Economics -

Microeco-
nomics
I

Richard
McManus Economics - Microeconomics I:
Demand
The demand curve
Demand, supply and the market
Price elasticity of
demand
Other demand
elasticities

Supply Richard McManus

The supply curve
Price elasticity of
supply
Supply over time
Canterbury Christ Church University
Christ Church Business School
The market
Market equilibrium
Consumer and
producer surplus First Semester 2020/21
Market failures

Richard McManus Economics - Microeconomics I

Economics -
Microeco-
nomics
I

Richard
McManus

Demand Section 1
The demand curve
Price elasticity of
demand
Other demand
elasticities

Supply
Demand
The supply curve
Price elasticity of
supply
Supply over time

The market
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

Economics -
Microeco-
nomics
I

Richard
McManus

Demand
The demand curve
Subsection 1
Price elasticity of
demand
Other demand
elasticities
The demand curve
Supply
The supply curve
Price elasticity of
supply
Supply over time

The market
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 Demand

Economics -
Microeco-
nomics
I
Definition: Effective demand Ceteris paribus
Richard
McManus The amount consumer(s) are willing A Latin phrase meaning ‘with
and able to purchase of a good given other things the same’ or ‘all
Demand
The demand curve a level of price, ceteris paribus. other thing being equal’.
Price elasticity of Economic analysis
demand
Other demand
elasticities
Individual and market demand
Supply
The supply curve • Typically when we talk about ‘demand’ we mean ‘market demand’
Price elasticity of
supply which refers to the total demand for one product.
Supply over time

The market
• This is made up of every individual’s demand.
Market equilibrium
Consumer and
• Macroeconomists also discuss ‘aggregate demand’ which represents
producer surplus
Market failures
total demand within the economy: we will cover this in
Macroeconomics I.

Richard McManus Economics - Microeconomics I

 The relationship between price and demand:
tripartite
Economics -
Microeco-
nomics
The relationship between prices and demand is a central
I concept in economics. It can be explained in the following ways:
Richard
McManus

Demand
Words/intuition Graphically
8/27/13 ch03f01.jpg (1263×750)

The demand curve

Price elasticity of As the price (P ) of a
demand
Other demand
elasticities
product increases
Supply
demand (QD ) for
The supply curve
Price elasticity of
that product
supply
Supply over time
typically falls.
The market
Market equilibrium
Consumer and
Equations
producer surplus
Market failures
QD = a − (b × P );
b > 0.

Richard McManus Economics - Microeconomics I

 Reasons why demand is inversely proportional to
price
Economics -
Microeco- Diminishing marginal utility Definition: utility
nomics
I Demand is assumed to fall when prices rise Utility is a word used
Richard because it is assumed that the more we in Economics to
McManus
consume of something the less we enjoy the describe how much
Demand extra unit of consumption. As such, happiness is derived
The demand curve consumers are less willing to pay for each from consumption of
Price elasticity of
demand additional unit of the good. a good.
Other demand
elasticities

Supply Income and substitution effects

The supply curve
Price elasticity of
There are two effects on demand when prices fall:
supply
Supply over time • Income effect: as a good becomes cheaper individuals become richer
The market as their money can be spent on more products: they therefore
Market equilibrium
demand more.
Consumer and
producer surplus
Market failures
• Substitution effect: if a price of one good falls it will become more
attractive against similar products leading to a switch from the more
expensive to the less expensive good.

Richard McManus Economics - Microeconomics I

 Drawing a demand curve

Economics -
Microeco-
nomics Although in principle we can use words to describe the
I
relationship between prices and demand we typical draw this
Richard
McManus relationship. This is to allow for more in depth analysis when
Demand
more variables are included.
The demand curve
Price elasticity of The demand curve
demand 8/27/13 ch03f01.jpg (1263×750)

Other demand
elasticities

Supply
The supply curve
Price elasticity of
supply
Supply over time

The market
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 Best practice when drawing graphs

Economics -
Microeco- Graph drawing is straight forward, but there are many places
nomics
I where you can go wrong. These are best practice procedures to
Richard avoid mistakes:
McManus
• Always label both axis of the graph (the vertical and
Demand
The demand curve
horizontal lines) and the lines
Price elasticity of
demand • Always use a ruler when drawing straight lines within the
Other demand
elasticities
graph
Supply
The supply curve • Ensure that the graph is sufficiently large to be clear
Price elasticity of
supply
Supply over time
• Use different colours if they add to the ease of reading
The market • If you draw a graph, ensure that it is discussed in prose
Market equilibrium
Consumer and
producer surplus
• If you use abbreviations within the graph (e.g. ‘D’, ‘P’ and
Market failures
‘Qty’) ensure that these do not carry forward into the
prose discussing the graph

Richard McManus Economics - Microeconomics I

 Shifts in the demand curve Shifts

Economics -
Microeco-
nomics
‘Conditional analysis’ - an important concept in economics
I
As discussed above ‘ceteris paribus’ is Latin for ‘all other things being
Richard equal’. This allows us to think about the link between quantity demanded
McManus
and prices in isolation of other things that may also be happening in the
Demand market.
The demand curve
Price elasticity of
demand Other factors which may influence Definitions
Other demand
elasticities (individual and market) demand A pair of substitute goods are
Supply those which are considered by
The supply curve
• Income (current and
Price elasticity of future?) consumers to be alternatives to
supply
each other (e.g. tea and coffee).
Supply over time
• Tastes/preferences
The market
Goods which are complementary
Market equilibrium • The price of substitute are consumed together (e.g. tea
Consumer and
producer surplus goods and a kettle).
Market failures
• The price of complimentary
goods

Richard McManus Economics - Microeconomics I

 Examples of my demand fun concepts

Economics -
Microeco-
nomics
I

Richard
McManus
Ikea rugs Imported glasses
Demand
The demand curve
Price elasticity of
demand
Other demand
elasticities

