Professional Documents
Culture Documents
Introduction to Microeconomics
Delivered by
Chapter 1
Scarcity . . .
TEN PRINCIPLES OF
ECONOMICS
10
11
13
14
12
15
16
17
Conclusion
THINKING LIKE AN
ECONOMIST
Chapter 2
18
19
20
21
Learning economics
22
Revenue
Goods and
services bought
Firms
Wage, rent,
and profit
Spending
Households
Inputs for
production
Labor, land
and capital
Income
25
3,000
4,000
26
Produced
D
3,000
A
2,000
2,100
2,000
1,000
E
A
Production
possibilities
frontier
0
0
300
600 700
1,000
Quantity of
Cars Produced
700 750
1,000
24
Quantity of
Computers
Produced
2,200
23
Microeconomics and
Macroeconomics
Quantity of
Cars Produced
27
28
31
34
Use of graphs
Economists make extensive use of graphs
Graphs are used in economic theories to express
ideas that are more difficult to understand only in
words
Graphs also provide a convenient way of
representing data about the real world
Graphs permit to show
The breakdown into its constituents parts of a
single variable
The relation between two or more variables
The latter are used more commonly in economic
theory
29
30
32
33
Conclusion
35
GRAPHING: A BRIEF
REVIEW
Appendix to Chapter 2
36
Individuals (23%)
Private Insurers (32%)
Other (4%)
Government (41%)
1996 Value
billions
of dollars)
(in
$140
120
100
(b) Bar Graph
80
60
40
General
Electric
($126 billion)
Exxon
($99 billion)
($68 billion)
IBM
General
Motors
($39 billion)
20
0
output per hour of labor,
Productivity Index (farm
1977 = 100)
160
140
120
100
80
60
40
20
0
1950
1960
1970
1980
1990
37
38
Price of
39
Novels
$11
Grade
(5, $10)
Point
10
Average
4.0
3.5
Albert E.
(25, 3.5)
3.0
(9, $9)
(13, $8)
(17, $7)
2.5
(21, $6)
Alfred E.
2.0
(5, 2.0)
(25, $5)
1.5
Demand,
1.0
3
0.5
2
10
15
20
25
30
35
40
Study
Time
10
15
20
25
30
Quantity
of Novels
Figure 2A-3
Price of
40
Novels
Price of
$11
Novels
41
Purchased
42
$11
10
10
(13, $8)
INTERDEPENDENCE AND
THE GAINS FROM TRADE
9
9
(16, $8)
8
(13, $8)
6
When income
5
4
3
(income =
decreases, the
demand curve
$20,000)
(21, $6)
1
(income =
21
13
-= 8
(income =
2
$40,000)
Demand,
$30,000)
Chapter 3
10
13
15 16
20
25
30
Quantity
10
13
15
20 21
of Novels
Purchased
Figure 2A-4
43
25
30
Quantity
of Novels
Purchased
Figure 2A-5
44
45
46
49
FARMER
RANCHER
Meat
Patatoes
Meat
Patatoes
20 hours/lb
10 hours/lb
2 lbs
4 lbs
1 hour/lb
8 hours/lb
40 lbs
5 lbs
47
50
Self-sufficiency
52
Self-sufficiency - rancher
(b) The Ranchers Production Possibilities Frontier
Meat
(pounds) 40
20
Potatoes (pounds)
51
Self-sufficiency - farmer
Meat
(pounds)
2
A
1
0
48
53
4 Potatoes (pounds)
54
Farmers
consumption
without trade
2
1
0
Farmers
consumption
with trade
4 Potatoes (pounds
55
21
20
Without Trade
58
Gains from
Trade
1 pound
meat
61
1 pound
potatoes
pound
potatoes
59
The principle of
comparative advantage
Comparative advantage and differences in
opportunity costs are the basis for specialized
production and trade
Whenever potential trading parties have differences
in opportunity costs, they can each benefit from
trade
Individuals, regions and nations specialise because
they have comparative advantage not absolute
