B220 MICROECONOMICS

Learning Outcomes
• Describe the concepts of demand and supply
• Explain the factors affecting demand and supply
• Apply the factors shifting demand and supply curves
• Explain how optimal prices and output are determined
• Explain the concepts of consumer and producer surplus to
the demand and supply curves

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 Activity 1

The class will be

divided into 2 groups
for discussion:
- Group A to attempt
and share answers
for Activity 1(A)
- Group B to attempt
and share answers
for Activity 1(B)
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Activity 1(A)
a) Based on the comic strip, why did Susie (Calvin’s
classmate) decide not to buy the lemonade?
b) Who forms the ‘demand’ that Susie mentioned?
c) If you were Susie, what would be the price at
which you would be willing to buy a cup of
lemonade?
d) What do you think would happen to the number
of lemonade bought as the price of the lemonade
falls from $15 to $5 to $1 and finally to $0.20?
e) What do you think would happen to the number
of lemonade bought at each price if:
i. the incomes of consumers increased?
ii. Scientific studies showed that drinking lemonade is
beneficial for health and helped in losing weight?
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Activity 1(B)
a) Who forms the supply of the lemonade
market based on the comic?
b) Suppose Calvin’s cost of producing
lemonade is $0.30 per cup. What do you
think would happen to his willingness to sell
lemonade if the market price increases from
$0.20 to $1, and finally to $15?
c) What do you think would happen to the
number of lemonade sold if:
i. the price of lemons and sugar increased by 20%?
ii. Calvin found that he could sell more lemon tarts
and earn higher profits compared to when he
sold lemonade?

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 Ceteris Paribus

• A Latin phrase which literally means “all other

things being equal or held constant.”

• In economics, this simply means we look at the

effects of only one variable, while assuming that
all other variables remain the same.

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 Law of Demand
The law of demand: The higher the price of a good, the smaller is the
quantity demanded; and the lower the price of a good, the greater is the
quantity demanded, ceteris paribus.
Price

A downward sloping
P1 demand curve illustrates
the inverse relationship
between price and
P2
quantity demanded.
Demand
Curve

Q1 Q2 Quantity

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Movement along the Demand Curve
A MOVEMENT along the demand curve occurs when there is a change in price

Price

A fall (rise) in price of the good

itself increases (decreases) the
QUANTITY DEMANDED for
P1 goods and services, resulting in
a MOVEMENT along the
demand curve.
P2

Demand
Curve

Q1 Q2
Quantity
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 Law of Supply
The law of supply: The higher the price of a good, the greater is the quantity
supplied; and the lower the price of a good, the lower is the quantity supplied,
ceteris paribus.

Price
Supply
Curve

P2
Hence, an upward sloping
supply curve that illustrates the
direct relationship between
P1 price and quantity supplied.

Q1 Q2 Quantity
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Movement along the Supply Curve
A MOVEMENT along the supply curve occurs when there is a change in price.
Price

Supply
Curve

An (A) increase (decrease) in

P2
price increases (decreases) the
QUANTITY SUPPLIED of goods
P1 and services, resulting in a
MOVEMENT along the supply
curve.

Q1 Q2 Quantity

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 Activity 2
Refer to your Activity 1 on Calvin’s lemonade business.
a) Based on your answer in Activity 1(A) Question (d), illustrate the
relationship between the price of the lemonade and the number of
lemonade that Susie would be willing to buy in Figure 1 below.
b) Describe the shape of the curve/line that you have drawn in part (a) and
explain what this curve/line means.

Figure 1
Lemonade ($)
Price of

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Quantity of Lemonade
 Activity 2
c) Based on your answer in Activity 1B Question (b), illustrate the
relationship between the price of the lemonade and the number of
lemonade that Calvin would be willing to sell in using the same Figure 1.
d) Describe the shape of the curve/line that you have drawn in part (c) and
explain what this curve/line means.

Figure 1
Lemonade ($)
Price of

15
Quantity of Lemonade
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 Market Equilibrium
Market equilibrium is a situation where demand and supply forces interact to give rise
to an equilibrium price and quantity. This occurs when THE QUANTITY DEMANDED
EQUALS TO THE QUANTITY SUPPLIED of a product/service.