Supply
The supply curve
Price elasticity of
supply
Supply over time

The market
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 Movements along and shifts in demand curves

Economics -
Microeco-
nomics Movements along and shifts in demand curves Animation
I
Demand can change either because we have moved along a given
Richard
McManus demand curve, or because the demand curve has shifted:
Demand • A movement along a demand curve is due to a change in prices
The demand curve
Price elasticity of
demand
• A shift in demand curve comes from a change in other factors
Other demand Other factors
elasticities

Supply
The supply curve Movement along Shift in
Price elasticity of 8/27/13 ch03f04.jpg (1260×842) 8/27/13 ch03f08.jpg (1618×689)

supply
Supply over time

The market
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 Examples of a shift in demand curves

Economics -
Microeco-
nomics
I

Richard
McManus This is a popular topic to be discussed and one which
Demand frequently comes up in assessment. Potential positive
The demand curve
Price elasticity of
(up-and-right) shifts in demand could come from:
demand
Other demand • An increase in income
elasticities

Supply • An improvement of preferences

The supply curve
Price elasticity of
supply
• A rise in the price of a substitute good
Supply over time
• A fall in the price of a complimentary good
The market
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 Aggregating demand curves

Economics -
Microeco-
• We can aggregate individual’s demand curves to get
nomics
I
product/market demand
Richard • We can aggregate similar product’s demand curves to get
McManus
market demand
Demand • When we aggregate demand we add across individual quantities
The demand curve
Price elasticity of
demand
demanded given a certain price: we add ‘horizontally’
Other demand
elasticities
Aggregating demand
Supply 8/27/13 ch03f09.jpg (1634×652)

The supply curve

Price elasticity of
supply
Supply over time

The market
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 Fun concepts in demand my examples

Economics -
Microeco-
nomics
I Definition: normal and inferior goods
Richard
McManus A normal good is one where a rise in income would lead to a
Demand
rise in demand. An inferior good is one where a rise in income
The demand curve leads to a fall in demand.
Price elasticity of
demand
Other demand
Example: inferior goods
elasticities

Supply
The supply curve Definition: ordinary and Veblen goods
Price elasticity of
supply
Supply over time
An ordinary good is one where a rise in price leads to a fall in
The market
demand. A veblen good is one where a rise in price leads to a
Market equilibrium
Consumer and
rise in demand.
producer surplus
Market failures
Examples: ordinary goods , Veblen goods

Richard McManus Economics - Microeconomics I

Economics -
Microeco-
nomics
I

Richard
McManus

Demand Subsection 2
The demand curve
Price elasticity of
demand
Other demand
elasticities
Price elasticity of demand
Supply
The supply curve
Price elasticity of
supply
Supply over time

The market
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 Price elasticity of demand: economic tripartite

Economics -
Microeco-
nomics Intuition
I
The price elasticity of demand (P εD ) describes the sensitivity of the
Richard
McManus amount of a good demanded (QD ) to changes in the price (P ) of
that good.
Demand
The demand curve
Price elasticity of
demand
Other demand
elasticities Equation Graph
8/27/13 ch04f05.jpg (1620×964)
Supply
%∆QD
The supply curve
P εD =
Price elasticity of
supply %∆P
Supply over time
Where ∆ represents ‘a
The market
Market equilibrium
change in’. Typically
Consumer and
producer surplus
P εD < 0 as when
Market failures
P ↑⇒ QD ↓. Maths Reminders

Richard McManus Economics - Microeconomics I

 Price inelastic and price elastic demand

Economics -
Microeco-
nomics
We often describe P εD using either the expression ‘inelastic’ or
I ‘elastic’. Price inelastic demand:
Richard
McManus • Demand is not very sensitive to prices (e.g. water,
Demand cigarettes)
The demand curve
Price elasticity of • 0 > P εD > −1
demand
Other demand
elasticities
• The demand curve is steep
Supply
The supply curve
Price elastic demand:
Price elasticity of
supply • demand is very sensitive to prices (e.g. bread, pencils)
Supply over time

The market
• P εD < −1
Market equilibrium
Consumer and
• The demand curve is not steep (shallow)
producer surplus
Market failures
We also have ‘unit elastic demand’ where prices and quantities
change in the same proportion (P εD = −1). Animation

Richard McManus Economics - Microeconomics I

 Price elasticity along the demand curve

Economics -
Microeco-
As prices get lower demand is typically assumed to become
nomics
I
more price inelastic (e.g. my rugs and glasses).
Richard
McManus
Price elasticity along the demand curve
8/27/13 ch04f03.jpg (1242×854)

Demand
The demand curve
Price elasticity of
demand
Other demand
elasticities

Supply
The supply curve
Price elasticity of
supply
Supply over time

The market
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 Price elasticity along the demand curve

Economics -
Microeco-
As prices get lower demand is typically assumed to become
nomics
I
more price inelastic (e.g. my rugs and glasses).
Richard
McManus
Price elasticity along the demand curve
8/27/13 ch04f04.jpg (946×718)

Demand
The demand curve
Price elasticity of
demand
Other demand
elasticities

Supply
The supply curve
Price elasticity of
supply
Supply over time

The market
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 Typical determinants of price elasticity

Economics -
Microeco-
nomics
I
• The nature of the product
Richard • Is the product a necessity? Do we need to consume it?
McManus
• Competition in the market - the awareness and availability
Demand of alternatives
The demand curve
Price elasticity of • Can we just move our consumption to a rival competitor?
demand
Other demand
elasticities
• The proportion of income spent on the product
Supply • The more we spend on a good the greater the income
The supply curve
Price elasticity of
effect of a change in price will be for the good
supply
Supply over time • The time horizon
The market • Can we adjust our spending habits over time? (e.g. oil,
Market equilibrium
Consumer and coffee)
producer surplus
Market failures • Who is paying for the product? example

Richard McManus Economics - Microeconomics I

 Price elasticity of demand and total revenue

Economics - Total revenue (T R) is measured by the product of prices (P ) and qunatity