advantage
Specialisation and trade lead to higher levels of
consumption for all the parties that participate in
trade
Patatoes
Meat
Patatoes
FARMER
20 hours/lb
4 hours/lb
2 lbs
10 lbs
RANCHER
1 hour/lb
8 hours/lb
40 lbs
5 lbs
57
Absolute advantage
Consumption
1 pound
meat
2 pounds
potatoes
Potatoes (pounds)
Trade
2 pounds
meat
with trade
Ranchers
consumption
without trade
With Trade
Production
3 pounds
Gets 3
0 pounds
meat pounds meat meat
4 pounds for 1 pound 3 pounds
potatoes
potatoes
potatoes
Ranchers
consumption
Production
and
Consumption
Farmer
B*
56
62
60
Comparative advantage
Comparative advantage looks at relative costs, in
other words to the opportunity costs
The producer who has the smaller opportunity cost
of producing a good is said to have a comparative
advantage in producing that good
In our original example the rancher is able to
produce more of both goods
Still, the farmer has comparative advantage in
patatoes while the rancher has comparative
advantage in meat
Farmer gives up 0.5 lb. of meat to produce 1 lb. of
patatoes: the ratio is 8 to 1 for the rancher
63
64
Conclusion
Self-sufficiency is not desirable
Specialisation leads to higher productivity for the
producers of goods and services
Interdependence and trade allow people to enjoy a
greater quantity and variety of goods and services
The person who can produce a good with a smaller
quantity of inputs has an absolute advantage.
The person with a smaller opportunity cost has a
comparative advantage
The gains from trade are based on comparative
advantage, not absolute advantage
Turkey benefits from international trade
67
65
66
Chapter 4
68
69
Market forces of
supply and demand
70
Markets
The terms supply and demand refer to the behavior
of people as they interact with one another in
markets
A market is a group of buyers and sellers of a
particular good or service
Buyers determine demand
Sellers determine supply
Some markets are formally organised with a
building, etc. such as the Stock Market,
Commodities Market, etc.
Most markets are not formally organised but they
exist because buyers and sellers know them
People know where to go to buy a car, bread, etc.
71
72
A Competitive Market
Types of markets
73
76
Price
$0.00
0.50
1.00
1.50
2.00
2.50
3.00
Quantity
12
10
8
6
4
2
0
79
$3.00
$3.00
The law of
demand states that
there is an inverse
relationship
between price and
quantity
demanded.
2.50
2.00
1.50
1.00
2.50
2.00
1.50
1.00
0.50
0.50
1
9 10 11 12 Quantity of
Ice-Cream Cones
77
9 10 11 12 Quantity of
Ice-Cream Cones
78
Demand function
80
75
Price of
Ice-Cream
Cone
Law of Demand
Demand function
Price of
Ice-Cream
Cone
Determinants of Demand
74
Price of
Ice-Cream
Cones
Increase
in demand
Demand
curve, D 1
Demand
curve, D 2
81
Price of
Ice-Cream
Cones
Decrease
in demand
Demand curve, D 3
0
Quantity of
Ice-Cream Cones
Demand
curve, D 1
Quantity of
Ice-Cream Cones
82
83
Ceteris Paribus
85
Income
Tastes
Expectations
Number of buyers
86
Price of
Cigarettes,
per Pack
C
Price of
Cigarettes,
per Pack
A policy to discourage
smoking shifts the
demand curve to the left.
