3-Minute Soft Skill Talk

Microeconomics
 
Lecturer: Yong EL
BEcon (Hons), MEcon, PhD (Econ)

SJ14103
All contents are strictly copyrighted.
Microeconomics Lecture 2
SJ14103 Demand • Supply • Market
Course Professor: Yong EL Equilibrium

Source: OsvaldoGago/Wikimedia/CC BY-SA 2.5/CC BY-SA 2.0/CC BY-SA 1.0 (resized & colour-adjusted)
Quick Info: Grand Bazaar
3
Country
• Istanbul, Turkey

Popularity

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• One of the oldest covered
market in the world, since
1455.
• One of the oldest shopping
malls in the world.

Source: JoJan/Wikimedia/CC BY 3.0 (resized & colour-adjusted)

 What is Market?
• A good or output market involves activities of demand and 4
supply for goods and/or services .
• Also refer lecture 1 note for the definition of market.
• In a good market, consumers (buyers) and producers (sellers)
make choices and decisions in transactions of goods and/or

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services using medium of exchange.
• The usual medium of exchange used by buyers and sellers at a
market is money.

Economic Agents/Units:

Consumer ~ Buyer ~ Household

- Objective: Utility maximization

Producer ~ Seller ~ Firm

- Objective: Profit maximisation
 Market Boundary
5
High-Tech Market
Software
Market

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Laptop
Market

Smartphone
Market

Mobile Technology Market

 Consumers’ Demand
• Refer lecture 1 for definitions of consumer and 6
demand.
• Consumers or households purchase goods and
services with the objective to maximise utility (what
is utility?).

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• Characteristics common to consumers/households.
 Limited income
 Maximise utility with limited income by making
choices/decisions on budget allocation and purchase of goods
and/or services.
 Opportunity costs (refer lecture 1 for the definition)
 The law of demand
 The Law of Demand
• When the price of a particular product increases, consumers 7
reduce quantity demanded of this good, ceteris paribus.
• Vice versa, when the price of a particular product decreases,
consumers increases quantity demanded of this good, ceteris
paribus.

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• Ceteris paribus, the price and quantity demanded of a particular
good/service is negatively or adversely related.
• What is the logic behind the law of demand?
 The Law of Demand (Example):
Consider the case of one household.
8

Big Mac (beef burger)

Table 1
Price of Big Mac Quantity Demanded

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(US$ per set) (set per week)
$2 12
$4 10
$6 8
$8 6
$10 4
$12 2
$14 0
 The Demand Curve
(But this is a straight line, what happens?)
Price per set ($)

14
9

12

10

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8

2
Dc
Quantity of Big
0 Mac (set per
2 4 6 8 10 12 14 16 week)
 10
Notes**
• The demand curve has a negative slope, indicating a negative
relationship between the price and quantity demanded of Big
Mac set.

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• For example, consider a household’s quantity demanded of Big
Mac set per week. When the price increases from $6 to $8, the
household’s quantity demanded of Big Mac set decreases from
8 sets to 6 sets per week. This demand behaviour complies
with the law of demand.
• When the price is $14, which is too high, quantity demanded
drops to zero.
• What is the quantity demanded when the price per set drops to
$0? (zero price (free) is unusual, this is only an assumption for
learning the demand curve)

**Students are required to make comprehensive notes for revision and examination.
 The Law of Demand (Example):
Consider the case of one household.
11

Big Mac (beef burger)

Table 1.1
Price of Big Mac Quantity Demanded

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(US$ per set) (set per week)
$2 16
$4 12
$6 8
$8 6
$10 4
$12 2
$14 0
 Demand Curve
Price per set ($)
(This is a curve.)
14
12

12

10

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8

Dc
2

Quantity of Big
0 Mac (set per
2 4 6 8 10 12 14 16 16 week)
 13
Notes**
• Demand curve is not always a linear line.
• For example, when the price is at a higher level, a 1-

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dollar decrease in the price can increase quantity
demanded by nearly constant rates. When the price is
at a lower level, a 1-dollar decrease in the price can
increase quantity demanded by higher rates.