Microeco-
nomics
(Qty). It will move with price changes in the following:

I • Elastic - ↑ P ⇒ QD y ⇒ T R ↓
Richard
x
McManus
• Inelastic - P ⇒ QD ↓⇒ T R ↑
Graphically, revenue can be shown by:
8/27/13 ch04f06.jpg (1030×695)
Demand
The demand curve
Price elasticity of
demand
Other demand
elasticities

Supply
The supply curve
Price elasticity of
supply
Supply over time

The market
Market equilibrium
Consumer and
producer surplus
Market failures

Summary

Richard McManus Economics - Microeconomics I

Economics -
Microeco-
nomics
I

Richard
McManus

Demand
The demand curve
Example
Price elasticity of
demand
Other demand
Price elasticity of demand
elasticities

Supply
The supply curve
Price elasticity of
supply
Supply over time

The market
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 Question 1
Price elasticity of demand example questions

Economics -
Microeco-
nomics
I

Richard Question
McManus
If the price of a good decreases by 10% and subsequently the
Demand
The demand curve
quantity demanded for that good increases by 15%, what is the
Price elasticity of
demand price elasticity of demand? (give you answer to two decimal
Other demand
elasticities places)
Supply
The supply curve
Price elasticity of
supply
Answer
Supply over time
%∆QD 15
The market P εD = = = −1.50
Market equilibrium
Consumer and
%∆P −10
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 Price elasticity of demand example questions

Economics -
Microeco- Question
nomics
I If the price of a good increases from £10.00 to £10.50 and
Richard subsequently the quantity demanded falls from 300 units to 270
McManus
units, what is the price elasticity of demand? (give you answer to two
Demand decimal places)
The demand curve
Price elasticity of
demand
Answer
Other demand
elasticities
%∆QD
Supply P εD =
The supply curve %∆P
Price elasticity of
supply
Supply over time 270 − 300 −30
%∆QD = = = −10%
The market 300 300
Market equilibrium
Consumer and
producer surplus 10.50 − 10.00 0.5
Market failures %∆P = = = 5%
10.00 10
−10
P εD = = −2.00
Richard McManus
5
Economics - Microeconomics I
 Price elasticity of demand example questions

Economics -
Microeco-
nomics
I

Richard Question
McManus
If the price elasticity of demand is -2.00, what percentage decrease in
Demand quantity demanded will there be if there is a 15% rise in price? (give
The demand curve
Price elasticity of
your answer to one decimal place)
demand
Other demand
elasticities

Supply
Answer
The supply curve
%∆QD
Price elasticity of
supply P εD = ⇔ %∆QD = P εD × %∆P
Supply over time %∆P
The market
Market equilibrium
Consumer and
%∆QD = −2.00 × 15 = −30.0%
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 Price elasticity of demand example questions

Economics -
Microeco- Question
nomics
I 500 units of product are sold at a price of £10.00. If the price elasticity of
Richard demand is -1.80 and a price cut leads to an additional 25 units being sold,
McManus
what is the new price? (give you answer to the nearest penny)
Demand
The demand curve
Price elasticity of
Answer
demand
Other demand %∆QD %∆QD
elasticities P εD = ⇔ %∆P =
Supply
%∆P P εD
The supply curve
525 − 500
Price elasticity of
%∆QD = = 5%
supply
Supply over time
500
The market %∆QD 5
Market equilibrium %∆P = = = −2.78%
Consumer and
P εD −1.8
producer surplus
Market failures
10.00 × (1 − 0.0278) = 9.72
£9.72

Richard McManus Economics - Microeconomics I

 Income elasticity of demand

Economics -
Microeco- Definition: income elasticity of demand
nomics
I Income elasticity of demand (Y εD ) measures the responsiveness of
Richard the quantity demanded of a good to changes in income (Y ):
McManus

%∆QD
Demand Y εD =
The demand curve %∆Y
Price elasticity of
demand
Other demand
elasticities Sign and size
Supply The sign of income elasticity of demand informs us of the type of
The supply curve
Price elasticity of good:
supply
Supply over time
• Y εD > 0: Y ↑⇒ QD ↑ (‘normal good’)
The market
Market equilibrium • Y εD < 0: Y ↑⇒ QD ↓ (‘inferior good’)
Consumer and
producer surplus
Market failures The size tells us how responsive it is - a large number (positive or
negative) means the quantity demanded is very sensitive to changes
in income.
Richard McManus Economics - Microeconomics I
 Cross price elasticity of demand

Economics -
Microeco-
nomics Definition: cross price elasticity
I

Richard
The cross price elasticity (CεDab ) of a good states how sensitive the
McManus quantity demanded (QDa ) in that good is sensitive to changes in the price
of another good (Pb ):
Demand
The demand curve
%∆QDa
Price elasticity of
CεDab =
demand
Other demand
%∆Pb
elasticities

Supply
The supply curve
Sign and size
Price elasticity of
supply The sign of cross price elasticity of demand informs us of the type of goods
Supply over time
we have:
The market
Market equilibrium
• CεDab > 0: Pb ↑⇒ QDa ↑ (‘substitute goods’)
Consumer and
producer surplus • CεDab < 0: Pb ↑⇒ QDa ↓ (‘complementary goods’)
Market failures

The size tells us how responsive it is.

