Week 8 Tutorial Micro

Possible Quiz 2
Equilibrium Price and Quantity after changes
Elasticity of Demand

Demand review:

The individual’s demand curve is a plot of the consumer reservation prices.

There are tow broad causes for a shift in the demand curve:
1. Change in the reservation prices of the consumer
a. Change MU of that good
b. Change in MU of ‘other good’
c. Change in price of ‘other good’
2. Change in the quantity demanded at every given price
a. Population growth (more or less consumers in the market)?
b. Has there been a change to income levels?
i. Direction of shift will depend whether the good in question is inferior
or normal
c. Expectation of price movements

Must mention part 1. Or part 2. when explaining why demand increase or decreases.

Supply Review:

The supply curve is a plot of producer reservation prices.

There are two broad causes for a shift in the Supply curve:

1. Change in the reservation prices of the producer

a. Change MC of production
2. Change in the quantity supplied at every given price
a. Are there more or less producers in the market?
b. Expectations of future movements

Question 6.

Part a.

Step one: How is iron ore related to automobiles?

Iron ore is a factor of production of automobiles

Step 2: Impact?
Factor of production has decreased in cost  MC of every unit has decreased.
Step 3: Supply curve or demand curve?
Producer are affected: supply curve

Step 4: Movement along or shift?

Producer reservation prices have changed: shift

Step 5: Which direction?

Producer reservation prices have decreased for each quantity, so outwards shift

Part b.
Step 1: How is red meat related to hamburgers?
To consume a hamburger, the consumer must also consume the red meat.

Step 2: Impact?
The desirability of red meat has a direct relationship with the desirability of hamburgers.
The marginal utility of each hamburger will fall.

Step 3 Supply of demand curve?

Consumers are affected: demand curve

Step 4: Movement along or shift?

Consumer reservation prices have changed: shift

Step 5: which direction?

Consumer reservation prices have decreased for each quantity, so inwards shift