Microeconomics

Vivekananda Mukherjee
Department of Economics and Finance, BITS-Pilani, Hyderabad Campus
Lecture 2
Summary

Firms’ earning (revenue)

Product Market Individuals’ expenditure

Buyer Seller
Individuals Firms
[Utility(Happiness) [Profit maximizers]
maximizers] Seller Buyer

Individuals’ earning (income)

Firms’ expenditure (cost)
Factor Market
Summary (contd.)

• Perfectly competitive markets [Homogeneous product, many sellers (price

takers), many buyers (price takers)]
• Monopoly [Single product, one seller (controls price completely), many buyers
(price takers)]
• Monopolistic Competition [Many varieties of a single product, many sellers
each selling a particular variety (controls price of a particular variety), many buyers (price
takers)]
• Duopoly/oligopoly [Homogeneous/differentiated product, two/few
sellers (partial control over price), many buyers (price takers)]
• Monopsony [Single product, many sellers (price takers), one buyer (controls price
completely)]
• Oligopsony [Homogeneous/differentiated product, many sellers (price takers),
two/few buyers (partial control
over price)]
 Perfect Competition: Market Demand curve and Market
Supply curve p
D S

E
P*
S
D
0 Q* Q
Price of the product/factor, which is beyond anyone’s control, adjusts itself to match
market demand with market supply
The volume of transaction and the value of transaction also get determined
Demand Curve 𝐷 ( 𝑝 ,∙ )=𝑎− 𝑏 𝑝 ; 𝑎> 0 , 𝑏>0.
𝜕𝑄
=− 𝑏 .
The demand curve shows 𝜕𝑝
how much buyers of a P
product want to 𝑎
D
𝑏
purchase at each possible
price holding fixed all 𝑏
other factors (like
preference, income,
prices of substitutes and
complements) that affect
demand. D

𝑎Q
Supply Curve S
𝜕𝑄
P 𝜕𝑝
=𝑑 .
The supply curve shows how
much sellers of a product want to
sell at each possible price holding S
fixed all other factors (like wages,
interest rate, cost of raw
materials, technology,
institution/management) that
affect supply. 𝑑
𝑐
𝑑

−𝑐
Q
 Excess Demand Function:
Market equilibrium at each

P at all At all such prices, price adjusts in the

upward direction.
Excess demand S
 price adjusts in
the upward
direction
 Qs increases
and Qd decreases P*
 lower excess
demand, until it Plow
disappears Excess
demand D
0 Qs Qd Q
Market equilibrium Excess Demand Function:
at each

at all . At all such prices, price adjusts in the

Excess supply P downward direction.

 price adjusts S
in the downward Excess supply
direction Phigh
 Qs decreases P*
and Qd increases
 lower excess
supply, until it D
disappears
Qd Qs Q
 Market equilibriumExcess Demand Function:
at each

P 

Qd = Qs
𝑏
S
Equilibrium
Example:
If both the buyers and sellers are
price takers, who adjusts the price P* 

at the market?

Walrasian Auctioneer D
−𝑐 Q* 𝑎 Q
Non-existence of Market Equilibrium

𝑎𝑐 Q
 Stability

P P
𝑎
𝑏
𝑏 S S

D
P* P*
𝑎𝑏
𝑏
𝑐 𝑑 𝑑
𝑐
𝑑
D 𝑑

Stable Equilibrium
Q Unstable Equilibrium Q