Micro Economics –

Lecture 3 & 4
Prof. Dr. Qais Aslam
 Laws
• Natural Laws: (Objective laws) Laws of Nature are laws of science, irrespective
of humans and are for all times. Example Laws of Physics, Chemistry, Biology,
Botany , zoology etc.
• State Laws: Made by the Parliament or the Sovereign (Government). These
are average behaviors defining the society and are punishable with fines, loss
of freedom and in extreme cases loss of life as determined by these laws.
Criminal Laws, Traffic laws, Family laws and other civil laws. They can be
changed by the law making authority (Parliament)
• Social Laws: (Subjective Laws) Not Laws, but Our observation “ how ordinary
people behave in ordinary economic, political and sociological life. Economics,
Political Science, Sociology, Psychology etc. are social sciences. Economics is a
more perfect social science because economic laws can be measured through
Money and Time. Therefore economics laws can be measured Mathematically
Demand and Supply
• Hidden hand of self interest of the force of
Demand and supply make market economies
work and determine the quantity of goods
and services produced and
the prices at which they are sold
 Demand
Act of Buying in the market
• Quantity demanded is the amount of goods and services that
buyers are willing to buy and able to purchase with their
money (resources) and includes:
1. (wants) need of purchaser , which are unlimited and they
repeat themselves
2. Buying power of the purchaser (Restraint to the economic
activity of satisfying wants) = income; time, resources, money
is limited, but can be used for alternate satisfying of wants
3. Willingness to purchase
 Law of Demand
•“Other things (factors) remaining Constant (The same),
when Price (P) of a commodity (goods & services)
increases, its quantity demanded (qd) should contracts;
and when P decreases, its qd should expands)”
• There is an inverse (negative) relationship between Price and qd. They
move in opposite to each other direction
• Qd = a – bP
• Qd = quantity demanded; P is Price; a is other factors (Constant) and b =
the rate of change in Price
• Minus (-) shows the inverse relationship between P and qd
Negatively sloped Demand curve (Movement on the demand curve). Demand
curve slopes down ward from left to right which shows the inverse relationship
between qd and price. Movement on the demand curve due to change in Price
Price

P2

P1

qd1 qd2
Quantity demanded
 Other factors that effect change in Demand
(Restraints to the Law of Demand)
•1.  Tastes and Habits (Human Preferences for unlimited wants). Goods that are liked more
are demanded more & vice versa
2. Income (y) of the Household (Consumer). When income increases demand increases &
vice versa
3. Prices of other goods – Substitutes (goods bought in place of each other) &
complements (goods which are used along with each other) – The demand curve of
complements move in the same direction & has a positive relationship. The demand
curve of substitutes moves in opposite to each other direction & has negative
relationship (In Economics, everything translated in money is a substitute because of
restraints)
4. Weather conditions. Demand of ice is less in cold weather and more in hot weather.
5. Fashion. Things in fashion are usually demanded more than things out of fashion
6. Arts, Artifacts and Antiques. Restraints to the law of demand
7. Narcotics, and Drugs (addiction); life saving medicines. Restraints to the law of demand
When there is Change in Demand
due to Demanded
Quantity Changeqd in Price
Demand

Movement on
Expansion Contraction the Demand
Curve
 Shift of the demandShift
curveof the demand curve is due to a change in other things
Movement on the demand curve is due to change in Price

Right ward shift of the

demand curve when
demand increases
Price(P)
Left ward shift of the
demand curve when
demand decreases

qd1 qd2 qd3

If there is Change in Price:
• There is movement of the Demand curve
• There is Expansion or Contraction in quantity
demanded (qd)
If there is change in other factors:
• There is shift (Rightward or left ward) of the demand
curve
• There is increase or decrees in Demand
Reasons for negative relationship between
Price and Demand
1.Price Effect
2.Income Effect (Buying Power)
3.Substitution Effect or Cross Effect (Prices of other Commodities)
Price Effect = Income effect + Substitution Effect
• Market Demand Curve shows the total quantity demanded of
various goods varies as the price of the good varies
• Market Demand curve represents total demand of all the buyers
of a particular good (or service) at a particular market in a
certain point of time
Hidden Hand of Self Interest
• The buyer (Demand) has an (hidden) interest to get
more for less money spent
• The seller has an (hidden) interest to give less for more
money earned
• “The butcher and the baker do not sell meat or bread
for the goodness of their hearts but with a self interest
to earn income with which they can buy different needs
for their own families and put food on their table”
 Case Study on Demand
• The demand schedule of all buyers of ice cream in the market would give
us the market demand curve of ice cream
• Market demand curve shows how the total quantity demanded of ice
cream for example (good x) varies as the price of ice cream (good x) varies.
• If the government fixes the prices of ice cream (good x) below the market
price, than the demand of ice cream would increase and the demand
curve would shift to the right.
• If the government fixes the prices of ice cream (good x) above the market
price, than the demand of ice cream would decrease and the demand
curve would shift to the left.
• If some one lost their job, than the demand for ice cream (good x) of that
person would fall and demand curve would shift to the left, because lower
income would mean that there is less to spend.
• Prices of related goods – Substitutes & complements – Suppose price of
frozen yogurt (good y) falls, than the consumer would shift to frozen yogurt
and demand of ice cream (good x) would fall and vice versa, because frozen
yogurt and ice cream are close substitutes
• Tastes & habits -
 Thank You
• Text:
• Mankiw, N. G, Gans, J, King, S. (2018) Principles of Microeconomics, Harkot,
International Edition
• McConnel, C. R. And Brue, S. L. Economics, McGraw- Hill, Toronto, 14th
International Edition, (2018)

15
Other Readings
• A. Koustsoyiannis, Modern Microeconomics
• Boyes - Melvin. Economics. Houghton Mifflin Company Boston,
USA.
• Theory and Practice. N.Y. Harcourt Brace Jovanovich
• Paul A. Samuelson. Economics An Introductory Analysis. 14th
Edition. McGraw - Hill Boo Company Inc. New York, Toronto,
London. 1990.
• R. G. Lipsey & Chrystal, Introduction To Positive Economics
• Stonier, Alfred W. & Hague, Douglas C. A Textbook of Economic
Theory. The English Language Book Society and Longman Group
Limited. London. 1977
• William Boys & Michael Melvin. Economics. Houghton Mifflin
Company. Boston.
• Field, C Barry & Martha K. Field. 2002. Environmental Economics – An
Introduction. Third Edition Mc Graw-Hill Higher Education International
Edition, NY
• Hyman, David N. 1999. Public Finance: A Contemporary application of
Theory and Policy. Sixth Edition, The Dryden Press, Harcourt Brace College
Publishers. New York, London, Tokyo
• Mountjoy, Alan B. 1982 Industrialization and Developing Countries. 5 th
Edition, Hutchinson University Library, London, Sydney, Johannesburg
• Ochs, Jack 1974. Public Finance. Harper & Row Publishers NY, London
• Ray, Debraj, 1998, Development Economics, Princeton University, Press,
Princeton, New Jersey
• Wood, Ellen M Unhappy Families: Global Capitalism In The World Of Nation
States. Monthly Review, Volume 51 Number 3. . July August 1999, Monthly
Review Foundation, NY
• World Development Report, 1999/2000., Entering The 21 st Century, World
Bank Oxford University, Press, Washington D.C
• World Development Report, 2006, 2009, Equity and Development, The
World Bank, Oxford University Press
• World Development Report, 2009, The World Bank, Oxford University Press 17