Welcome to Microeconomics! By definition "Micro" studies how consumers and businesses make decisions based on scarce resources. If something is "scarce" that means it's limited and we don’t have enough of the particular commodity, service, etc.

Those goods that in fact are limited (which if you stop and think about it we never have enough of anything) use the "pricing system" to allocate (distribute) scarce goods to consumers valuing them the most. Gasoline retailers understand this system and they adjust their prices accordingly. For instance, many of you drive therefore you use unleaded gasoline. In turn, gas station owners raise their prices because most people travel during spring, summer, and early fall; hence, consumers place value on their vacation time and will spend money (either at the pump or through higher airline ticket prices) in achieving this satisfaction. Now you may be saying to yourselves "yes, that’s true, but only up to a certain point will consumers continue to pay excessive fuel costs. They just won’t drive as much…" and you’re correct! Accordingly, microeconomics helps explain when consumers (and businesses. If contemporary events are any indication, summer 2008 should witness consumer demand for oil declining precipitously, however, that depends upon the elasticity for gas consumption...more on that concept later J) have had enough, thereby necessitating changes in choices based on budgets, resource costs, availability and, yes, scarcity.

The Law of Demand: at higher (lower) prices the quantity demanded is lower (higher). Think of it this way. Ladies, many of you enjoy the feel of "Nine West" shoes (as a male I’ve been to the ladies shoe department with my "significant other" and…well, let’s just say I survived) and you’re only budgeted for one pair of $30 sandals. However, when you arrive at the shoe store, and much to your satisfaction, the sandals are marked "half off." Effectively you can either buy another pair or spend the remainder of your budget on something else. The original sandals have been reduced in price; therefore, YOUR quantity demanded is higher.

If we were to draw an imaginary, downward sloping line we, in essence, will have constructed a Demand Curve. ALL MOVEMENTS ALONG THIS CURVE ARE BASED ON CHANGES IN PRICE. Follow me for this gets a bit tricky…the Demand Curve has a downward slope (in linear mathematics we would say this line has a negative slope). The negative relationship is one based on price to quantity demanded (P: QD): the lower the price the more purchased; the higher the price, less is purchased. So, price has to drop (a negative) for more quantity to be consumed.

Conversely, if upon arriving to the shoe department and the Nine West’s were priced more than $30 –we’ll presume not within your budget- the quantity you would purchase: 0. i.e. the price is high soooo… the quantity demanded….is low, or in this case, zero.

The Law of Supply: Now this is really interesting. The law says: At higher (lower) prices the quantity supplied of any good or service is (less) more. Sounds a bit strange, but let’s take a closer look…

The founders of Nine West didn’t just go into the shoe manufacturing business for their collective health. They recognized the profit potential from such an enterprise (profits and costs of production are discussed in future lessons but for right now we want to emphasize changes in quantities) and decided to manufacture ladies shoes.

Assuming Nine West could only make $5 per pair of sandals they might decide to sell only 10 pairs to the local Nordstrom’s. "Why," You ask…because there’s no profit in selling more when consumers will only pay $5. You see, "Nine" has done what we refer to in business as "marketing research." Such data collection activities determine prices consumers are willing to pay: $5 in this case; it makes no economic sense to manufacture more and have to pay labor costs. IF THE VALUE IS ONLY $5 IT SEEMS –AT LEAST TO CONSUMERS- THIS GOOD REALLY "AIN’T" TOO SCARCE… So Nine West manufactures just enough shoes to meet consumer demand.

Ah, but something funny has transpired…future data show consumers willing to pay more for Nine’s sandals; as much as $20 per pair! As a result, Nine manufactures and sells 200 pairs to the local Nordstrom’s. What just happened???

Think back: the law of supply says "as prices rise the quantity supplied is more"-manufactures have greater incentives to produce more for they can make more money! "At lower prices the quantity supplied is less…" why sell more than 10 pairs if the market will only pay $5? Get the picture (click! click!)???

Back to graphics…this relationship of price to quantity supplied (P: OS) is a positive one. Consequently, the slope of the supply curve is positive meaning as prices rise quantities supplied are more. Again, draw an imaginary curve only this time its "UPWARD SLOPING" Movement along this curve is a CHANGE IN QUANTITY SUPPLIED

One last thing and then the homework assignment (I know, HOORAH!)

Supply and demand curves cannot operate as mutually exclusive functions. There has to be an intersection of both curves representing a quantity that consumers are willing to pay and the amount suppliers will provide. This is what is commonly referred to as "market equilibrium."

In lesson two we’ll discuss market equilibrium and the factors contributing to shifts (i.e. changes) in demand and supply functions. Stay tuned…

Read chapters 1-3. Design a market for a good of which you are the manufacturer. Using the laws of supply and demand describe prices, quantities, and the functioning of supply and demand whereby consumer and sellers decide on prices. Illustrate with a graph.

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