Microeconomics

Session 1-2
 The demand curve
Q
Q=q(P)

5000

P
680
 The inverse demand curve
P
P=p(Q)

680

Q
5000
 SUPPLY AND DEMAND
The Demand Curve
Figure 2.2

The Demand Curve

The demand curve, labeled D,

shows how the quantity of a good
demanded by consumers
depends on its price. The
demand curve is downward
sloping; holding other things
equal, consumers will want to
purchase more of a good as its
price goes down.
The quantity demanded may also
depend on other variables, such
as income, the weather, and the
prices of other goods. For most
products, the quantity demanded
increases when income rises.
A higher income level shifts the
demand curve to the right (from D
to D).
 IEA sees surge in oil demand from India,
emerging nations
PTI May 12, 2016

Surge in oil demand in India Y

and other emerging Price
nations will lead to reduction
in global oil surplus in the Before Oil
Surge
first half of 2016,
the International Energy
Agency (IEA) said today.

After Oil
Surge

After Oil
X
Before Oil
Surge Surge Oil Demand
 Monsoon to wash away diesel demand surge
Reuters Jun 16, 2016
Y
The monsoon is expected to Shift In Demand Curve
dump above-average rainfall
Price
on the South Asian nation
after two years of drought,
cutting its use of diesel for
irrigation pumps and
generators over the third Before
quarter and potentially
After
rejuvenating exports of the oil
product.

After Before X
Demand For Diesel
 Homework 1
Show that the term Supply can be used in
two different senses implying either
quantity supplied or supply curve using
some newspaper articles.
 Shifts in Demand

When Price of X Increases,

Quantity Demanded Quantity Demanded

of Y Decreases of Y Increases

Complements Substitutes
Two goods for which an Two goods for which an
increase in the price of one increase in the price of one
leads to a decrease in the leads to an increase in the
quantity demanded of the quantity demanded of the
other other.
 SUPPLY AND DEMAND
The Supply Curve
supply curve Relationship between the quantity of a good that
producers are willing to sell and the price of the good.

Figure 2.1

The Supply Curve

The supply curve, labeled S in

the figure, shows how the
quantity of a good offered for
sale changes as the price of the
good changes. The supply
curve is upward sloping: The
higher the price, the more firms
are able and willing to produce
and sell.

If production costs fall, firms

can produce the same quantity
at a lower price or a larger
quantity at the same price. The
supply curve then shifts to the
right (from S to S).
 THE MARKET MECHANISM

Figure 2.3

Supply and Demand

The market clears at price P0

and quantity Q0.

At the higher price P1, a surplus

develops, so price falls.

At the lower price P2, there is a

shortage, so price is bid up.
 How Parsees are coping
up with the problem of
extinction?

Why everybody in China

are purchasing increasingly
bigger house over time?
 CHANGES IN MARKET
EQUILIBRIUM
Figure 2.6
New Equilibrium Following
Shifts in Supply and Demand
Supply and demand curves
shift over time as market
conditions change.
In this example, rightward
shifts of the supply and
demand curves lead to a
slightly higher price and a
much larger quantity.
In general, changes in price
and quantity depend on the
amount by which each
curve shifts and the shape
of each curve.
 CHANGES IN MARKET
EQUILIBRIUM
Figure 2.6
New Equilibrium Following Price
Shifts in Supply and Demand
S1
Supply and demand curves
shift over time as market
conditions change.
In this example, rightward
shifts of the supply and S2
demand curves lead to a
slightly lower price and a
much larger quantity.
In general, changes in price P1
and quantity depend on the
amount by which each P2
curve shifts and the shape
of each curve. D2

D1

Q1 Q2 Quantity
 CHANGES IN MARKET EQUILIBRIUM

Demand Supply Quantity Price

Increases Increases Increases Ambiguous

Decreases Decreases Decreases Ambiguous

Increases Decreases Decreases Increases

Decreases Increases Increases Decreases

 A change in quantity
P
P=p(Q)

700

680

Q
4990

5000
 ELASTICITIES
elasticity Percentage change in one variable resulting from
a 1-percent increase in another.

Price Elasticity of Demand

price elasticity of demand Percentage change in quantity

demanded of a good resulting from a 1-percent increase in its
price.

(2.1)
 ELASTICITIES
Linear Demand Curve
linear demand curve Demand curve that is a straight line.

Figure 2.11

Linear Demand Curve

The price elasticity of demand

depends not only on the slope
of the demand curve but also
on the price and quantity.
The elasticity, therefore, varies
along the curve as price and
quantity change. Slope is
constant for this linear demand
curve.
Near the top, because price is
high and quantity is small, the
elasticity is large in magnitude.
The elasticity becomes smaller
as we move down the curve.
 ELASTICITIES
Linear Demand Curve
Figure 2.12

(a) Infinitely Elastic Demand

(a) For a horizontal demand

curve, Q/P is infinite.
Because a tiny change in price
leads to an enormous change
in demand, the elasticity of
demand is infinite.

infinitely elastic demand Principle that consumers will buy as much

of a good as they can get at a single price, but for any higher price the
quantity demanded drops to zero, while for any lower price the
quantity demanded increases without limit.
 ELASTICITIES
Linear Demand Curve
Figure 2.12