Richard McManus Economics - Microeconomics I

Economics -
Microeco-
nomics
I

Richard
McManus

Demand
The demand curve
Example
Price elasticity of
demand
Other demand
Income elasticity of demand
elasticities

Supply
The supply curve
Price elasticity of
supply
Supply over time

The market
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 Income elasticity of demand example

Economics -
Microeco-
nomics
I Question
Richard Suppose an individual’s income increases from £16,000 to £20,000.
McManus
Calculate the income elasticity of demand for the following products:
Demand • Product A: Quantity demanded increases from 2,000 units to 2,100
The demand curve
Price elasticity of units;
demand
Other demand • Product B: Quantity demanded falls from 3,000 units to 2,400 units.
elasticities

Supply
The supply curve
Answer
Price elasticity of
supply
Supply over time %∆QD,A 5
Y εD = = = 0.2
The market %∆Y 25
Market equilibrium
Consumer and %∆QD,B −20
producer surplus Y εD = = = −0.8
Market failures %∆Y 25

Richard McManus Economics - Microeconomics I

Economics -
Microeco-
nomics
I

Richard
McManus

Demand
The demand curve
Intuition
Price elasticity of
demand
Other demand
Elasticities of demand
elasticities

Supply
The supply curve
Price elasticity of
supply
Supply over time

The market
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 Elasticities intuitive summary

Economics -
Microeco-
nomics
I

Richard
McManus The price elasticity of demand measures how sensitive demand is to
changes in prices which is very important for anybody in a transaction to
Demand
The demand curve
know. All elasticities are telling us is how sensitive demand and supply is to
Price elasticity of
demand
other factors. The key questions to ask are:
Other demand
elasticities 1 What is an elasticity measuring?
Supply 2 What sorts of goods would you expect to have different elasticity
The supply curve
Price elasticity of
values (a high/low elasticity or a positive/negative elasticity)?
supply
Supply over time 3 Why is this important?
The market
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 Elasticities intuitive examples
Examples of when demand elasticities might be useful:
Economics -
Microeco-
• Say you are trying to sell a product. If you know somebody is very
nomics price insensitive, you are likely to bargain from a higher price ⇒ this
I
is just an extension of price elasticity of demand.
Richard
McManus • Say we are selling something which is addictive and once tried
consumers will be very price insensitive. If we know this, we can offer
Demand
The demand curve
a cheap/free first taste, and then start charging them high prices
Price elasticity of once they get addicted.
demand
Other demand • Say we are selling two goods: one which is price demand elastic and
elasticities
one which is price demand inelastic. We know that if for some reason
Supply
The supply curve
there is a price increase (an increase in raw materials) we are more
Price elasticity of
supply
exposed to losses with respect to the first good than the second good.
Supply over time • Say we sell an ‘inferior good’: we know that if the economy and
The market incomes improve we are going to lose customers.
Market equilibrium
Consumer and
• Say we are selling an ‘inferior good’: one way of removing the risk of
producer surplus
Market failures
the above would be to start selling second good which has a positive
income elasticity. This is known as diversifying our risk - the
economy increases, we sell more of our normal good, the economy
decreases, we selling more of our inferior good - we win both ways.
Richard McManus Economics - Microeconomics I
Economics -
Microeco-
nomics
I

Richard
McManus

Demand
Section 2
The demand curve
Price elasticity of
demand
Other demand
elasticities
Supply
Supply
The supply curve
Price elasticity of
supply
Supply over time

The market
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 Supply

Economics -
Microeco-
nomics
I

Richard
McManus
Definition: (effective) supply
Demand Effective supply is the amount producer(s) are willing and able to supply of
The demand curve
Price elasticity of
a good given a level of price, ceteris paribus.
demand
Other demand
elasticities
Individual and market supply
Supply
The supply curve Typically we talk about market supply (we also discuss ‘aggregate supply’
Price elasticity of
supply but we will come to this in the Macroeconomics I block) but supply may
Supply over time
also refer to a single firm or individual.
The market
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 The relationship between price and supply:
tripartite
Economics -
Microeco-
nomics
I The relationship between prices and supply is a central concept in
Richard economics. It can be explained in the following ways:
McManus

Demand Intuition Graphically

The demand curve 8/27/13 ch05f01.jpg (1189×734)

Price elasticity of
demand
As the price (P ) of a product
Other demand
elasticities
increases supply (QS ) of that
product also typically
Supply
The supply curve increases.
Price elasticity of
supply
Supply over time
Equations
The market
Market equilibrium QS = a + (b × P );
Consumer and
producer surplus
b > 0.
Market failures

Richard McManus Economics - Microeconomics I

 Other factors influencing supply Shifts

Economics -
Microeco-
nomics
I Other factors which will influence (individual and market) supply:
Richard • A change in technology
McManus
• A change in the costs of inputs/cost structures
Demand
The demand curve • The profitability of alternative products
Price elasticity of
demand
Other demand
• Labour supply (e.g. athletes, bankers) GaryNeville
elasticities
• Goods in joint supply (e.g. oil)
Supply
The supply curve • Nature/random (exogenous) shocks/unpredictable events (e.g.
Price elasticity of
supply weather and farming/building/retail/etc.)
Supply over time
• Government legislation
The market
Market equilibrium
• Market supply will be affected by the number of producers in the
Consumer and
producer surplus
market
Market failures

Richard McManus Economics - Microeconomics I

 Movements along and shifts in supply curves

Economics -
Microeco-
Movements along and shifts in supply curves
nomics
I Supply can change either because we have moved along a given supply
Richard
curve, or because the supply curve has shifted:
McManus • A movement along a supply curve is due to a change in prices
Demand • A shift in supply curve comes from a change in other factors
The demand curve Other factors
Price elasticity of
demand
Other demand
elasticities Movement along Shift in
8/27/13 ch05f01.jpg (1189×734) 8/27/13 ch05f04.jpg (1104×825)

Supply
The supply curve
Price elasticity of
supply
Supply over time

The market
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 Aggregating supply curves

Economics -
Microeco-
nomics • We can aggregate individual firm’s supply curves to get market supply
I
• When we aggregate supply we add across individual quantities given
Richard
McManus a certain price: we add ‘horizontally’

Demand Aggregating supply

The demand curve 8/27/13 ch05f05.jpg (1641×674)

Price elasticity of
demand
Other demand
elasticities

Supply
The supply curve
Price elasticity of
supply
Supply over time

The market
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 Price elasticity of supply

Economics -
Microeco- Definition: price elasticity of supply
nomics
I The price elasticity of supply (P εS ) measures the responsiveness of
Richard supply (QS ) to price (P ) changes. Algebraically:
McManus

%∆QS
Demand P εS =
The demand curve %∆P
Price elasticity of
demand
Other demand
Graphically it is shown by the slope of the supply curve.
elasticities
Note typically we assume P εS > 0 as we think when P ↑⇒ QS ↑.
Supply
The supply curve
Price elasticity of
supply
Price elastic and price inelastic supply
Supply over time
• Price inelastic supply is when supply is unresponsive to
The market
Market equilibrium movements in price (0 < P εS < 1, e.g sports events,
Consumer and
producer surplus universities).
Market failures

• Price elastic supply is when supply is very responsive to

movements in price (P εS > 1).