A
2.00
$2.00
D2
D1
88
12
20
87
Change in Demand
$4.00
84
Price
Number of Cigarettes
Smoked per Day
89
Number of Cigarettes
Smoked per Day
20
90
Supply Curve
Law of Supply
The law of supply states that there is a direct
(positive) relationship between price and the
quantity supplied
At higher prices there will be higher quantities of the
good or service supplied
The supply schedule is a table that shows the
relationship between the price of the good or service
and the quantity supplied
The supply curve is the upward-sloping line relating
price to quantity supplied
Market supply curve is the sum of the supply curves
of the individual producers
10
D1
Price of
Ice-Cream
Cone
Price
$0.00
0.50
1.00
1.50
2.00
2.50
3.00
Quantity
0
0
1
2
3
4
5
$3.00
2.50
2.00
1.50
1.00
0.50
Quantity of
Ice-Cream Cones
91
94
Supply curve, S3
Supply
curve, S1
Decrease
in supply
Quantity of
Ice-Cream Cones
Variables that
Affect Quantity Supplied
Price of
Ice-Cream
Cone
Price
Input prices
Technology
Expectations
Number of sellers
97
Supply
curve, S2
Quantity of
Ice-Cream Cones
95
Supply
curve, S1
Increase
in supply
93
Increase in Supply
98
Decrease in Supply
Price of
Ice-Cream
Cone
92
Price of
Ice-Cream
Cone
Supply
Equilibrium
Equilibrium price
$2.00
Demand
Equilibrium
quantity
0
3 4
5 6
8 9 10 11 12 13
Quantity of
Ice-Cream Cones
99
Excess Demand
Excess Supply
Price of
Ice-Cream
Cone
Price of
Ice-Cream
Cone
Excess
supply
Supply
Supply
$2.50
2.00
$2.00
1.50
Excess
demand
Demand
0
4
Quantity
demanded
10
Quantity
supplied
Quantity of
Ice-Cream Cones
96
4
Quantity
supplied
10
Quantity
demanded
Demand
Quantity of
Ice-Cream Cones
100
Changes in Equilibrium
For the market equilibrium to change one or more of
the determinants of demand or supply must have
changed
When faced with an event or policy that affects the
market
First, we must try to understand whether the event
shifts the supply or demand curve (or both)
Then we search for the direction of the shift(s) in the
curve(s): upward or downward
Only then can we determine the impact of the event
or policy on the equilibrium price and quantities
And also the direction of the change
103
P same
Q same
P up
Q up
P down
Q down
P down
P up
Q up
Q down
P unknown P up
Q up
Q unknown
P down
P unknown
Q unknown Q down
106
101
Price of
Ice-Cream
Cone
102
Price of
Ice-Cream
Cone
S2
1. An earthquake reduces
the supply of ice cream...
S1
Supply
$2.50
New equilibrium
2.00
2. ...resulting
in a higher
price...
New
equilibrium
$2.50
Initial equilibrium
2.00
2. ...resulting
in a higher
price...
Initial
equilibrium
D2
Demand
D1
0
10
3. ...and a higher
quantity sold.
Quantity of
Ice-Cream Cones
104
8 9 10 11 12 13
3. ...and a lower
quantity sold.
Quantity of
Ice-Cream Cones
105
Some Examples
Conclusion
107
108
Conclusion
Changes in the other factors cause upward or
downward shifts in the demand curve
Supply comes from producers or sellers
Quantity supplied is a function of the price, of input
prices, of technology, etc.
Higher prices increase quantity supplied
Supply and demand together determine the prices of
the economys goods and services as well as the
quantities produced
Market equilibrium changes when supply or demand
(or both) shifts
Prices are the signals that guide the allocation of
resources in the market economy
109
Elasticity
Elasticity is a practical measure developed by
economists to enrich our understanding of the forces
of supply and demand and how they interact
Elasticity calculates the response of buyers and
sellers to changes in market conditions
Through this measure producers and government
gains valuable insights about the behaviour of
different markets
We will learn about three types of elasticity
Price elasticity of demand
Income elasticity of demand
Price elasticity of supply
112
Ranges of elasticity
115
114
Demand
1. At any price
above $4, quantity
demanded is zero.
$5
$4
4
1. An
increase
in price...
Demand
2. At exactly $4,
consumers will
buy any quantity.