The equilibrium price

is the price at which
the quantity
demanded equals the
quantity supplied

The equilibrium quantity is

the quantity bought and sold
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at the equilibrium price.
 Invisible Hand: How it Works
Price surplus S
At p1, the producers are willing to
supply more goods than the consumers
are willing to buy. There is a surplus and p1
market forces will bring the prices down
till the equilibrium is reached.
Equilibrium Point
At p2, the consumers demand more
than what the suppliers are willing to
supply. There is a shortage and market p2
forces will bring the prices up till the
equilibrium is reached. shortage D
Quantity

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 Activity 3
Refer to the following graph in your pre-reading for this question.

a) The market equilibrium is where the demand and

supply curve intersects. What do you notice about
the quantity demanded and quantity supplied at
market equilibrium? State the equilibrium price
and quantity.
b) What do you notice about the quantity demanded
as the price increases from $3 to $4? Explain using
the graph.
c) What do you notice about the quantity supplied as
the price increases from $3 to $4? Explain using
the graph.
d) Assume that the demand and supply curves in the
graph do not change. If the price is temporarily at
$4, what will happen to the market at this instant?
Do you expect the price to stay at $4 in the long
term? Explain your answer.
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 Factors that affect Demand
Example
Consumer’s
A change in consumer
Income preference due to
fashion/health trends, or
demographic changes.
More women become more
Prices of
Consumer health conscious and exercise
Related
Preferences
Goods more.
Demand  Demand for sports apparel
increases
 Demand curve to shift right
 Increase in quantity
Expected Population
demanded for sports apparel
Future / Number at each price
Prices of buyers
 Price increases, ceteris
paribus
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Shifts of the Demand Curve
• Demand curve shifts when there is a
NON-PRICE factor that affects
demand of the good.

• Important notes:
– Price of related goods is a non-price
factor because it is not the price of
that good we are examining.
– Expected future prices of the good
is a non-price factor because it is
not the current price of the good.

• When this shift happens, the

equilibrium quantity and price level
changes.

• In the graph, the demand curve

shifts right indicating an increase in
demand and this leads to an
increase in equilibrium price and
equilibrium quantity.
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 Factors that affect Supply
Example
Price of Technological advancement
Resources shortens the production process
of olive oil and more olive oil can
be produced within the same
period of time.
Expected
Technology Future  Supply of olive oil increases
Prices
 Supply curve to shift right
Supply  Increase in quantity supplied
for olive oil at each price
 Price decreases, ceteris
paribus
Number of Taxes and
Producers Subsidies

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Shifts of the Supply Curve
• Supply curve shifts when there is a
NON-PRICE factor that affects supply
of the good.

• Important notes:
– Price of resources is a non-price factor
because it is not the price of that good
we are examining.
– Expected future prices of the good is a
non-price factor because it is not the
current price of the good.

• When this shift happens, the

equilibrium quantity and price level
changes.

• In the graph, the supply curve shifts

right indicating an increase in supply
that leads to a decrease in equilibrium
price and increase in equilibrium
quantity.
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 Change in Quantity Demanded vs Change in Demand

Change in Quantity Demanded Change in Demand

Change in the price of the good itself Change in non-price factor of the good
Factors affecting demand:
Inverse relationship between price and quantity
Future expected price, prices of related goods,
demanded
consumers income, consumers preferences,
P ,Q | P ,Q
number of buyers

A change in price of the good causes a movement A change in demand causes a shift in the entire
along the same demand curve demand curve

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 Change in Quantity Supplied vs Change in Supply

Change in Quantity Supplied Change in Supply

Change in the price of the good itself Change in non-price factor

Factors affecting supply:
Direct relationship between price and quantity
Price of resources, expected future prices,
supplied
technology, taxes and subsidies, number of
P ,Q | P ,Q
producers

A change in price of the good causes a movement A change in supply causes a shift in the entire
along the same supply curve supply curve

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 Activity 4
a) Click to open the excel file below:

i. What happens to the Demand or Supply curve when the

change in factors are favourable?
ii. What happens to the Demand or Supply curve when the
change in factors are unfavourable?

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 Activity 4
b) Refer to Questions e(i) and e(ii) of Activity 1A below:
What do you think would happen to the number of lemonade bought at each
price if:
i. the incomes of consumers increased?
ii. Scientific studies showed that drinking lemonade is beneficial for health and
helped in losing weight?
Based on your answers to your class activity, illustrate the impact on the equilibrium
price and the quantity of lemonade for both scenarios, with graphs.

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 Activity 4
c) Refer to Questions c(i) and c(ii) of Activity 1B below.
What do you think would happen to the number of lemonade sold if:
i. the price of lemons and sugar increased by 20%?
ii. Calvin found that he could sell more lemon tarts and earn higher profits
compared to when he sold lemonade?

Based on your answers for your class activities, illustrate the impact on the
equilibrium price and the quantity of lemonade for the scenarios, with graphs.