**Students are required to make comprehensive notes for revision and examination.
 Movement on the Demand Curve
Price per set ($)
14

P1 a

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P2 b

Dc

Quantity of Big
Mac (set per
0 Q1 Q2
week)
 15
Notes**
• In the graph, the price is the only factor that causes
quantity demanded to change, as indicated by
movements on the demand curve.

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• From example, when the price decreases from P 1 to P2,
the red arrow indicates the increase in the quantity
demanded from Q1 to Q2. A movement from point a to b.
• When the price increases from P 2 to P1, the black arrow
indicates the decrease in the quantity demanded from
Q2 to Q1. A movement from point b to a.

**Students are required to make comprehensive notes for revision and examination.
 Shifts in the Demand Curve
Price per set ($)
16

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a b
P1

Dc1

Dc0 Quantity of Big

Mac (set per
0 Q1 Q2 week)
 17
Notes**
• In addition to the price, other factors can also change
the demand for Big Mac set (see next slide).

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• Factors other than the price (e.g., income) change the
demand curve by shifting it to the left (decrease) or
right (increase).
• For example, when a household’s income increases,
more Big Mac sets can be purchased per week. This is
shown by the shift in the demand curve from Dc 0 to
Dc1.
• What happen when the household’s income decreases?

**Students are required to make comprehensive notes for revision and examination.
 What Factors Shift the Demand Curve?
• Changes in income 18
 An increase in income allows a household to buy more
goods and services (e.g., Big Mac), ceteris paribus. This
shifts the demand curve to the right (Dc0 to Dc1).
 A decrease in income leads to the opposite shift in the
demand curve.

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• Changes in preferences
 Many other factors (other than income and price) can
influence a household’s preferences.
 For example, busy work schedule could increase
households’ preference for Big Mac because they prefer
a fast and delicious meal.

**Students are required to make comprehensive notes for revision and examination.
 Demand Function
• What is function? 19
• The demand function identifies the degree of dependency of
the quantity demanded of a good on the price.
Qd B =  +  PB (1)

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QdB = The quantity of Big Mac (B) per set per week demanded.
PB = The price per set of Big Mac (B).
• When PB = 0, QdB = .
• How to determine the value for  in equation (1)? (We will
learn this in the coming tutorial).
 Firms’ Supply
• Refer lecture 1 for definitions of producer/firm and 20
demand.
• Firms supply goods and services with the objective
to maximise profit (what is profit?).

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• Characteristics common to firms.
 Limited resources
 Maximise profit with limited resources by making
choices/decisions on resource allocation and production.
 Opportunity costs (refer lecture 1 for the definition)
 The law of supply

Resources = Factors of Production

- Labour
- Capital
- Land
 The Law of Supply
• When the price of a particular product increases, firms increase 21
quantity supplied of this good, ceteris paribus.
• Vice versa, when the price of a particular product decreases,
firms reduce the quantity supplied of this good, ceteris paribus.
• Ceteris paribus, the price and quantity supplied of a particular

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good/service is positively related.
• What is the logic behind the law of supply?
 The Law of Supply (Example):
Consider the case of one firm.
22

Big Mac (beef burger)

Table 1.2
Price of Big Mac Quantity Supplied

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(US$ per set) (set per week)
$2 3
$4 5
$6 7
$8 9
$10 11
$12 13
 Supply Curve
Price per set ($)

14
23
Sc
12

10

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8

Quantity of Big
0 Mac (set per
2 4 6 8 10 12 14 16 week)
 24
Notes**
• The supply curve has a positive slope, indicating a positive
relationship between the price and quantity supplied of Big
Mac set.

