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MICROECONOMICS - 2.demand and Supply

The document discusses the concepts of demand and supply in microeconomics, explaining how demand curves shift due to changes in prices of substitute and complementary goods, as well as consumer income. It also covers supply curves, their shifts based on input costs and technology, and the concept of market equilibrium where quantity demanded equals quantity supplied. Additionally, it introduces elasticities of demand and supply, detailing how they measure responsiveness to price and income changes.

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吴小瑶 WYY
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9 views3 pages

MICROECONOMICS - 2.demand and Supply

The document discusses the concepts of demand and supply in microeconomics, explaining how demand curves shift due to changes in prices of substitute and complementary goods, as well as consumer income. It also covers supply curves, their shifts based on input costs and technology, and the concept of market equilibrium where quantity demanded equals quantity supplied. Additionally, it introduces elasticities of demand and supply, detailing how they measure responsiveness to price and income changes.

Uploaded by

吴小瑶 WYY
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Microeconomics_ 2.

Demand and Supply

Demand
The demand is the relationship between the price of a good (P) and the quantity demanded (Q).

The demand curve shows how much of a product people want to buy at
different prices, assuming all other factors are constant.
It slopes downward, since generally if the price of a good decreases,
consumers tend to buy more of it.

Demand shifts

Demand function:
Qd = D(Price, other factors)

The demand curve can shift due to changes in various


If the price of a substitute good increases (), the demand increase (), shifting the
demand curve to the right. On the contrary, if the price of a complementary good
increases (), the demand decrease (), shifting the demand curve to the left.
Changes in consumer income can also shift the demand curve: for normal goods, an
increase in income leads to higher demand, while for inferior goods, an increase in
income leads to lower demand.

Supply
The supply curve shows how much sellers of a product want to sell at each possible
price, holding fixed all other factors that affect supply. It slopes upward,
since generally if the price of a good increases, producers are willing to supply
more of it.

Supply function:
Qs= D(Price, other factors)

Supply shifts
The supply curve can shift due to changes in factors other than the price of the product.
If the prices of inputs decrease, producers can supply
more at each price level, shifting the supply curve to the
right. Improvements in technology can also increase
supply, as can reductions in taxes or regulations.
On the other hand, if input costs rise or new regulations
are imposed, the supply curve may shift to the left,
indicating a decrease in supply.

Market equilibrium
The interaction between demand and supply leads to the concept of market
equilibrium, which is the point where the quantity demanded by consumers
equals the quantity supplied by producers (Qd=Qs). At this point, the
market is in balance, and the price at which this occurs is called the
equilibrium price, while the quantity is called the equilibrium quantity.

If the price is above the If the price is below the


equilibrium level, there will equilibrium level, there will
be excess supply, meaning be excess demand,
producers want to sell more meaning consumers want to
than consumers want to buy more than producers are
buy. In this case, sellers willing to sell. In this
may lower their prices to situation, buyers may bid up
encourage more purchases, moving the the price, again moving the market back
market back toward equilibrium. toward equilibrium.

Changes in market equilibrium:

Elasticities
Elasticity is a important concept in microeconomics that measures
the responsiveness of one variable (y) to changes in another (x).
Elasticities of demand
The price elasticity of demand measures how responsive the quantity demanded is to
changes in prices. It is calculated as the percentage change in quantity demanded
divided by the percentage change in price.

 If a small price increase leads to a large drop in demand,


the demand is said to be elastic.
 If demand changes very little in response to a price change,
the demand is inelastic.

The income elasticity of demand measures how responsive the demand


is to changes in income. For normal goods, demand increases as income
rises, while for inferior goods, demand decreases as income rises.

The cross-price elasticity of demand measures how responsive the quantity


demanded of one product is to changes in the price of another product.
If the cross-price elasticity is positive, the goods are substitutes, while if
it is negative, the goods are complements.

Elasticities of supply

The price elasticity of supply measures how


responsive the quantity supplied is to changes in prices.

Total expenditure and elasticity


The concept of elasticity is closely related to total expenditure, which is the total
amount of money spent on a good (P·Q).
 Elastic demand: a decrease in price leads to an increase in
total expenditure since the increase in quantity demanded
outweighs the decrease in price.
 Inelastic demand: a decrease in price leads to a decrease in
total expenditure since the increase in quantity demanded is not
enough to offset the lower price.

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