1

MICROECONOMICS
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LEARNING OUTCOME

 Describe factors that affect quantity demanded;

 Describe how demand for a product or service is affected by
substitute and complementary products and services;
 Describe factors that affect quantity supplied;
 Describe market equilibrium;
 Describe and interpret price and income elasticities of demand
and their effects on quantity and revenue;
 Distinguish between accounting profit and economic profit;
 Describe production levels and costs, including fixed and variable
costs, and describe the effect of fixed costs on profitability;
 Identify factors that affect pricing;
 Compare types of market environment: perfect competition, pure
monopoly, monopolistic competition, and oligopoly.
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I. DEMAND AND SUPPLY

1. Demand

The law of demand

…quantity As price
demanded vice versa goes
goes down…
As price down …quantity
goes demanded
up… goes
up

Demand curve
Price
A graphical representation of
A the relationship between the
P1 price of a good or service and
the quantity demanded for a
B given period of time.
P2
At point A, the price is higher
C (P1) and the quantity
P3
demanded is lower (Q1)
Q1 Q2 Q3 Quantity compared to point B and C
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I. DEMAND AND SUPPLY

1. Demand

The law of demand example

Quantity
Price of of lattes
Sam’s demand for lattes − Notice that
lattes demande
Sam’s preferences obey the law of
d
demand. Quantity of lattes demanded
will increase when their price falls, vice
versa. $1.00 14

$2.00 11

$6.00 $3.00 9
$5.00
$4.00 7
$4.00
$3.00 $5.00 5

$2.00 $6.00 4
$1.00

0 5 10 15
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I. DEMAND AND SUPPLY

1. Demand

Shift of the demand curve

D1 D D2

A change in a factor
Price

(income, population,…) may

make the product more
attractive/ unattractive

Quantity Demanded

D1

Demand shift to the left, Demand shift to the right,

meaning that people will meaning that people will
demand less of the product demand more of the
at a given price. product at a given price.

D2
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I. DEMAND AND SUPPLY

1. Demand

Main factors that affect the demand for products and services

A change in demand for a product resulting from

a change in consumer buying power is called the
income effect.
Income E.g: When income increases without any change
to prices, this makes consumers able to purchase
more normal goods at the same price, and they
tend to spend less on inferior goods.

Normal goods Inferior goods

Goods whose demand Goods whose demand

Meaning rise when consumers’ decline when
income rises consumers’ income rises

When income increases, When income increases,

people gain more spare people gain more spare
money to buy furniture, money, leading to the
clothes, automobiles,… decrease in needing
Example
noodles, canned food,
second-hand clothes;
which are substituted by
higher quality goods.
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I. DEMAND AND SUPPLY

1. Demand

Main factors that affect the demand for products and services

Both the expected future price and current

demand move in the same direction.

Expected Example: if consumers expect that the price of

Future Price rice will increase as a result of a shortage, the
current quantity of rice demanded may increase
as consumers accumulate it to avoid paying a
higher price in the future.

Changes in consumers’ general tastes and

preferences may also affect a product’s demand
General curve.
Tastes and
Preferences Example: if a report that links eating chocolate to
better health is published, demand for chocolate
bars may increase.
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I. DEMAND AND SUPPLY

1. Demand

Main factors that affect the demand for products and services

a product that could generally

take the place of (substitute for)
another product.
Prices of Other
Products Substitute
Pepsi is a substitute goods for
product
Coca, and vice-versa. When the
The effect of a price of Coca goes up, demand for
change in the Pepsi will subsequently rise (if
prices of other Pepsi does not raise its price).
products on a
product’s demand
curve depends on Products that are frequently
the type of consumed together.
relationship
between the Complementary Printing paper and ink cartridges. If
products. products the price of ink cartridges
increases, consumers may print
less and purchase both less ink
cartridges and printing paper.
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I. DEMAND AND SUPPLY

2. Supply

The law of supply

As price …quantity
goes supplied
vice versa down… goes
As price …quantity down
goes supplied
up… goes
up

Supply curve
Price
The representation of the
relationship between the
C price of a good or service
P3
and the quantity supplied
B for a given period of time.
P2
A At point A, the price is
lower (P1) and the quantity
P1
supplied is lower (Q1)
Q1 Q2 Q3 Quantity compared to point B and C
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I. DEMAND AND SUPPLY