Richard McManus Economics - Microeconomics I

 Supply over time

Economics - 8/27/13 ch05f06.jpg (1625×1552

Microeco-
nomics
I

Richard
McManus

Demand
The demand curve
Price elasticity of
demand
Other demand
elasticities

Supply
The supply curve
Price elasticity of
supply
Supply over time

The market
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

Economics -
Microeco-
nomics
I

Richard
McManus

Demand
The demand curve
Example
Price elasticity of
demand
Other demand
Price elasticity of supply
elasticities

Supply
The supply curve
Price elasticity of
supply
Supply over time

The market
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 Price elasticity of supply example

Economics -
Microeco-
nomics
I

Richard Note the similarities of the price elasticity of demand and supply and
McManus therefore you can use the examples from there .
Demand
The demand curve
Question
Price elasticity of
demand If the price increases by 5% and the quantity supplied increases by 5%,
Other demand
elasticities
what is the value of the price elasticity of supply?
Supply
The supply curve
Price elasticity of
Answer
supply
Supply over time %∆QS 5
P εS = = =1
The market %∆P 5
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

Economics -
Microeco-
nomics
I

Richard
McManus

Demand Section 3
The demand curve
Price elasticity of
demand
Other demand
elasticities
The market
Supply
The supply curve
Price elasticity of
supply
Supply over time

The market
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 The market and equilibrium

Economics -
Microeco-
nomics
I

Richard
McManus
Definitions (from Gillespie)
Demand
The demand curve A market occurs when buyers and sellers interact to exchange goods and
Price elasticity of
demand services.
Other demand
elasticities
Equilibrium occurs in a market when the quantity supplied equals the
Supply
quantity demanded and there is no incentive for this position to change.
The supply curve In a free market equilibrium is reached by changes in the price (the
Price elasticity of
supply invisible hand).
Supply over time

The market
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 Graphical representation

Economics -
Microeco-
nomics
I Demand & supply diagram Market clearing
8/27/13 ch06f01.jpg (1044×807)

Richard The price P2 is also

McManus
known as the market
Demand
clearing price, as it is
The demand curve the price that ensures
Price elasticity of
demand the market clears.
Other demand
elasticities

Supply
The supply curve
Price elasticity of
supply
Supply over time

The market
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 Prices and the invisible hand

Economics -
Microeco-
nomics
I
Excess demand The invisible hand
Richard 8/27/13 ch06f02.jpg (1072×815)

McManus -P > PE ⇒ QD <

QS ⇒P ↓
Demand
The demand curve
-P < PE ⇒ QD >
Price elasticity of
demand
QS ⇒P ↑
Other demand
elasticities

Supply
The supply curve
Price elasticity of
supply
Supply over time

The market
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 Prices and the invisible hand

Economics -
Microeco-
nomics
I
Excess supply The invisible hand
8/27/13 ch06f01.jpg (1044×807)
Richard
McManus -P > PE ⇒ QD <
QS ⇒P ↓
Demand
The demand curve
-P < PE ⇒ QD >
Price elasticity of
demand
QS ⇒P ↑
Other demand
elasticities Animation
Supply
The supply curve
Price elasticity of
supply
Supply over time

The market
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 A shift in demand

Economics -
Microeco- A 8/27/13
shift in demand
nomics ch06f03.jpg (1429×908)
I

Richard
McManus

Demand
The demand curve
Price elasticity of
demand
Other demand
elasticities

Supply
The supply curve
Price elasticity of
supply
Supply over time

The market
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 A shift in demand

Economics -
Microeco-
nomics The importance of elasticity
I 8/27/13 ch06f05.jpg (1277×1521)

Richard
McManus

Demand
The demand curve
Price elasticity of
demand
Other demand
elasticities

Supply
The supply curve
Price elasticity of
supply
Supply over time

The market
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 A shift in supply

Economics -
Microeco- A shift in supply
nomics 8/27/13 ch06f06.jpg (1193×937)
I

Richard
McManus

Demand
The demand curve
Price elasticity of
demand
Other demand
elasticities

Supply
The supply curve
Price elasticity of
supply
Supply over time

The market
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 A shift in supply

Economics -
Microeco- The importance of elasticity
nomics 8/27/13 ch06f07.jpg (1271×1572)

Richard
McManus

Demand
The demand curve
Price elasticity of
demand
Other demand
elasticities

Supply
The supply curve
Price elasticity of
supply
Supply over time

The market
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 Summary

Economics -
Microeco-
nomics
I

Richard
McManus Summary of demand and supply shifts and their impact on prices and
quantities:
Demand
The demand curve Supply
Price elasticity of
demand None Increase Decrease
Demand

Other demand
elasticities None N/A P ↓; Q ↑ P ↑; Q ↓
Supply Increase P ↑; Q ↑ P ?; Q ↑ P ↑; Q?
The supply curve Decrease P ↓; Q ↓ P ↓; Q? P ?; Q ↓
Price elasticity of
supply
Supply over time The question mark symbol (‘?’) has been used to identify ambiguous movements.
The market Summary1 Summary2
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

