Microeconomics

Economics - Economics is the study of the allocation of scarce resources to meet unlimited human needs. Microeconomics - is concerned with decision-making by individual economic agents such as firms and consumers. Macroeconomics - is concerned with the total performance of the entire economic system.

Uses of Microeconomics models Because microeconomics models explain why economic decision are made and allow us to make predictions, they can be very useful for individuals, governments, and firms in making decisions.

Supply and demand

Demand: The required quantity of goods or service which the consumers have the desire and the ability to buy in specific price and certain time. Or Demand: The quantity of a good or service that consumers demand depends on price and other factors such as consumer income and the price of related goods. Supply: The quantity of goods or service that firms supply depends price and other factors such as the cost of inputs firms use to produce the good or service. Market equilibrium: The interaction between consumer demand and firms supply determines the market price and quantity of a goods service that is bought and sold.

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Equilibrium price: the price at which sellers together are willing to sell the same amount as buyers together are willing to buy, also known as market clearing price. Equilibrium quantity: the amount of that good or service that will be produced and bought without surplus/excess supply or shortage/excess demand. Shocking the equilibrium: change in a factor that affect demand (such as consumers income), supply (such as rise in the price of inputs), or a new governments policy (such as a new tax) alter the market price and quantity of goods.

Demand Potential consumers decide how much of a good or service to buy on the basis of its price and many other factors, including their own tastes, information, prices of other goods, income, and government actions. Factors that affect the Demand 1- Good's own price: The basic demand relationship is between potential prices of a good and the quantities that would be purchased at those prices. Generally the relationship is negative meaning that an increase in price will induce a decrease in the quantity demanded. This negative relationship is embodied in the downward slope of the consumer demand curve. The assumption of a negative relationship is reasonable and intuitive. If the price of a new novel is high, a person might decide to borrow the book from the public library rather than buy it. 2- Price of related goods: The principal related goods are complements and substitutes. A complement is a good that is used with the primary good. Examples include hotdogs and mustard, beer and pretzels, automobiles and gasoline.(Perfect complements behave as a single good.) If the price of the complement goes up the quantity demanded of the other good goes down. Mathematically, the variable representing the price of the complementary good would have a negative coefficient in the demand function. For example, Qd = a - P - Pg where Q is the quantity of automobiles demanded, P is the price of automobiles and P g is the price of gasoline. The other main categories of related goods are substitutes. Substitutes are goods that can be used in place of the primary good. The mathematical relationship between the

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price of the substitute and the demand for the good in question is positive. If the price of the substitute goes down the demand for the good in question goes down.

3- Personal Disposable Income: In most cases, the more disposable income (income after tax and receipt of benefits) you have the more likely you are to buy. 4- Tastes or preferences: The greater the desire to own a good the more likely you are to buy the good there is a basic distinction between desire and demand. Desire is a measure of the willingness to buy a good based on its intrinsic qualities. Demand is the willingness and ability to put one's desires into effect. It is assumed that tastes and preferences are relatively constant. 5- Consumer expectations about future prices and income: If a consumer believes that the price of the good will be higher in the future he is more likely to purchase the good now. If the consumer expects that his income will be higher in the future the consumer may buy the good now. 6- Population: If the population grows this means that demand will also increase.

7- Nature of the good: If the good is a basic commodity, it will lead to a higher demand This list is not exhaustive. All facts and circumstances that a buyer finds relevant to his willingness or ability to buy goods can affect demand. For example, a person caught in an unexpected storm is more likely to buy an umbrella than if the weather were bright and sunny.

Demand Curve

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In economics, the demand curve is the graph depicting the relationship between the price of a certain commodity and the amount of it that consumers are willing and able to purchase at that given price. It is a graphic representation of a demand schedule. The demand curve for all consumers together follows from the demand curve of every individual consumer: the individual demands at each price are added together. Demand curves are used to estimate behaviors in competitive markets, and are often combined with supply curves to estimate the equilibrium price and the equilibrium quantity of that market. In a monopolistic market, the demand curve facing the monopolist is simply the market demand curve.