2. Supply

The law of supply example

Price Quantity
Starbucks’ supply of lattes − Notice that of of lattes
Starbucks’ supply schedule obeys the law lattes supplied
of supply. Quantity of lattes demanded
increases when their price increases, vice
versa. $0.00 0

$1.00 3

$6.00 $2.00 8
$5.00
$3.00 10
$4.00
$3.00 $4.00 14
$2.00
$5.00 16
$1.00
$0.00 $6.00 18
5 10 15
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I. DEMAND AND SUPPLY

2. Supply

Shift of the supply curve

S1 S S2
A change in a factor
Price

(production cost, tax,…)

might affect the supply of a
product

Quantity Demanded

S1

Supply shift to the left, Supply shift to the right,

meaning that supplier will meaning that supplier will
supply a product less at a supply a product more at a
given price. given price.

S2
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I. DEMAND AND SUPPLY

2. Supply

Main factors that affect the products and services supply

An increase/ decrease of production cost might

affect the quantity supplied. The production cost
includes wages, material, overhead.
Production Ex: Lower wages, lower material costs, and lower
cost overheads due to technology improvement leads
to the lower cost of production. This means
business can produce more at each price, thus
increase supply.

Tax might impact on the cost of goods, thus,

quantity supplied is also impacted.
Ex: The government increases the tax on
Taxes
tobacco, this leads to higher expense when
selling this products and lower profit. Business
might reduce the supply of tobacco
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I. DEMAND AND SUPPLY

3. Market Equilibrium

Market equilibrium is is the state in which market supply and

demand balance each other, and as a result prices become stable

D S
The equilibrium price

The equilibrium price (EP) is

Price

EP the price at which the

quantity demanded (D)
equals the quantity
supplied (S)
Quantity

Characteristic

At any price above the

If the price is below the
equilibrium price (EP) in the
equilibrium price, consumers
Exhibit above, suppliers are
will demand more of a product
willing to produce more of a
than suppliers find it profitable
product than consumers are
to produce.
willing to buy.
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I. DEMAND AND SUPPLY

3. Market Equilibrium

Relationship between change in equilibrium price

and the shifts of demand/supple curve
D1
D
S
D2
If demand increases while
EP1 supply curve stays the same,
Price

EP the result is an increase in the

EP2 equilibrium price and quantity,
from EP to EP1, vice versa.

Quantity
S1
D
S

S2 If supply increases while

EP1 demand curve stays the same,
EP the result is an decrease in the
Price

EP2 equilibrium price and and an

increase in quantity, from EP
to EP1, vice versa.

Quantity
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I. DEMAND AND SUPPLY

Vocabulary

Vocabulary Meaning

Equilibrium Điểm cân bằng

Effect Ảnh hưởng

Law of demand/supply Quy luật cầu/cung

Complement Hàng hoá bổ sung, đi kèm

Substitute Hàng hóa thay thế

Income Thu nhập

Shift Dịch chuyển

Inferior goods Hàng hóa thứ cấp

Normal goods Hàng hóa thông thường

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II. ELASTICITIES OF DEMAND

1. Price Elasticity of Demand (PED)

Definition Formula

Price Elasticity of Demand is a PED

measure of the responsiveness % Change in quantity demanded
=
of the quantity demanded to a % Change in price
change in price
% ∆QD
=
% ∆P

Sign Magnitude

According to the law of Provides information about the

demand, demand decreases strength of the relationship
when price increases, vice between quantity demanded and
versa, demand increases when changes in price.
price decreases. Therefore,
price elasticity of demand is % ∆QD
PED =
always negative % ∆P
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II. ELASTICITIES OF DEMAND

1. Price Elasticity of Demand

Magnitude Classification Description Example

│PED│ = 0 Perfectly %∆QD = 0 Special

inelastic The change in price does not medicine,
impact on demand. This might …
be because these goods or
service are must-have items and
do not have any subtitutes.

│PED│ < 1 Relatively %∆QD < %∆P Water,

inelastic The change in price does not petrol, …
have much impact on demand.
This might because these goods
are essential or have no close
subtitutes.