Economics -
Microeco-
nomics
I

Richard
McManus

Demand
The demand curve
Example
Price elasticity of
demand
Other demand
Market analysis - shifts in curves
elasticities

Supply
The supply curve
Price elasticity of
supply
Supply over time

The market
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 Market analysis - shifts in curves example

Economics -
Microeco- Question
nomics
I Using a supply and demand diagram illustrate the impact of a decrease in
Richard the price of a complimentary good.
McManus

Demand Answer
The demand curve
Price elasticity of
demand Effect of a shift in the demand curve
Other demand P
elasticities
S

Supply
The supply curve
Price elasticity of
supply
Supply over time g
Pe1

The market
Market equilibrium
Consumer and
producer surplus
D1
Market failures
O Qe1 Q

Richard McManus Economics - Microeconomics I

 Market analysis - shifts in curves example

Economics -
Microeco- Question
nomics
I Using a supply and demand diagram illustrate the impact of a decrease in
Richard the price of a complimentary good.
McManus

Demand Answer
The demand curve
Price elasticity of
demand Effect of a shift in the demand curve
Other demand P
elasticities
S

Supply
The supply curve
Price elasticity of
supply
Supply over time g
Pe1

The market
Market equilibrium
Consumer and D2
producer surplus
D1
Market failures
O Qe1 Q

Richard McManus Economics - Microeconomics I

 Market analysis - shifts in curves example

Economics -
Microeco- Question
nomics
I Using a supply and demand diagram illustrate the impact of a decrease in
Richard the price of a complimentary good.
McManus

Demand Answer
The demand curve
Price elasticity of
demand Effect of a shift in the demand curve
Other demand P
elasticities
S

Supply
The supply curve
i
Price elasticity of Pe2
supply
Supply over time g h
Pe1

The market
Market equilibrium
Consumer and D2
producer surplus
D1
Market failures
O Qe1 Qe2 Q

Richard McManus Economics - Microeconomics I

Economics -
Microeco-
nomics
I

Richard
McManus

Demand
The demand curve
Intuition
Price elasticity of
demand
Other demand
Market analysis
elasticities

Supply
The supply curve
Price elasticity of
supply
Supply over time

The market
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 Market analysis intuition

Economics -
Microeco-
nomics
I
The key element with market equilibriums shifting is separating out cause
Richard
McManus and effect. Say for example a product is seen by a popular celebrity and
then overnight the demand for that good increases. Intuitively, a number
Demand
of things are going to happen:
The demand curve
Price elasticity of
demand
• Prices will increase as consumers are willing to pay more for the good
Other demand
elasticities
and therefore suppliers can get away for supplying it at more;
Supply • If prices increase, supply is likely to increase as new suppliers enter
The supply curve
Price elasticity of
the market and existing suppliers produce more;
supply
Supply over time
• People will demand more as this was what was happening in the first
The market place ⇒ the product was seen with the celebrity and therefore more
Market equilibrium people wanted to have it.
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 Market analysis intuition

Economics -
Microeco-
nomics
I Here the cause is the product being seen by the celebrity. This lead
Richard to demand increasing, meaning that more of the good was demanded
McManus by consumers at any given price. This lead to more supply as it is
Demand
now more profitable to sell.
The demand curve
Price elasticity of
Put differently: Demand ↑ shifted ⇒ Movement along the supply
demand
Other demand
curve ⇒ Price ↑ ⇒ Quantity ↑. The demand and supply model allows
elasticities
us to view this intuition in a diagrammatical form. Moreover, through
Supply
The supply curve
considering the elasticities of demand and supply we can consider
Price elasticity of
supply
how much these shifts will alter prices and quantities respectively.
Supply over time
Through formalising the model in this way it allows us to address
The market
Market equilibrium
relatively complex issues into easy pieces (how often do you hear ‘its
Consumer and
producer surplus
simple demand and supply’ ? This is just reflecting how easily the
Market failures model has been adopted.

Richard McManus Economics - Microeconomics I

Economics -
Microeco-
nomics
I

Richard
McManus

Demand Subsection 2
The demand curve
Price elasticity of
demand
Other demand
elasticities Consumer and producer surplus
Supply
The supply curve
Price elasticity of
supply
Supply over time

The market
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 Consumer surplus

Economics -
Microeco-
nomics
I

Richard
McManus Consumer surplus: Graphical representation
9/5/13 ch07f02.jpg (1035×717)

definition
Demand
The demand curve Consumer surplus is
Price elasticity of
demand the difference between
Other demand
elasticities
the maximum price a
Supply
consumer is willing to
The supply curve pay and the actual
Price elasticity of
supply
price paid.
Supply over time

The market
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 Producer surplus

Economics -
Microeco-
nomics
I

Richard
McManus Producer surplus: Graphical representation
9/5/13 ch07f03.jpg (1039×739)

definition
Demand
The demand curve Producer surplus is
Price elasticity of
demand
the difference between
Other demand
elasticities
the minimum price a
producer is willing to
Supply
The supply curve
supply at and the
Price elasticity of
supply
actual price paid in
Supply over time the market.
The market
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 Consumer surplus, producer surplus and
equilibrium: graphical representation
Economics -
Microeco-
nomics Consumer surplus, producer surplus and equilibrium: graphical
I
representation
Richard 9/5/13 ch07f04.jpg (1640×853)
McManus

Demand
The demand curve
Price elasticity of
demand
Other demand
elasticities

Supply
The supply curve
Price elasticity of
supply
Supply over time

The market
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 Economic concepts of efficiency

Economics -
Microeco-
nomics
I When economist talk of ‘efficiency’ what they mean is finding the outcome
Richard
which maximises the overall ‘surplus’ in a transaction/economy as this is a
McManus measure of total welfare.
Demand
• A free market (let agents act the way they want) provides the most
The demand curve surplus providing all costs and benefits and internalised and there is
Price elasticity of
demand perfect knowledge
Other demand
elasticities • That is to say, if you want the most efficient world where happiness is
Supply maximised, markets should be allowed to operate freely.
The supply curve
Price elasticity of • This is an important concept in economics and is proved under
supply
Supply over time reasonably constraining assumptions.
The market • If these assumptions are wrong we are said to have ‘market failure’
Market equilibrium
Consumer and where a potential improvement is possible compared to the free
producer surplus
Market failures
market.

