Microeconomics

Lesson 2
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 Pareto Efficiency or Pareto Optimality
• Pareto efficiency, or Pareto optimality, is a
central theory in economics.
• It is a movement from one alternative allocation
to another that can make at least one individual
better off, without making any other individual
worse off.
• The term is named after Vilfredo Pareto, an
Italian economist who used the concept in his
studies of economic efficiency and income
distribution.
• If an economic system is Pareto
efficient, then it is the case that no
individual can be made better off
without another being made worse off.
It is commonly accepted that outcomes
that are not Pareto efficient are to be
avoided, and therefore Pareto efficiency
is an important criterion for evaluating
economic systems and political policies.
 The Supply Curve
• The relationship between the quantity sellers want
to sell during some time period (quantity supplied)
and price is what economists call the supply curve.
• Though usually the relationship is ________, so
that when price increases so does quantity supplied,
there are exceptions. Hence there is no law of
supply that parallels the law of demand.
• The supply curve can be expressed mathematically
in functional form as
• Qs = f (price, other factors held constant).
• It can also be illustrated in the form of a table or a
graph.
If one of the factors that is held constant
changes, the relationship between price
and quantity, (supply) will change. If the
price of an input falls, for example, the
supply relationship may change, as in the
following graph.
 Changes in the amount that sellers will
sell into two categories.

1. A change in supply refers to a change in

behavior of sellers cause, because a factor
held constant has changed. As a result of a
change in supply, there is a new
relationship between price and quantity. At
each price there will be a new quantity and
at each quantity there will be a new price.
• A change in quantity supplied refers to
a change in behavior of sellers caused
because price has changed. In this case,
the relationship between price and
quantity remains unchanged, but a new
pair in the list of all possible pairs of
price and quantity has been realized.
 The Demand Curve

• The DEMAND CURVE is defined as the

relationship between the price of the
good and the amount or quantity the
consumer is willing and able to purchase
in a specified time period, given constant
levels of the other determinants--tastes,
income, prices of related goods,
expectations, and number of buyers.
 The Demand Relationship
The Determinants
1. Price of the good.
2. Taste or level of desire for the product by the
buyer
3. Income of the buyer
4. Prices of related products:
• substitute products (directly competes with
the good in the opinion of the buyer)
• complementary products (used with the good
in the opinion of the buyer)
5. Future expectations:
- expected income of the buyer
- expected price of the good.
6. For the total market demand,
number of buyers in the market is
also a determinant of the amount
purchased.
 Surplus & Shortage
• Equilibrium is a state where quantity demanded
equals quantity supplied and there is no
tendency for change. If the market price is
greater than the equilibrium price, the amount
producers are willing to supply exceeds the
amount that consumers are willing to buy and a
surplus results. The surplus causes price to fall.
As price falls, quantity supplied falls and
quantity demanded increases until the surplus is
eliminated and the market is in equilibrium.
• If the market price is less than the
equilibrium price, the quantity
demanded exceeds the quantity
supplied and a shortage occurs. The
shortage causes price to rise. As price
rises, quantity demanded falls and
quantity supplied increases until the
shortage is eliminated and the market
reaches equilibrium.
 Findings
• We have learned the determinants of the
quantity of a good consumers will purchase.
• These are often separated into two
categories, (1) the good's price, and (2) the
"non-price" determinants--consumers' tastes,
income, prices of related goods, expectations
about income and prices, and number of
buyers in the market.