MICROECONOMICS INTRODUCTION

2 actors in the economy:

Consumers Producers

How much to
MARKET produce?
• is where buyers and sellers meet.
• The place where they both trade or exchange goods or services (where their
transactions take place).

However, in economic parlance, the term maret does not neccessarily refer to a tangible
area where buyers and sellers could be seen transacting. It can represent an intangible
domain where goods and services are traded, such as the stock market, real estate market,
or labor market - where workers offer their services, and employers look for workers to hire.
MICROECONOMICS DEMAND AND SUPPLY OVERVIEW

 Supply and demand is an economic model of price determination in a

perfectly competitive market.

 describes how prices vary as a result of a balance between product

availability and demand.

 It postulates that, holding all else equal, in a competitive market, the unit

price for a particular good, or other traded item such as labor or liquid
financial assets, will vary until it settles at a point where the quantity
demanded (at the current price) will equal the quantity supplied (at the
current price), resulting in an economic equilibrium for price and quantity
transacted.
MICROECONOMICS DEMAND AND SUPPLY OVERVIEW

The price P of a product is determined by

a balance between production at each
price (supply S) and the desires of those
with purchasing power at each price
(demand D). The diagram shows a
positive shift in demand from D1 to D2,
resulting in an increase in price (P) and
quantity sold (Q) of the product.
MICROECONOMICS MICROECONOMIC MODELS LAW OF DEMAND

LAW OF DEMAND

Higher Lower
Price = Demand

(inverse relationship)
MICROECONOMICS MICROECONOMIC MODELS LAW OF DEMAND

the relation of the quantity that all buyers would be

DEMAND
willing to buy at each unit price of the good.

Demand theory describes individual consumers as rationally choosing the

most preferred quantity of each good, given income, prices, tastes, etc.

constrained utility maximization

UTILITY = the hypothesized relation of each individual

consumer for ranking different commodity bundles as
more or less preferred.

Demand is generally affected by the behavior of consumers.

MICROECONOMICS MICROECONOMIC MODELS LAW OF DEMAND
DEMAND therefore, implies 3 things:
1. desire to possess a thing;
2. the ability to pay for it or means of purchasing it; and
3. willingness in utilizing it.
DEMAND SCHEDULE

a table that shows the relationship of prices and the

specificquantities demanded at each of these prices.
SITUATION PRICE (P) QUANTITY (Q)
A 5 8
B 4 13
C 3 20
D 2 30
E 1 45
MICROECONOMICS MICROECONOMIC MODELS LAW OF DEMAND

DEMAND CURVE
• a graphical representation showing the relationship between price and
quantities demanded per time period.
• has a negative slope thus it slopes downward from left to right.
MICROECONOMICS MICROECONOMIC MODELS LAW OF DEMAND

DEMAND FUNCTION
• shows the relationship between demand fora commodity and the factors that
determine or influence this demand.
• These factors are - price of the commodity itself, prices of other related
commodities, consumer's leve lof incomes, taste and preferences, size an
composition of level of production, distribution of income, etc.
• expressed as a mathematical function.

QD = f (own price, income, price of related goods, etc.)

MICROECONOMICS MICROECONOMIC MODELS LAW OF DEMAND

Change in Quantity Demanded vs. Change in Demand

 there is a change in quantity demanded if the
movement is along the same demand curve.
 brought about by an increase (decrease) in
the product's price.
• There is a change in demand if the entire
demand curve shifts to the right side
resulting to an increase in demand.
• At the same price, therefore, more amount of
good or service are demanded by
consumers.
MICROECONOMICS MICROECONOMIC MODELS LAW OF DEMAND
FORCES THAT CAUSES THE DEMAND CURVE TO CHANGE
 Taste or preferences - pertain to the personal likes and dislikes of consumers for certain goods and
services.
 changing incomes - An increase in one's income raises his capacity or power to demand for goods and
services which he is not able to purchase at lower income.
 occassional or seasonal products
 population change - An Increase in population leads to an increase in the demand for some types of goods
and services, and vice versa.
 Substitute goods - These are goods that are interchanged with another goods, generally offered at cheaper
price. In a situation where the price of a particular good increases, a consumer will tend to look for closely
related commodities.
 Expectation of future Prices - If buyers expect the price of a good or services to rise (or fall) in the future, it
may cause the current demand t oincrease (or decrease). Also, expectations about the future may alter
MICROECONOMICS MICROECONOMIC MODELS LAW OF SUPPLY

the relation between the price of a good and the

SUPPLY
quantity available for sale at that price.

states that, in general, a rise in price leads to an

"Law of
expansion in supply and a fall in price leads to a
Supply"
contraction in supply.
MICROECONOMICS MICROECONOMIC MODELS LAW OF SUPPLY

LAW OF SUPPLY
Increase
Increase
in Price = in
Supply

(direct relationship)
MICROECONOMICS MICROECONOMIC MODELS LAW OF SUPPLY

SUPPLY
= is the relation between the price of a good and the quantity
available for sale at that price.
= typically represented as a function relating price and quantity, if
other factors are unchanged.
LAW OF SUPPLY
states that, in general, a rise in price leads to an
expansion in supply and a fall in price leads to a
contraction in supply.