│PED│ = 1 Unitary %∆QD = %∆P In fact,

elastic the proportion of change in this case
demand for goods and services rarely
is equal to proportion of change happens
in its price

│PED│ > 1 Relatively %∆QD > %∆P Pork,

elastic The change in price impacts on beef,
demand relatively. chicken,…
This might because these goods
have many subtitutes
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II. ELASTICITIES OF DEMAND

1. Price Elasticity of Demand

Example of Price Elasticity of Demand

Question:

When the price of radio increased from $20 to $22, the quantity of
radios demanded decreased from 100 to 87.

What is the price elasticity of demand for radios?

Answer:

The price increases from $20 to $22.

 % change in price = (22-20)/2 = 2/20 = 0.1 = 10%
Quantity fell by: (100 – 87)/100 = 13/100 = – 0.13 = -13%
 PED = -13%/10% = - 1.3
 Magnitude: │PED │ = 1.3 > 1
 This is relatively elastic as radio is not an essential item,
consumers might choose to buy it if the price is low, or they can use
TVs or their cellphones instead.
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II. ELASTICITIES OF DEMAND

1. Price Elasticity of Demand

Cross-price Elasticity of Demand

Cross-price Elasticity of Demand is the change in the quantity

demanded of a product in response to a change in the price of
another product
 Cross price elasticity > 0: the goods are substitute
 Cross price elasticity < 0: the goods are complement

𝑑𝑥
%𝛥𝑄𝑥𝑑
𝐸𝑝𝑦 =
%𝛥𝑃𝑦

Example:

If a 5% increase in the price of coffee leads to a 7% decrease in the

quantity demanded of cream, then the cross-price elasticity of
demand is:
−7%
= −1.4
+5%
If a 5% increase in the price of coffee leads to a 7% increase in the
quantity demanded of tea, then the cross-price elasticity of demand
is:
+7%
= +1.4
+5%
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II. ELASTICITIES OF DEMAND

2. Income Elasticity of Demand

Definition Equation
Measuring the effect of changes in
income on quantity demanded of a
d %ΔQdx
product when other factors remain Eincome =
the same. %ΔI

Example % Change in quantity demand

=
If there is economic downturn, % Change in income
people will save their money
instead of spending on luxury
items such as expensive watches,..

Effects on goods

Necessity Normal goods

Inferior goods Luxury goods
goods

0 Income elasticity of demand 1

income demand income demand rises more

increase, remain increase, than proportionate
demand unchanged demand to a change in
decrease increase income
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II. ELASTICITIES OF DEMAND

Vocabulary

Vocabulary Meaning

Own-Price elasticity Độ co giãn chéo của mức cầu

Sign and Magnitude Dấu hiệu & độ lớn

Cross- price elasticity of

Độ co giãn chéo của mức cầu
demand

Elasticity of demand: Tính co giãn của mức cầu

Hệ số co giãn thu nhập của

Income elasticity of demand
mức cầu

Necessity goods Hàng hóa cần thiết

Luxury goods Hàng hóa xa xỉ

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III. PROFIT AND COSTS OF PRODUCTION

1. Accounting Profit vs. Economic Profit

Total revenue

Total costs Profit

Implicit
Explicit costs = Accounting Economic
costs Opportunity profit profit
cost

a direct the value company’s difference

payment forgone by net earnings between the
made to choosing a on its revenue
others in the particular income received
course of course of statement from the
running a action sales and the
business relative to costs
(ex: wages, the best (including
rent, alternative implicit
material,…) that is not costs)
chosen
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III. PROFIT AND COSTS OF PRODUCTION

1. Accounting Profit vs. Economic Profit

Explicit costs Explicit costs

Total
revenue
Implicit costs
Accounting
profit
Economic profit

Use when Use when

measuring seeking a
the financial comparison to
performance of income that
a company. might have
been gained
from choosing
different option
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III. PROFIT AND COSTS OF PRODUCTION

1. Accounting Profit vs. Economic Profit

Example for Accounting profit and Economic profit

Fred currently works for a company and he has annual salary of $125,000..
He is considering opening his own restaurant, where he expects to earn
$200,000 per year. He would need $85,000 of for all the expenses, such as
rent, wages, raw food per year. If these figures are accurate, would Fred’s
restaurant be profitable?