Figure 1 Liner Demand Equation A simple equation can be used to express the relationship between the price of a good and the demand among that good’s consumers. QD = a - bp Example: Pizza restaurant sells 800 piece at 0$, (800 maximum demand), and the demand decrease 60 piece for each 1$. How we can draw the demand liner if we have the following price?:

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P (0, 2, 4, 6, 8, 10). Result: QD = a-bp QD = Quantity Demand a= Autonomous Level of Demand b= Changes in Demand Quantity from Changing the Price. p= Price

QD= 800 – 60(0) = 800, QD= 800 – 60(6) = 440,

QD= 800 – 60(2) = 680, QD= 800 – 60(8) = 320,

QD= 800 – 60(4) = 560 QD= 800 – 60(10)= 200

Figure 2 Effects of Other Factors on Demand If a demand curve measures the effects of price change when all other factors that affect demand are held constant, how can we use demand curve to show the effect of change in one of these other factors, such as the price of beef?

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One solution is to draw the demand curve in three-dimensional diagram with the price of lamb on one axis, the price of beef on a second axis, and the quantity of lamb on the third axis. But just thinking about drawing such a diagram probably makes your head hurt. Economic use a simpler approach to show the effect on demand of a change in a factor that affects demand other than the price of the good. A change in any factor other than the price of the good itself causes a shift of the demand curve than a movement along the demand curve. Many people view beef as a close substitute for lamb. Thus at a given price of a lamb, if the price of beef rises, some people will switch from beef to lamb.

Price D1 D2

3.30

0

176

220 Figure 3

232

Quantity

Figure 3 shows how the demand curve for lamb shifts to the right from the original demand curve D1 to a new demand curve D2 as the price of beef rises from 4.00$ to 4.60$ per Kg. (the quantity axis starts at 176 instead of 0 in the figure to emphasize the relevant portion of the demand curve) on the new demand curve, D2, more lamb is demand at any given price than on D1. At a price of lamb of 3.30$ the quantity of lamb demanded goes from 220 on D1, before the change in the price of beef, to 232 on D2 after the price change.

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The Demand Function In addition to drawing the demand curve, you can right it as a mathematical relationship called the Demand Function. The processed lamb demand function is: Q= D(Pl, Pb, Pc, Y) Where: Q= the quantity of lamb demanded Pl= price of lamb Pb= price of beef Pc= price of chicken Y= consumers income This expression says that the amount of lamb demand varies with the price of lamb, the price of the substitutes (beef and chicken), and the income of consumers. Any other factors that are not listed in the demand function are assumed to be irrelevant. By writing the demand function in this general way, we are not explaining exactly how the quantity demand varies as Pl, Pb, Pc or Y changes. Instead, we can rewrite the equation above as a specific function: Q= 171 – 20Pl + 20Pb + 3Pc + 2Y This is the estimated demand function that corresponds to the demand curve D1 in figure 3. When we drew the demand curve D1 in figure 3, we held Pb, Pc and Y at their typical values during the period studied: Pb= 4$ per 1kg. Pc= 3.3$ per 1 kg. Y=12.5 (thousand dollars) If we substitute these values for Pb, Pc and Y in equation 3 we can write the quantity demand as a function of only the price of lamb:

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Q= 171 – 20p + 20pb + 3pc +2y = 171 – 20p + (20 x 4) + (3 x 3.3) + (2 x 12.5) = 286 – 20p The constant term, 286, in this equation is the quantity demand if the price is zero. Setting the price equal to zero in this equation, we find that the quantity demand is Q=286 – (20 x 0) = 286. This equation also shows us how quantity demanded changes with a change in price: a movement along the demand curve. If the price increase from P1 to P2, the change in price; p = P1 – P2 (The symbol is the Greek letter delta, means “changing in” the following variable, so P means changing in price.) If the price of lamb increase by 1$ from P1 = 3.3$ to P2 = 4.3$, P = 1 and the Q = Q2Q1. More generally, the equation demand at p1 is Q1= D(p1), and the quantity demanded at p2, is Q2= D(p2). The change in the quantity demanded, Q = Q2-Q1 in response to the price change is: Q = Q2 – Q1 = D(p2) – D(p1) = (286 – 20p2) – (286 – 20P1) = -20 (p2-p1) = -20 p. Thus the change in the quantity demanded, Q, is -20 times the change in the price If P = 1$, Q= -20 P = -20.

The slop of a demand curve is P/ , the “Rise”( , the change along in the vertical axis) divided by the “Run” ( , the change along the horizontal axis). Slop = = = = -0.05$ per million kg per year.

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The negative sign of this slope is consistent with the Law of demand. The slope says that the price rises by 1$ per kg as the quantity demanded falls by 20 million kg per year. Turning that statement around: the quantity demanded falls by 20 million kg per year as the price rises by 1$ per kg. Thus we can use the demand curve to answer questions about how a change in price affects the quantity demand and how a change in the quantity demand affects prices.

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