The law of supply implies that higher price is an incentive for

business firms to produce more goods or services as this will
maximize their profits.
MICROECONOMICS MICROECONOMIC MODELS LAW OF SUPPLY

SUPPLY SCHEDULE
- A schedule listing the various prices of a product and the specific quantities supplied at each
of these prices.
- the information provided by a supply schedule can be used to construct a supply curve
showing the price/ quantity supplied relationship in graphical form.

SITUATION PRICE (P) QUANTITY (Q)

A 5 48
B 4 41
C 3 30
D 2 17
E 1 5
MICROECONOMICS MICROECONOMIC MODELS LAW OF SUPPLY

SUPPLY CURVE
- A graphical representation showing the relationship between the price of the product or
factors of production (e.g.) labor and the quantity supplied per time period.
- The typical supply curve fora prodcut slopes upward from left to right indicating that as price
rises (falls), more (less) is supplied.
MICROECONOMICS MICROECONOMIC MODELS LAW OF SUPPLY

SUPPLY FUNCTION
- A form of mathematical notation that links the dependent variable, quantity supplied (Q s),
with various independent variables which determine the quantity supplied.
- Among the factors that influence the quantity supplied are price of the product, number of
sellers in the market, price of factor inputs, technology, business goals, importations, weather
conditions, and government policies.

Qs = f(own price, number of sellers, price of factor inputs,

technology, etc.)
MICROECONOMICS MICROECONOMIC MODELS

Law of Demand
}
interact to determine the
actual market prices and
volumes of goods that
Law of Supply are traded on the
market.
The theory of supply and demand is an organizing principle
for explaining how prices coordinate the amounts produced
and consumed.
MICROECONOMICS MICROECONOMIC MODELS LAW OF SUPPLY

Change in Quantity Supplied vs. Change in Supply

 There is a change in quantity supplied if the
• There is a change in supply if the entire
movement is along the same supply curve.
 brought about by an increase (decrease) in supply curve shifts rightward or leftward.
• At the same price, therefore, more amount of
the product's own price.
 The direction, however, is positive good or service are supplied by producers or
considering the Law of Supply. sellers.
MICROECONOMICS MICROECONOMIC MODELS LAW OF SUPPLY

FORCES THAT CAUSES THE SUPPLY CURVE TO CHANGE

 OPTIMIZATION IN THE USE OF FACTORS OF PRODUCTION - OPTIMIZATION refers to the process,

methodology or making something as fully perfect, functional, or effective as possible. Simply put, it is
the efficient use of resources. In business parlance, it could mean maximum production of output at
minimum cost.
 TECHNOLOGICAL CHANGE - The introduction of cost-reducing innovations in production technology
increases supply on one hand. On the other hand, it can also decrease the supply by means of freezing
the production through the problems that the new technology might encounter, such as technical trouble.
 FUTURE EXPECTATIONS - If sellers anticipate a rise in prices, they might choose to hold back the
currrent supply to take advantage of the future increase in price, thus decreasing market supply. This is
called hoarding.
MICROECONOMICS MICROECONOMIC MODELS LAW OF SUPPLY

FORCES THAT CAUSES THE SUPPLY CURVE TO CHANGE

 NUMBER OF SELLERS - The more sellers there are in the market, the greater supply of goods and
services will be available.
 WEATHER CONDITIONS - Bad weather reduces supply of agricultural commodities while good weather
has an oposite impact.
 GOVERNMENT POLICIES - Removing qoutas and tariffs on imported products also affect supply. Lower
trade restrictions and lower quotas or tariffs will boost imports, thereby adding more supply of goods in
the market.
MICROECONOMICS DEMAND AND SUPPLY OVERVIEW

Paradox of Value
(Water-Diamond Paradox)
MICROECONOMICS DEMAND AND SUPPLY OVERVIEW

Paradox of Value
(Water-Diamond Paradox)
• is the contradiction that, although is on the whole more useful, in terms
of survival, than diamonds, diamond commands a higher price in the
market.
MICROECONOMICS MICROECONOMIC MODELS

MARKET EQUILIBRIUM
• occurs where quantity supplied equals
quantity demanded, the intersection of the
supply and demand curves in the figure on
the left.

The price of a commodity:

determined by the interaction of supply and

demand in a market. The resulting price is
referred to as the equilibrium price and
represents an agreement between producers
relationship of price to supply and demand
and consumers of the good.
MICROECONOMICS MICROECONOMIC MODELS

EQUILIBRIUM
• Generally pertains to a balance that exists when quantity demanded
equals quantity supplied.
• the general agreement of the buyer and the seller at a particular price
and at a particular quantity.
Equilibrium Market Price

- the price agreed by the seller to offer its good or service for sale and for the
buyer to pay for it.
MICROECONOMICS MICROECONOMIC MODELS
WHAT HAPPENS WHEN THERE IS MARKET DISEQUILIBRIUM?
1. SURPLUS
 a condition in the market where the quantity
supplied is more than the quantity demanded.
 there is a downward pressure to price when
there is a surplus in order to restore equilibrium
in the market.
2. SHORTAGE

 a condition in the market in which quantity

demanded is higher than supplied.
 When there is shortage, there is an upward
pressure to prices to restore equilibrium in the
market.
 -end of discussion-

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