Microeconomic Real World Examples Flashcards
Supply Shift Right, oil markets
The US shale oil boom from 2010 onwards significantly increased global oil supply, reducing oil prices and making the US one of the world’s top producers, reshaping energy markets.
Supply Shift Left, Ukraine war
The 2022 Russian invasion of Ukraine disrupted global wheat supplies, as both countries are major exporters. This led to higher food prices worldwide due to reduced supply and geopolitical uncertainty.
Inelastic PED, medical example
Insulin has highly inelastic demand because it is a life-saving necessity for diabetics, meaning price changes have minimal effect on quantity demanded, making it a key target for price regulation.
XED (Complements)
Printers and ink cartridges have a negative cross-price elasticity (XED); when printer prices fall, ink demand rises, as both goods are consumed together.
XED (Substitutes)
Coca-Cola and Pepsi have a positive XED; if Coca-Cola’s price increases, consumers switch to Pepsi, leading to higher demand for the substitute.
YED (Normal Goods)
Luxury cars, such as BMW and Mercedes, are normal goods with a high income elasticity of demand (YED). As incomes rise, consumers allocate more spending to high-end brands.
YED (Inferior Goods)
Own-brand supermarket bread is an inferior good; when incomes increase, consumers switch to premium bakery products, reducing demand for the cheaper alternative.
Positive Externalities in Consumption
Vaccinations create herd immunity, reducing disease transmission and benefiting society beyond the individual receiving the vaccine, justifying government intervention.
Positive Externalities in Production
iPhones are a good example since they invest heavily in R&D which leads to innovation:
How it works:
• Private Benefits: Apple invested heavily in R&D to develop the iPhone, which resulted in a highly profitable product for the company, allowing it to capture a large share of the smartphone market.
• Social Benefits: The iPhone and its innovations (like touchscreens, mobile apps, and mobile internet connectivity) spurred widespread advancements in other industries. For example:
• The rise of mobile applications created an entire ecosystem of app developers, offering new services and business models.
• The availability of smartphones improved productivity in various sectors, from education (via e-learning apps) to healthcare (through mobile health tracking).
• The iPhone helped stimulate advancements in related technologies like wireless internet, GPS, and mobile payment systems.
The social benefits go beyond Apple’s direct profit, as the innovation positively impacts various other industries and society as a whole, improving communication, access to information, and economic activity.
Indirect Tax for Market Failure
The UK imposes high excise taxes on cigarettes to reduce smoking rates and cover healthcare costs associated with tobacco-related illnesses, internalizing the negative externality.
Subsidy for Market Failure
Germany’s renewable energy subsidies support wind and solar power, reducing fossil fuel dependence and encouraging investment in cleaner technologies.
Regulation of Market Failure
The UK banned single-use plastic bags to reduce plastic pollution, shifting both consumer behavior and business practices toward sustainable alternatives.
Tradable Pollution Permits
The EU Emissions Trading System sets a cap on CO₂ emissions, allowing firms to buy and sell permits, creating a financial incentive for companies to reduce pollution efficiently.
Minimum Price for Market Failure
Scotland introduced a minimum unit price for alcohol in 2018 to curb excessive drinking and its social costs, targeting alcohol-related health issues.
Perfect Competition
Agricultural markets, such as wheat farming, exhibit perfect competition due to many small producers, homogenous products, and no significant barriers to entry
Monopolistic Competition
The restaurant industry features many firms offering differentiated products, low barriers to entry, and some degree of price-setting power.
Oligopoly (Competitive)
The smartphone market is dominated by Apple and Samsung, but strong competition exists through product differentiation, branding, and innovation.
Price Discrimination
Airlines engage in price discrimination by charging different fares for the same flight based on booking time, seat class, and customer profile, maximizing revenue.
Loss-Making Companies
Uber operated at a loss for years, prioritizing market dominance over short-term profitability by offering aggressive discounts and driver incentives.
Profit Maximization
Apple sets iPhone production levels and prices to maximize profit, balancing costs, consumer demand, and brand positioning - they do this to achieve dynamic efficiency for long term profits
Sales Maximization
Spotify prioritizes user growth over immediate profitability by offering free services and investing in market expansion.
Corporate Social Responsibility (CSR)
Patagonia donates 1% of sales to environmental causes, promotes sustainable sourcing, and encourages long-term environmental responsibility.
Demand for Labour shift right
Tech firms have significantly increased demand for AI engineers due to rapid advancements in machine learning and automation.
Wage Elasticity of Demand (Inelastic)
Doctors have inelastic wage elasticity of demand because their skills are essential and few substitutes exist.
Wage Elasticity of Demand (Elastic)
Retail workers have elastic wage elasticity of demand as automation and a large labor pool make substitution easy.
Supply of Labour Shift Right
Remote work expanded the labor supply for tech jobs by enabling workers to apply for roles worldwide - reinforced by COVID as employers were forced to adapt
Wage Elasticity of Supply (Inelastic)
Surgeons have inelastic wage elasticity of supply due to extensive training requirements and skill scarcity.
Wage Elasticity of Supply (Elastic)
Waiters are a good example - the supply is very inelastic because it is very low skill and training takes a matter of days
Labour supply shift left
The Office for National Statistics (ONS) found that among the over-50s who left the workforce during COVID, only one in ten had returned by mid-2022. Many cited health reasons, lack of suitable jobs, or simply not needing to work anymore as their reasons for staying out.