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• For example, when the price increases from $6 to $8, quantity
supplied of Big Mac set increases from 700 sets to 900 sets per
week. This firm’s behaviour complies with the law of supply.
• When the price is $12, which is considered high, hence the
quantity supplied increases to 1300 sets per week.
• What is the quantity supplied when the price drops to $0?
(zero price (free) is unusual, this is only an assumption for
learning the supply curve)

**Students are required to make comprehensive notes for revision and examination.
 Movement on the Supply Curve
Price per set ($)
25
Sc

P2 b

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P1 a

Quantity of Big
Mac (set per
0 Q1 Q2 week)
 26
Notes**
• In the graph, price is the only factor that causes quantity
supply to change as indicated by movements on the supply
curve.

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• From example, when price increases from P 1 to P2, the black
arrow indicates an increase in the quantity supplied from Q 1
to Q2.

• When price decreases from P2 to P1, the red arrow indicates

an decrease in the quantity supplied from Q 2 to Q1.

**Students are required to make comprehensive notes for revision and examination.
 Shifts in the Supply Curve
Price per set ($)
27
Sc0
Sc1

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P1 a b

Quantity of Big
Mac (set per
0 Q1 Q2 week)
 28
Notes**
• Other than the price, other factors can also change the supply
of Big Mac set (see next slide).

Factors other than the price (e.g., technology) change the

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•
supply curve by shifting it to the left (decrease) or right
(increase).

• For example, when a firm’s production technology is

upgraded, more Big Mac sets can be produced every week.
This is shown by the shift in the supply curve from Sc 0 to Sc1.

• What would happen to the supply assuming the firm’s factory

was flooded in one particular day of the week?

**Students are required to make comprehensive notes for revision and examination.
 What Factors Shift the Supply Curve?
• Changes in technology of production 29
 An increase in technological efficiency allows a
producer/firm to lower costs of production and supply
more goods and services (e.g., Big Mac), ceteris
paribus. This shifts the supply curve to the right (Sc0 to
Sc1).

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 A decrease in technological efficiency leads to the
opposite shift in the supply curve.
• Changes in input allocation
 Firms can increase supply by employing more labour,
capital, and land capacity.
 Refer lecture 1 for definitions of labour, capital, and
land.
 Supply Function
• What is function again? 30
• The supply function identifies the degree of changes in the
quantity supplied of a good due to changes in the price.
QsB =  +  PB (2)

QsB = The quantity of Big Mac (B) per set per week supplied. PB

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= The price per set of Big Mac (B).
• When PB = 0, QsB = φ.
• What is  in equation (2)? (Exercise in the coming tutorial).
 Equilibrium

• Equilibrium exists when the quantities of demand 31

and supply are equal in a market at a particular
price level.
 The balance between demand and supply can be found at
one point where the demand curve and supply curve cross.

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• In the good market (e.g., fast food), the two
components of equilibrium are:
1) Equilibrium price
2) Equilibrium quantity.
 Equilibrium Condition
• The equilibrium condition for Big Mac can be obtained as: 32
Qd B = QsB

 +  PB =  +  PB (3)

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• Solve for PB to obtain the equilibrium price and the
corresponding equilibrium quantity.
• Equilibrium is found in market involving all households and
firms. Thus, market demand and supply must first be
determined.
 Market Demand & Supply
• A market comprises a group of buyers and sellers. Thus, 33
there are multiple demand and supply curves.
 Every household and firm has individual demand and supply
curves, which can be different from one another.