100
0
3. At a price below $4,
quantity demanded is infinite.
Quantity
116
$5
4
1. A 22%
increase
in price...
Quantity
Elastic demand
4
1. A 22%
increase
in price...
Quantity
113
Price
Price
$5
80 100
111
Some concepts
Price
Price
Demand
110
117
Inelastic demand
Price
$5
Demand
50
100
Quantity
4
1. A 22%
increase
in price...
Demand
90
100
Quantity
118
Elasticity is
larger
than 1.
6
5
Elasticity is
smaller
than 1.
3
2
1
10
12
14
Quantity
121
124
$5
4
Demand
50
100
Quantity
122
-2
123
$4
P X Q = $400
(total revenue)
Demand
100
Quantity
125
100
(4.00 - 5.00)
4.00
50 percent
- 25 percent
ED
Price
120
(100 - 50)
119
Determinants of
price elasticity of demand
Price
$7
126
Price
Price
$5
$4
$3
Demand
Demand
Revenue = $200
Revenue = $100
Revenue = $240
$1
50
Quantity
20
Quantity
Revenue = $100
Demand
Demand
100
Quantity
80
Quantity
127
130
Percentage Change in
Quantity Supplied
Elasticity of Supply =
Percentage Change
in Price
128
Percentage Change in
Quantity Demanded
Percentage Change
in Income
133
131
ES = f
horizontal
ES > 1
flat
Price
Relatively Elastic
132
Supply
$5
Unit Elastic
ES = 1
1. An
increase
in price...
Relatively Inelastic
ES < 1
steep
ES = 0
vertical
Perfectly Inelastic
0
100
Quantity
134
Price
Price
$5
$5
$5
1. A 22%
increase
in price...
1. A 22%
increase
in price...
1. A 22%
increase
in price...
100
125
135
Elastic supply
Price
Quantity
129
Perfectly Elastic
Inelastic supply
100 110
Some examples
Quantity
100
200
Quantity
136
Price
1. At any price
above $4, quantity
supplied is infinite.
4
1. A 22%
increase
in price...
2. At exactly $4,
producers will
supply any quantity.
Quantity
100
3. At a price below $4,
quantity supplied is zero.
139
142
Price of
Drugs
1. Drug interdiction reduces
the supply of drugs...
S2
P1
2. ...which
raises the
price...
0
Demand
S1
P1
P2
2. ...which
reduces
the price...
Q 2 Q 1 Quantity of Drugs
3. ...and reduces the
quantity sold.
D2
Q2
140
S2
2. ...leads $3
to a large
fall in
2
price...
Demand
0
100
110
Quantity of Wheat
138
141
143
144
Application of elasticity
Determinants of
elasticity of supply
$5
137
D1
Q 1 Quantity of Drugs
3. ...and reduces the
quantity sold.
P
2. ...leads 2
to a large
increase P
in price. 1
P2
P1
Demand
Demand
0
Quantity of Oil
Quantity of Oil
145
146
148
151
Chapter 6
149
152
Equilibrium
price
$3
3
Equilibrium
price
2
Shortage
100
Equilibrium
quantity
Quantity of
Ice-Cream
Cones
Price
ceiling
Demand
Demand
0
75
Quantity
supplied
125
Quantity
demanded
150
Price ceilings
Supply
Price
ceiling
Price controls
Supply
147
Price of
Ice-Cream
Cone
Price of
Ice-Cream
Cone
$4
Conclusion
Elasticity is a practical measure that helps producers
and policymakers
Price elasticity of demand measures how much the
quantity demanded responds to changes in the price
If a demand curve is elastic, total revenue falls
when the price rises
If it is inelastic, total revenue rises as the price rises
The price elasticity of supply measures how much
the quantity supplied responds to changes in the
price
In most markets, supply is more elastic in the long
run than in the short run
Quantity of
Ice-Cream
Cones
153
154
1. Initially,
the price
ceiling
is not
binding...