(b) Completely Inelastic Demand

(b) For a vertical demand curve,

Q/P is zero. Because the
quantity demanded is the same
no matter what the price, the
elasticity of demand is zero.

completely inelastic demand Principle that consumers will buy a

fixed quantity of a good regardless of its price.
 Price Elasticity of Demand

Elastic Inelastic

Tomato Hyundai Car Car Salt

- -4.6 -4.3 -1.3 E = -1 -0.1 0

Infinitely Unitary Completely
Elastic Elastic Inelastic
 A change in quantity (algebra)
Total Revenue TR(Q) = p(Q) Q
Marginal Revenue MR(Q) = TR(Q)
TR(Q) = p(Q) + p(Q) Q
= p(Q) [ 1 + p(Q) Q / p(Q)]
= p(Q) [ 1 + 1/e]
where

e = p / (p(Q) Q)
 Price elasticity of demand
e = p Q(p) / Q(p)
TR(Q) = MR(Q) = p(Q) [ 1 + 1/e]

Abs(e) > 1 ; demand is elastic; TR(Q) > 0

Abs(e) < 1 ; demand is inelastic; TR(Q) < 0
 ELASTICITIES
Other Demand Elasticities
income elasticity of demand Percentage change in the quantity
demanded resulting from a 1-percent increase in income.

(2.2)

cross-price elasticity of demand Percentage change in the

quantity demanded of one good resulting from a 1-percent increase in
the price of another.

(2.3)

Elasticities of Supply
price elasticity of supply Percentage change in quantity supplied
resulting from a 1-percent increase in price.
 SHORT-RUN VERSUS LONG-RUN ELASTICITIES
Demand

Figure 2.13
(a) Gasoline: Short-Run and Long-Run
Demand Curves
(a) In the short run, an increase in
price has only a small effect on the
quantity of gasoline demanded.
Motorists may drive less, but they will
not change the kinds of cars they are
driving overnight.
In the longer run, however, because
they will shift to smaller and more
fuel-efficient cars, the effect of the
price increase will be larger.
Demand, therefore, is more elastic in
the long run than in the short run.
 SHORT-RUN VERSUS LONG-RUN ELASTICITIES
Demand
Demand and Durability

Figure 2.13
(b) Automobiles: Short-Run and Long-Run
Demand Curves
(b) The opposite is true for
automobile demand. If price
increases, consumers initially defer
buying new cars; thus annual
quantity demanded falls sharply.
In the longer run, however, old cars
wear out and must be replaced; thus
annual quantity demanded picks up.
Demand, therefore, is less elastic in
the long run than in the short run.
 SHORT-RUN VERSUS LONG-RUN ELASTICITIES
Demand

Income Elasticities

Income elasticities also differ from the short run to the

long run.
For most goods and servicesfoods, beverages, fuel,
entertainment, etc. the income elasticity of demand is
larger in the long run than in the short run.
For a durable good, the opposite is true. The short-run
income elasticity of demand will be much larger than the
long-run elasticity.
 MARKET DEMAND
market demand curve Curve relating
the quantity of a good that all consumers
in a market will buy to its price.

From Individual to Market Demand

TABLE 4.2 Determining the Market Demand Curve
(1) (2) (3) (4) (5)
Price Individual A Individual B Individual C Market
($) (Units) (Units) (Units) (Units)
1 6 10 16 32
2 4 8 13 25
3 2 6 10 18
4 0 4 7 11
5 0 2 4 6
 MARKET DEMAND
From Individual to Market Demand

Figure 4.10
Summing to Obtain a Market Demand
Curve

The market demand curve is

obtained by summing our three
consumers demand curves DA,
DB, and DC.
At each price, the quantity of
coffee demanded by the market is
the sum of the quantities
demanded by each consumer.
At a price of $4, for example, the
quantity demanded by the market
(11 units) is the sum of the
quantity demanded by A (no
units), B (4 units), and C (7 units).
 CONSUMER SURPLUS

consumer surplus Difference between what a consumer is willing to

pay for a good and the amount actually paid.

Consumer Surplus and Demand

Figure 4.13

Consumer Surplus

Consumer surplus is the

total benefit from the
consumption of a product,
less the total cost of
purchasing it.

Here, the consumer surplus

associated with six concert
tickets (purchased at $14
per ticket) is given by the
yellow-shaded area.
 Consumer and Producer Surplus

Individual consumer surplus is the difference

between the maximum amount that a consumer is
willing to pay for a good and the amount that the
consumer actually pays.
Producer surplus for a particular unit of output is

the difference between the price at which it is sold

and the marginal cost of producing it. Total
producer surplus is the sum of producer surplus
over all units sold. It equals the difference between
revenue and variable costs.
 Homework 2 (Page 56, exercise 5)
Much of the demand for U.S. agricultural output has come
from other countries. In 1998, the total demand for wheat
was Q = 3244 283P. Of this, total domestic demand was
QD = 1700 107P, and domestic supply was QS = 1944
+ 207P. Suppose the export demand for wheat falls by 40
percent.
a) U.S. farmers are concerned about this drop in export
demand. What happens to the free-market price of wheat
in the United States? Do the farmers have much reason
to worry?
b) Now suppose the U.S. government wants to buy enough
wheat to raise the price to $3.50 per bushel. With the drop
in export demand, how much wheat would the
government have to buy? How much would this cost the
government?