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 Market Analysis for Change/Increase in
both Demand and Supply
S0 S0

Price
Price

S1
P1 S1

P0 P0

P1
D0 D1 D0
D1

Q0 Quantity Q0 Q1 Quantity
Q1

1. Increase in Demand > Increase in Supply 2. Increase in Demand < Increase in Supply
• Equilibrium quantity increase • Equilibrium quantity increase
• Equilibrium price increases • Equilibrium price decreases

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 Market Analysis for An Increase in both
Demand and Supply
Based on the 3 illustrations, a
RIGHTWARD shift in both demand and
Price

S0 supply curves will result in an

INCREASE in EQUILIBRIUM QUANTITY.
S1
However EQUILIBRIUM PRICE is
UNCERTAIN / INDETERMINATE,
P0
D1
depending on the magnitude of the
D0 shifts. It can either:
i. Increase (illustration 1)
Q0 Q1 Quantity ii. Decrease (illustration 2)
iii. Remain unchanged (illustration 3)
3. Increase in Demand = Increase in Supply
• Equilibrium quantity increase What if demand &
• Equilibrium price remains unchanged supply both
decrease, or, when
demand and supply
shift in opposite
directions? 31
Demand & Supply - News

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 Consumer Surplus
Price $

• The difference between the

total amount that consumers 100 S
are willing and able to pay for
a good or service (indicated by
the demand curve) and the
total amount that they
actually pay (the market price) 40

• Represented by the area

below the demand curve and
above the market price

Q Quantity

Example:
Anna, a consumer, who loves to shop on eBay, is willing to pay a maximum price of $100
for a pair of shoes. However, she realizes that there are sellers who are able to sell the
shoes at a lower price of $40, she has a consumer surplus of $60. 34
 Producer Surplus
Price
$

S
• The difference between
what producers are willing
and able to supply a good
for and the price they
actually receive 40

• Represented by the area

above the supply curve and
below the market price 10
D

Q Quantity

Example:
Thomas is willing to sell power cables at $10 a piece and consumers are willing to
purchase the cables at $40 a piece. Due to available market information that consumers
are willing to pay a higher price, Thomas is able to charge a higher price and earn a
producer surplus of $30 per cable. 35
 Activity 5
Jon found his ideal headphones and was willing to pay $365 for it. However
he managed to buy it for $265. In fact, the seller who sold the headphones to
Jon was originally willing to sell his headphones at $200 due to poor business
and was happy he made the trade at a higher price finally.
a) What is the additional benefit to a consumer like Jon?
b) What is the additional benefit to the producer?
c) Identify the 2 economic terms mentioned in Questions (a) and (b). Label
the area A for Question (a) and area B for Question (b) in the figure
below.

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 Concept diagram
Price Shifts in demand /
supply curve change
equilibrium
Surplus S Factors affecting
Demand P
S
• Prices of
related goods
Consumer • Income P
Equilibrium Surplus • Population
• Expected D1
Price
Producer future prices
Surplus D
• Consumer D2
Preferences Q Q

Shortage Factors affecting

D Supply P
S2

• Expected future S
Equilibrium Quantity prices S1
Quantity • Taxes and
subsidies P
• Technology
At market equilibrium, quantity • Number of
demanded of a product equals the suppliers D
quantity supplied. • Prices of
resources Q Q
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 Challenge Yourself
Refer to the comic strip of Activity 1.
a) If Calvin was successful in persuading his mum to provide him a
subsidy for each cup of lemonade sold, and consumers like Susie
are now more health conscious, preferring to drink lemonade
instead of other cola drinks. Illustrate the impact on the
equilibrium quantity and price of lemonade using graphs.
b) Calculate the equilibrium price and quantity given that:
– Demand = 2200 – 200P
– Supply = 800 + 500P

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 References
Textbooks
• Parkin, M. (2016). Microeconomics 12th Edition. Pearson.
• Parkin, M. (2016). Economics 12th Edition. Pearson.
• Gillespie, A. (2014). Foundations of Economics 3rd Edition. Oxford University Press

Websites
• Supply and Demand. (n.d). Retrieved 24 Apr 2020 from EconWeb website:
http://www.econweb.com/MacroWelcome/sandd/notes.html

• Extract from:
Consumer Surplus. (n.d). Retrieved 24 Apr 2020 from Tutor2u website: http://tutor2u.net/economics/reference/consumer-
surplus
Producer Surplus. (n.d). Retrieved 24 Apr 2020 from Tutor2u website: http://www.tutor2u.net/economics/revision-notes/a2-
micro-consumer-producer-surplus.html

Videos
• Demand and Supply - EconMovies 4: Indiana Jones. Retrieved 24 Apr 2020 from YouTube website:
https://www.youtube.com/watch?v=RP0j3Lnlazs
• Shifting Demand and Supply – Econ 2.3. Retrieved 24 Apr 2020 from YouTube website:
https://www.youtube.com/watch?v=V0tIOqU7m-c
• Equilibrium price and surplus. Retrieved 24 Apr 2020 from YouTube website:
https://www.youtube.com/watch?v=nofL7pUcUw8
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