Richard McManus Economics - Microeconomics I

 Government intervention

Economics -
Microeco-
nomics
I

Richard
McManus Government objectives
Frequently government intervention is observed in markets by governments
Demand
The demand curve seeking the objectives of:
Price elasticity of
demand • Social efficiency: social benefits and costs may differ from the private
Other demand
elasticities ones which may therefore lead to a different optimal equilibrium.
Supply • Equity: is the equilibrium achieved by free markets perceived to be
The supply curve
Price elasticity of ‘fair’ ?
supply
Supply over time • General equilibrium: when looking at all markets is social efficiency
The market reached?
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 Externalities

Economics -
Microeco- Externalities
nomics
I Externalities occur within a market when the private cost and/or the
Richard private benefit are different from those experienced by the whole society.
McManus Whereas the optimum allocation when there are no externalities is where
Demand
the private marginal costs (M C, which is represented by supply) are equal
The demand curve to the private marginal benefits (M B, which is represented by demand),
Price elasticity of
demand
when externalities occur this optimum allocation is given where the
Other demand
elasticities
marginal social cost (M SC) is equal to the marginal social benefit (M SB).
Supply
The supply curve
Price elasticity of
Types of externalities
supply
Supply over time • Pollution in the production process (M SC > M C)
The market • Smoking (M SB < M B)
Market equilibrium
Consumer and
producer surplus
• Use of public transport (M SB > M B)
Market failures
• Gardening (M SB > M B)
• Animation

Richard McManus Economics - Microeconomics I

 Public goods (M SB > M B)

Economics -
Microeco-
nomics
I
Definition: public good
Richard A public good is one where consumption by one individual allows all
McManus individuals to consume. There are two key features:
Demand • Non-rivalry: consumption by one does not reduce the amount
The demand curve
available to others
Price elasticity of
demand
Other demand
• Non-excludability: consumption by one does not exclude
elasticities
consumption by another
Supply
The supply curve Examples: fresh air; knowledge; national defence
Price elasticity of
supply
Supply over time
The free rider problem
The market
Market equilibrium Due to non-excludability public goods suffer from the free rider problem as
Consumer and
producer surplus individuals will rely on others’ consumption. This will lead to
Market failures
under-consumption, and in extreme circumstances non-consumption.

Richard McManus Economics - Microeconomics I

 Externalities and levels of consumption

Economics -
Microeco-
nomics
I

Richard
McManus Due to private agents only considering private benefits and costs the free
market will not allocate resources reflecting the social optimum.
Demand
The demand curve
Price elasticity of Externality Mis-allocation
demand
Other demand External costs of production (M SC > M C) Over-production
elasticities
External benefits of production (M SC < M C) Under-production
Supply
External costs of consumption (M SB < M B) Over-consumption
The supply curve
Price elasticity of External benefit of consumption (M SB > M B) Under-consumption
supply
Supply over time
Remember, marginal costs in the market are represented by ‘supply’ and
The market
marginal benefits are represented by ‘demand’.
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 Consumption externalities: graphical representation

Economics -
Microeco- Consumption externalities
nomics
I
External costs and benefits in consumption
Richard
McManus

Demand
The demand curve
Price elasticity of

Costs and benefits (£)

Costs and benefits (£)

demand
Other demand External benefit
elasticities

Supply External cost

The supply curve P S P S
Price elasticity of MSB
supply
Supply over time MB
MB
The market MSB
Market equilibrium
O O Q1 Q2
Consumer and Q2 Q1
producer surplus
Car miles Rail miles
Market failures

(a) External costs (b) External benefits

Richard McManus Economics - Microeconomics I

 Production externalities: graphical representation

Economics -
Microeco-
nomics Production externalities
I

Richard
External costs and benefits in production
McManus

Demand MSC MC = S MC = S MSC

The demand curve
Price elasticity of

Costs and benefits (£)

demand
Costs and benefits (£)

Other demand
elasticities
External benefit
Supply
P D P D
The supply curve
Price elasticity of External cost
supply
Supply over time

The market
Market equilibrium
O Q2 Q1 O
Consumer and Q1 Q2
producer surplus Quantity Quantity
Market failures

(a) External costs (b) External benefits

Richard McManus Economics - Microeconomics I

 Other forms of market failure

Economics -
Microeco-
nomics
I

Richard
McManus • Monopoly power
Demand • To discuss in Microeconomics II
The demand curve
Price elasticity of • Macroeconomic objectives
demand
Other demand
elasticities • To discuss in Macroeconomics II
Supply • Uncertainty and knowledge
The supply curve
Price elasticity of
supply
• Protecting people’s interests
Supply over time
• Principal agent problem
The market
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 Types of government intervention

Economics -
Microeco-
nomics
I

Richard
McManus

Demand • Taxes and subsidies - ‘internalise’ the social costs and benefits
The demand curve examples below
Price elasticity of
demand
Other demand
• Laws and regulations
elasticities
• Changes in property rights RobertCoase
Supply
The supply curve • Direct provision
Price elasticity of
supply
Supply over time

The market
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 The problem of government intervention

Economics -
Microeco-
nomics
I

Richard • Shortages and surpluses (potential excess demand and supply)

McManus
• Poor information
Demand
The demand curve • Bureaucracy
Price elasticity of
demand • Market incentives ⇒ market efficiency
Other demand
elasticities
• Political (ideological) movements
Supply
The supply curve • Freedom
Price elasticity of
supply
Supply over time
The introduction of politics into economic policy is never ideal and raises
issues on grounds other than economic efficiency. These are themes which
The market
Market equilibrium we will become more apparent throughout the module.
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 Using taxes in externalities back

