ECON 110 Introductory Microeconomics

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ECON 110Introductory Microeconomics

• Lecture 4
• Fall, 2009
• William Chow

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Highlights

• Demand and Quantity Demanded
• Factors affecting Demand
• Change in Demand and Change in Quantity Demanded
• Supply and Quantity Supplied
• Factors affecting Supply
• Change in Supply and Change in Quantity Supplied

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Demand and Supply

• Some clarifications on misused concepts
• We deal with Prices in terms of Relative Prices
• We distinguish between demand and quantity
  demanded, and between supply and quantity supplied

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Demand and Supply

• Relative prices indicate the opportunity cost or
  buying an item
• Papple 10 Porange 15
• Relative Price of apple 10/15 2/3
• i.e. the opportunity cost of apple 2/3 orange

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Demand and Supply

• The reason of using relative prices becomes
  obvious when there is an increase in both the
  prices of apples and oranges
• Then apples and oranges are more expensive in
  money terms, but not in terms of opportunity
  costs.

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Demand

• Quantity Demanded The amount consumers plan to
  buy at a particular price during a given time
  period
• Demand The entire relationship between the price
  of the good and quantity demanded of the good
• Each price level corresponds to a unique quantity
  demanded

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Demand

• A demand curve shows the relationship between the
  quantity demanded of a good and its price when
  all other influences on consumers planned
  purchases remain the same
• Law of Demand Other things remaining the same,
  the higher the price of a good, the smaller is
  the quantity demanded

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Income Effect

• The reason for this negative relationship is
  two-fold Income Effect and Substitution Effect
• To understand Income Effect, we need to define
  the following
• Substitute - a good that can be used in place of
  another good e.g. DVD-RW and CD-RW
• Complement - a good that is used in conjunction
  with another good e.g. DVD-RW and DVD-burner

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Income Effect

• Income effect when the price of a good or
  service rises relative to income, people cannot
  afford all the things they previously bought, so
  the quantity demanded decreases
• As the price of CD-RW rises, ceteris paribus, the
  purchasing power of your income drops and you are
  worse off you buy less of this item

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Substitution Effect

• Substitution Effect when the price of a good
  rises, the relative price (opportunity cost) of a
  it rises as well and people seek substitutes for
  it. So the quantity demanded decreases
• So both the Income Effect and Substitution Effect
  works to bring down quantity demanded when there
  is a price increase

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Factor Affecting Demand

• The own price of the good
• The prices of other goods complements or
  subtitutes
• Expected future prices
• Income normal or inferior goods
• Population
• Preferences

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The Demand Curve

• Each point on the Demand curve states the maximum
  price consumers are willing to pay for a certain
  amount of the good
• It also measure the Marginal Benefit consumers
  derive from those units

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Change in Quantity Demanded

• Any changes in the amount of goods being desired
  as a result of a change in its own price is
  called a Change in Quantity Demanded
• It is represented by a movement (sliding along)
  the Demand curve

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Change in Demand

• When the amount of goods desired change as a
  result of changes in factors other than its own
  price, there is a Change in Demand
• The buying plan changes without changes in the
  price of the good at the same price level, the
  quantity demanded of it changes
• The is represented by a shift in the entire
  Demand Curve

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Change in Demand

• A shift to the right indicates an increase in
  demand
• A shift to the left indicates a decrease in demand

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Change in prices of related goods

• Substitutes the price change of a substitute
  has a positive effect on the demand for the good
• Complements the price change of a complement
  has an opposite effect on the demand for the good

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Change in Income

• When income increases, consumers buy more of most
  goods and the demand curve shifts rightward
• A normal good is one for which demand increases
  as income increases
• An inferior good is a good for which demand
  decreases as income increases

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Factors Affecting Supply

• The own price of the good
• The prices of resources needed to produce it
• The prices of related goods produced
• Expected future prices
• The number of suppliers
• Available technology

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Supply

• The quantity supplied of a good or service is the
  amount that producers plan to sell during a given
  time period at a particular price
• Supply refers to the entire relationship between
  the quantity supplied and the price of a good

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Supply

• The supply curve shows the relationship between
  the quantity supplied of a good and its price
  when all other influences on producers planned
  sales remain the same
• Each point on the supply curve shows the minimum
  price the producers are willing to take for a
  given amount of quantity supplied

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Supply

• The Law of Supply Other things remaining the
  same, the higher the price of a good, the greater
  is the quantity supplied
• The intuition is that the opportunity cost (and
  hence the Marginal Cost) of producing a good
  increases in quantity
• i.e. the more you produce, the higher the MC and
  the higher the price is needed to cover this
  added cost

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Change in Quantity Supplied

• Any changes in the amount of goods being supplied
  as a result of a change in its own price is
  called a Change in Quantity Supplied
• It is represented by a movement (sliding along)
  the Supply curve

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Change in Supply

• When any factor that influences selling plans
  other than the price of the good changes, there
  is a Change in Supply
• This is represented by a shift in the entire
  Supply curve
• An leftward shift signifies a decrease in supply,
  and a rightward shift an increase in supply

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Change in Supply

• We saw that there are various factors that can
  influence production/selling plans
• Advances in technology create new products and
  lower the cost of producing existing products, so
  they increase supply and shift the supply curve
  rightward
• A rise in the price of productive resources
  decreases supply and shifts the supply curve
  leftward

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Change in Supply

• A substitute in production for a good is another
  good that can be produced using the same
  resources. Goods are complements in production if
  they must be produced together
• The supply of a good increases and its supply
  curve shifts rightward if the price of a
  substitute in production falls or if the price of
  a complement in production rises