right on into one of our microeconomic models: the circular flow diagram (aka: circular flow model or circular flow of economic activity).

The circular ﬂow diagram is a model economists use to show the relationships that exist between producers and consumers in the economy. As you can see, there are a lot of things happening here ----> So we’re going to take this one piece at a time over the next several pages. CIRCULAR FLOW DIAGRAM

Remember the two key players in the economy?

Right! Producers and consumers.

In the model, households are the Reminder: consumers and Businesses are also businesses are the sometimes called “firms.” producers. CIRCULAR FLOW DIAGRAM Now, remember what a market is? Right! A market is a place where exchanges happen. BIG HINT! The product market The name of the is where ﬁnished market tells you products (a good or what is sold service) are sold. there. The factor (or resource) market is where productive resources are sold. CIRCULAR FLOW DIAGRAM: Switch it up? Not all circular ﬂow diagrams will appear exactly the same. Sometimes things will be moved around, however businesses and households must always be across from each other and the markets must always be across from each other. Interacting in the Factor Market

Now let’s focus on the Reminder: 4 factors of production interaction in the Land (natural resources) factor market. Labor (workers) Remember, in order Capital (tools/machinery) for a business to make Entrepreneur (owner) products they need the 4 factors of production. Businesses get resources from the households to help them make their goods or services. Interacting in the Factor Market

Payments for each of the resources are known as: I don’t know about Land (rent) you, but most people Labor (wages) aren’t going to work Capital (interest) without getting paid! Entrepreneur (profit) In return for the resources they provide to businesses, the businesses then pay the households for their work. Factor Market Example

Bob goes to work at Walmart. Bob gets paid wages every Friday for the hours he worked that week. The exchange of labor for money happens in the factor (resource) market. In this instance, Walmart is the resource market. Interacting in the Product Market

Now let’s focus on the interactions in the product market.

Businesses make goods and services that households want and need. Interacting in the Product Market

Of course, you can’t just go grab something off a shelf without paying for it.

In exchange for the products and services that households buy, they pay businesses.

The money businesses earn is called revenue. Product Market Example

Bob needs groceries.

Bob buys groceries from Walmart.

The exchange of goods for money happens in the product market. In But wait! I thought we said Walmart was a resource market a this instance, few slides ago? Walmart is the Can a business be both a resource AND product market? YES! product market. More on this in just a second, but first, let’s get the full picture. Putting it All Together

Notice that in the inside rings, resources are converted into products. In the opposite direction we see the flow of money for the goods and resources. Money is never actually created. It simply flows from businesses to households, back to businesses, and the process continues. It’s a Model...not reality Remember, the circular flow diagram is a MODEL. It shows a simplified version of how producers and consumers interact in an economy. In reality, things are a lot messier. A business (like Walmart) can exchange money for RESOURCES and PRODUCTS for money all under one roof. The model is here to help us see that the exchanges of businesses and households keeps money flowing in the economy. LET’S PRACTICE ☺ Grab a blank or scratch piece of paper. USING THE LIST OF TERMS, FILL IN THE BLANK SPACES ON THE CIRCULAR FLOW CHART *Hint: start with households or businesses and focus on one market at a time like we did in the lesson.

a) Productive Resources b) Income c) Expenditures d) Products e) Goods & Services f) Revenue g) Resources h) Wages, interests, net profit, rent CIRCULAR FLOW CHART ANSWER KEY CHECK YOUR ANSWERS. HOW DID YOU DO? REVIEW

• Circular Flow Model is a diagram showing the interactions of households and businesses in their various markets. • Product Market – Market in which goods and services are bought and sold. • Resource (Factor) Market – Market in which productive resources (factors of production) are bought and sold. • Need more help? Check out this video: https://www.stlouisfed.org/education/economic-lowdown-video-se ries/episode-6-circular-flow