Economics -
Microeco-
nomics
I
Using taxes to correct a market failure
Using taxes to correct a market distortion
Richard MSC
McManus MC = S

Demand Costs and benefits

The demand curve
Price elasticity of
demand
Other demand
elasticities
P D
Supply
The supply curve External cost
Price elasticity of
supply
Supply over time

The market
Market equilibrium
Consumer and
producer surplus O Q1
Market failures
Quantity

Richard McManus Economics - Microeconomics I

 Using taxes in externalities back

Economics -
Microeco-
nomics Using taxes to correct a market failure
I Using taxes to correct a market distortion
Richard MSC
McManus MC = S

Demand
Optimum tax = MSC – MC
Costs and benefits
The demand curve
Price elasticity of
demand
Other demand
elasticities
P D
Supply
The supply curve
Price elasticity of
supply MC
Supply over time

The market
Market equilibrium
Consumer and
producer surplus
O Q2 Q1
Market failures
Quantity

Richard McManus Economics - Microeconomics I

 Using subsidies in externalities back

Economics -
Microeco-
nomics
I
Using subsidies toUsing
correct a market failure
subsidies to correct a market distortion
Richard MC = S
McManus MSC

Demand Costs and benefits

The demand curve
Price elasticity of
demand
External benefit
Other demand
elasticities
P D
Supply
The supply curve
Price elasticity of
supply
Supply over time

The market
Market equilibrium
Consumer and
producer surplus
O Q1
Market failures
Quantity

Richard McManus Economics - Microeconomics I

 Using subsidies in externalities back

Economics -
Microeco-
nomics
I Using subsidies toUsing
correct a markettofailure
subsidies correct a market distortion
Richard MC = S
McManus MSC

MC
Demand Costs and benefits
The demand curve
Optimum subsidy
Price elasticity of
demand = MC – MSC
Other demand
elasticities
P D
Supply
The supply curve
Price elasticity of
supply
Supply over time

The market
Market equilibrium
Consumer and
producer surplus
O Q1 Q2
Market failures
Quantity

Richard McManus Economics - Microeconomics I

Economics -
Microeco-
nomics
I

Richard
McManus

Demand
The demand curve
Intuition
Price elasticity of
demand
Other demand
Market failure
elasticities

Supply
The supply curve
Price elasticity of
supply
Supply over time

The market
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 Market failure intuition

Economics -
Microeco-
nomics
I

Richard
McManus
When all benefits and costs are internalised between the two parties within
Demand
a transaction, and when appropriate property rights are assigned (who
The demand curve owns what) then ⇒ free markets are optimal ⇒ self-interested agents
Price elasticity of
demand will come together for mutually beneficial transactions ⇒ government
Other demand
elasticities
interference could not improve the situation.
Supply
The supply curve There might be a desire for more equitable outcomes (less inequality) but
Price elasticity of
supply this can be best served through some ‘lump-sum’ tax which does not
Supply over time
interfere with other incentives.
The market
Market equilibrium
Consumer and
producer surplus
Market failures

Richard McManus Economics - Microeconomics I

 Market failure intuition

Economics - However, this happy equilibrium is said to ‘fail’ if the strong

Microeco-
nomics assumptions of all costs and benefits being internalised between the
I
two parties, or inappropriate property rights. Moreover, if there is a
Richard lack of knowledge in the market it is said to fail.
McManus
Under these circumstances government intervention could improve
Demand
The demand curve
the outcomes.
Price elasticity of
demand
Such scenarios might include:
Other demand
elasticities • My consumption of deodorant has a positive impact on you ⇒
Supply there is an externality which if I don’t internalise I might
The supply curve
Price elasticity of
under-consume;
supply
Supply over time • I have basketball cards to sell and somebody somewhere else
The market would like to buy them, but we just don’t know about it;
Market equilibrium
Consumer and
producer surplus
• We all have access to a small park and we all attend on one
Market failures
afternoon, leaving us all a little annoyed with have busy it is ⇒
with a better apportionment of property rights, a better solution
would have been reached.
Richard McManus Economics - Microeconomics I
Economics -
Microeco-
nomics
I

Richard
McManus

Appendices
Section 4
Conditional analysis
Examples
Maths reminders

Appendices

Richard McManus Economics - Microeconomics I

 Economics and marginal analysis back

Economics -
Microeco- • In the real world economic transactions occur in an environment of
nomics
I many different changing things.
Richard • In order to think about the world and to provide insightful policy
McManus
recommendations economists simplify these environments and often
Appendices consider very simple experiments.
Conditional analysis
Examples • Although many things maybe changing at once, we want to know the
Maths reminders
impact of each individual change and the addition of all changes in
combination.
• This way we can identify what is happening in markets more
effectively.
• Therefore, economists try and find what is happening as if all other
things are equal even if in reality it is hard to identify this.
• This works both for theory and for empirical research, the latter of
which is highly routed in the concept of finding the marginal impact
of a change in a single variable.

Richard McManus Economics - Microeconomics I

 Inferior goods back

Economics -
Microeco-
nomics
I

Richard
McManus

Appendices
Conditional analysis
Examples
Maths reminders

Richard McManus Economics - Microeconomics I

 Veblen goods back - fun back - determinants

Economics -
Microeco- Veblen goods example
nomics
I

Richard
McManus

Appendices
Conditional analysis
Examples
Maths reminders

Freakonomics

Richard McManus Economics - Microeconomics I

 Mathematical reminders back

Economics -
Microeco-
nomics To calculate the percentage change (%∆) in something:
I

Richard
N ew value − old value
P ercentage change =
McManus old value
Appendices If we have an expression which states that
Conditional analysis
Examples B
Maths reminders A=
C
then we can infer that:
B
B = C × A and C =
A
and therefore:
%∆QD
%∆QD = P εD × %∆P and %∆P =
P εD

Richard McManus Economics - Microeconomics I