The amount Fred

Explicit Explicit would have to
costs costs invest in to
= $85,000 operate his
= $85,000
restaurant.
Total
revenue Implicit
The amount of
= $200,000 costs money he had to
Accounting
= $125,000 give up when he
profit decided to quit
Economic
= $115,000 profit his job

= - $10,000
If Fred quited his job and opened his own restaurant, he would make a
loss of $10,000 per year. That does not mean he would not want to open
his own business, but it does mean he would be earning $10,000 less than
if he worked for his current company.
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III. PROFIT AND COSTS OF PRODUCTION

2. Fixed Costs vs. Variable Costs

Costs that fluctuate with the

level of output of the company
Costs

Variable costs

Costs that do not fluctuate with

Fixed costs
the level of output
Number of units
Example: Fixed costs vs. Variable cost

XYZ Company manufactures automobiles and it costs the company $250

to make one steering wheel. In order to run its business, the company
incurs $550,000 in rental fees for its factory space.
Number of units Variable Cost Total Variable Total Fixed Cost
produced per Steering Cost
Wheel

1 $250 $250 $550,000

500 $250 $125,000 $550,000

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III. PROFIT AND COSTS OF PRODUCTION

2. Fixed Costs vs. Variable Costs

If the revenues are higher

than the total costs, the
company is making a profit.
Cost

If the revenues are lower

than total costs, the
company is suffering a loss

Number of units

Breakeven point
 The point at which the revenue and total costs lines intersect
 Reflect the number of units produced and sold at which the
company’s profit is zero—that is, revenues exactly cover total
costs.
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III. PROFIT AND COSTS OF PRODUCTION

3. Profit maximization theory

Marginal revenue (MR) Marginal cost (MC)

Is the amount of money a Is the cost that incurs for

company receives for selling producing that additional
that additional unit unit

Profit Maximization Rule

MR > MC MR < MC

for each extra unit produced, for each extra unit produced,
revenue will be higher than the cost will be higher than
the cost revenue

Produce more Produce less

Thus, company should produce until MC = MR

 Profit is maximized
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III. PROFIT AND COSTS OF PRODUCTION

Vocabulary

Vocabulary Meaning

Breakeven point Điểm hòa vốn

Cost Chi phí

Explicit cost Chi phí hiện

Fixed cost Chi phí cố định

Implicit cost Chi phí ngầm

Profit Lợi nhuận

Revenue Doanh thu

Variable cost Chi phí biến đổi

Operating leverage Đòn bẩy hoạt động

Opportunity cost Chi phí cơ hội

Marginal cost Chi phí cận biên

Marginal revenue Doanh thu cận biên

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IV. PRICING
Key factors that affect the price

 If a product has no unique characteristics,

substitute products can be easily found.
Product’s  If a product has a unique identity, it is less
characteristics price sensitive, which gives its producer the
ability to charge higher prices and obtain
higher profits.

 If demand for a product is greater than the

amount supplied, producers of competing
The state of
products will benefit from it.
the market for
 If supply for a product is interrupted, buyers
the product
frantically chase the limited supplies and bid
up prices.

Income levels and elasticity also influence the

pricing of products. Producers within an industry,
Other may have more pricing power as a group as
elements disposable income increases.
Ex: demand for mobile communications services in Vietnam
will increase in general if income level increases
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IV. PRICING
Vocabulary

Vocabulary Meaning

Factor Nhân tố

Characteristic Đặc điểm

Sensitive Dễ bị ảnh hưởng

Producer Người sản xuất

Obtain Thu được

Interrupted Gián đoạn

Bid up Tăng
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V. MARKET ENVIRONMENT
Characteristics of the 4 market structures:
perfect competition, monopolistic competition, oligopoly, pure monopoly

Perfect Monopolistic
Oligopoly Monopoly
competition competition

Number of Single
Many firms Many firms Few firms
sellers firms

Barriers to
Very low Low High Very high
entry

Very good
Nature of Very good Good
substitutes No good
substitute substitutes substitutes but
but substitutes
products (identical) differentiated
differentiated

Price, Price,
Factors to
Price only marketing, marketing, Advertising
compete on
features features

Pricing Some to
None Some Significant
power significant
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IV. MARKET ENVIRONMENT

Vocabulary

Vocabulary Meaning

Monopolistic competition Cạnh tranh độc quyền

Monopoly Độc quyền

Oligopoly Độc quyền nhóm

Cạnh tranh hoàn hảo

Perfect competition