S 2
155
2. ...but when
supply falls...
Supply
P 2
Supply
Price ceiling
Price ceiling
P 1
Demand
Q1
3. ...the price
ceiling becomes
binding...
4. ...
resulting
in a
shortage.
Quantity of
Gasoline
Controlled rent
Demand
Shortage
0
QS
QDQ 1
Quantity of
Gasoline
Controlled rent
Shortage
Demand
157
Demand
0
Quantity of
Apartments
Price of
Ice Cream
Cones
Supply
158
Supply
$4
Price floor
3
$3
Equilibrium
price
Price
floor
Demand
Demand
0
0
100
Equilibrium
quantity
Quantity of
Ice-Cream
Cones
160
Wage
Wage
Labor
supply
Labor
supply
Minimum
wage
Labor surplus
(unemployment)
Equilibrium
wage
Labor
demand
0
Equilibrium
employment
Quantity of
Labor
Labor
demand
0
Quantity
demanded
Quantity
supplied
Quantity of
Labor
80
Quantity
demanded
120
Quantity
Supplied
Quantity of
Ice Cream
Cones
159
Surplus
Equilibrium
price
156
Quantity of
Apartments
Price floors
S 1
S 1
P 1
Price of
Gasoline
Supply,
161
162
Taxes: impact
163
Supply, S1
Equilibrium without tax
Price
sellers
receive
164
Equilibrium
with tax
Price of
Ice-Cream
Cone
Price
buyers
pay
$3.30
Price
3.00
without
2.80
tax
S2
Equilibrium
with tax
S1
Tax ($0.50)
A tax on sellers
shifts the supply
curve upward by
the amount of
the tax ($0.50).
Price
sellers
receive
Demand, D1
D1
D2
0
Quantity of
Ice-Cream Cones
90 100
166
Labor supply
Labor demand
Quantity
of Labor
169
2. ...the
incidence of the
tax falls more
heavily on
consumers...
167
168
170
Price
Price buyers pay
Supply
3. ...than on consumers.
Tax
Demand
Quantity
165
Quantity of
Ice-Cream Cones
90 100
Demand
2. ...the
incidence of
the tax falls more
heavily on producers...
Quantity
171
172
Conclusion
The economy is governed by two kinds of laws:
The laws of supply and demand
The laws enacted by government
Prices can be controled by ceilings or floors
Price ceilings cause shortages and black market
Price floors result in surpluses and unsold stoks held
by the government
Taxes raise revenue to the government
Taxes create new price equilibriums in which buyers
and sellers share the tax
The incidence of the tax depends on the price
elasticity of demand and supply
Necessities are taxed to get more revenue
175
173
CONSUMERS, PRODUCERS,
AND THE EFFICIENCY OF
MARKETS
Chapter 7
178
176
174
177
Welfare economics
PART THREE
SUPPLY AND DEMAND II
MARKETS AND WELFARE
179
Willingness to pay
Consumer surplus
Willingness to Pay
John
$100
Paul
80
George
70
Ringo
50
180
181
Buyer
$80 to $100
John
$70 to $80
John, Paul
$50 to $70
$50 or less
Ringo
Initial
consumer
surplus
P1
P2
Consumer surplus
to new consumers
F
Additional
consumer
surplus to
initial
consumers
Demand
Q1
Q2
Quantity
$100
Johns consumer surplus ($30)
50
184
182
Price of
Album
80
70
Quantity
Demanded
Quantity of
Albums
185
Willingness to sell
We can now apply the concept of surplus to the
producers
Market supply curve shows the various quantities
that producers would be willing and able to sell at
different prices
It may be seen as a measure of supplier costs, that
is, the opportunity cost of supplying various
quantities of the good.
The marginal opportunity cost of production
increases as market output expands
Because a producers cost is the lowest price he/she
will accept, cost is a measure of his/her willingness
to sell
183