• Market demand is obtained by summing the individual

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demands at each price level. Similarly, market supply is
obtained by summing the individual supplies at each
price level.
• The common definitions are: The market demand curve
is obtained by summing the individual demand curves
horizontally (meaning at each price level). Similarly, the
market supply curve is obtained by summing the
individual supply curves horizontally (meaning at each
price level).
 Market Demand Curve
PB ($) PB ($)
Sam Jay 34

a a
5

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b b
3.5
Dc(S)

Dc(J)
0 0
6 10 8 9
QB (set) QB (set)
PB ($)

Market
PB = price per
set (Big Mac)
QB = set per 5 A
week (Big Mac)
3.5 B

Dc(S+J)

0 QB (set)
14 19
 35
Notes**
• We assume this is a market of two consumers: Sam and Jay.
• At price $5, Sam’s quantity demanded of Big Mac is 6 sets
per week. At the same price, Jay’s quantity demanded of Big

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Mac is 8 sets per week.
• Summing Sam’s and Jay’s quantity demanded yields the
market demand of 14 sets per week.
• When price drops to $3.5 per set, the two consumers’
demand (market demand) increases from 14 sets to 19 sets.
• Each individual’s demand curve is shown to be different in
terms of slope value. Thus, the slope of the market demand
curve should be between the two individual demand curves.

**Students are required to make comprehensive notes for revision and examination.
 Market Supply and Demand Curve
• Draw the market demand and supply curve using the 36
following data.
 Assume Carl and Bean are two owners of the only two fast-food
restaurants selling Big Mac in a small village called Plateau.
 Obtain the market supply and demand curves for Plateau.
Table 2

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Price Per Carl’s Bean’s Market Supply Market Demand*
Unit of Big Supply Supply (set per week) (set per week)
Mac Set (set per (set per
(US$) week) week)
$2 300 250 550 710
$3 330 270 600 680
$4 360 290 650 650
$5 390 310 700 620
$6 420 330 750 590
$7 450 350 800 560

* Assume there are 100 consumers.

 Market Supply, Market Demand, Market Equilibrium
Price per set ($)

7
Sc 37

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E
4 E = Market Equilibrium

Dc
1

Quantity of Big
0 Mac (set per
500 550 600 700 750 800
650 week)
Prove the Equilibrium Using the Equilibrium Condition

• Using the data in Table 2. Do the following exercises. 38

• Step 1: Derive the market demand function
 You will find this equation:

Qd B = 770 − 30 P

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• Step 2: Derive the market supply function
 You will find this equation:

QsB = 450 + 50 P

• Step 3: Apply the equilibrium condition

 Your answers must be consistent with the equilibrium values in the
graph.
 Determinants of Demand and Supply

39
Table 3
Demand Curve Supply Curve
Price  Move right on the curve Move left on the curve

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Income  Shift left No change
Consumers’ Shift left No change
Preference 
Technology  No change Shift left
Input  No change Shift left
 40
Notes**
• Summary in Table 3 is a simplified understanding of
the effects of five determinants on supply and demand.
In reality, matters can be more complicated.

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• Consumers’ preferences, for example, can also change
firms’ decision to increase or reduce supply. However,
for basic illustration, we clearly distinguish the effect of
each determinant as presented in Table 3.

**Students are required to make comprehensive notes for revision and examination.
 Lessons 1 & 2 Revision 41
1. Consumers are also known as ____________________________.
2. The objective of consumers is to maximise ______________________________.
3. The constraint to maximise utility or __________________________ by
consumers is _____________________________.

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4. The law of demand says that, ceteris paribus, when the price per unit
increases, the quantity demanded _____________________________.
5. The demand curve is ______________________ sloping.
6. Changes in factors other than the price will cause A) movement on the
demand curve or B) shift in the demand curve.
 Lessons 1 & 2 Revision (Continued) 42
7. Producers are also known as ____________________________.
8. The objective of producers is to maximise
______________________________.

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9. The constraint to maximise ___________________ by producers is
_____________________________.
10.The law of supply says that, ceteris paribus, when the price per
unit increases, the quantity supplied _____________________________.
11.The supply curve is ______________________ sloping.
12.Changes in factors other than the price will cause A) movement
on the supply curve or B) shift in the supply curve.
 End of Lecture 2
43

An inspirational quote for you:

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‘I can't change the direction of the wind, but I can
adjust my sails to always reach my destination.’
(Jimmy Dean)

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Prepared by Yong EL