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Microeconomics in Business
If you do not understand economics you do not understand
business!
Microeconomics shows us how prices affect the number of sales,
revenue and profits that a firm can realise.
Microeconomics also helps us understand the role of product
variety (differentiation), reputation (brands), contracts (HR &
outsourcing) and government (taxes & regulations).
Microeconomic theory is the foundation for most fields of business
study.
Determinants of Demand
Consumer income
Advertising expenditure
Quantity
(kg/week)
$3.00
$6.00
$9.00
$12.00
Price ($)
12
Price
Quantity
$3.00
$6.00
$9.00
$12.00
3
Jacks Demand Curve
0
Quantity (kg/week)
QD = a bP
Example
QD = 100 2P
2P
0 = 100
2P
0 + 2P = 100
2P + 2P
2P = 100
2P
100
=
2
2
P = 50
QD = 100
2P
QD = 100
20
QD = 100
Price
50
Demand
0
100
Quantity
Market Demand
The total market demand for a good or service can be found by
adding together the demands of each individual consumer in the
market.
Holding all else equal as a market grows so too does the demand
for a good or service.
Price
Price
30
Joes Demand
10
Market Demand
Sams Demand
0
3 4
13
Quantity
22
Quantity
Price
P2
Change in the
quantity demanded
P1
D
0
Q2
Q1
Quantity
Price
Change in demand
P1
D1
0
Q1
D2
Q2
Quantity
Price
D1
0
D2
Quantity
Price
D2
0
D1
Quantity
Price
D1
D2
Quantity
Price
eg. Once Charlie joined the workforce he could afford steak and
no longer ate the inferior good, instant noodles.
D2
0
D1
Quantity
Price
D1
D2
Price
Quantity
Population
An increase in population means that
more individual demand curves are
added together to form market demand.
D1
D2
Price
Quantity
D1
0
D2
Quantity
Special Cases
Some economic phenomena do not fit neatly into the standard
market setup that we analyse in this course.
We refer to these as special cases.
Price
Some results and rules must be amended when dealing with special
cases.
P = 20
Price
Quantity
QD = 20
Quantity
Feedback Question
Suppose that market demand is given by QD = 100 - 2P. If the
market price is $27 the quantity demanded is,
(a) QD = 46.
(b) QD = 54.
(c) QD = 73.
(d) QD = 127.
Determinants of Supply
Technology
Price ($)
Supply Curve
12
Price
Quantity
$3.00
10
$6.00
20
$9.00
30
$12.00
40
10
20
30
40
Quantity (kg/week)
Describing Supply
The supply schedule is a table listing the quantity of a good or
service that is supplied at each of a range of prices.
The supply curve is a curve on a price-quantity graph that
illustrates the relationship between the price of a product and the
quantity of the product supplied.
Within a supply schedule and along a supply curve all factors that
influence supply are held constant except for price.
QS = a + bP
Example
QS =
20 + 2P
QS =
20 + 2P
0=
20 + 2P
20 = 2P
10 = P
QS =
20 + 2 0
QS =
20
Price
Supply
10
-20
Quantity
Price
Price
Dells Supply
Asus Supply
Market Supply
30
10
120
180
Quantity
Price
30
20
50
300
Quantity
P2
Change in the
quantity supplied
P1
Q1
Q2
Price
Quantity
S1
S2
P1
Change in supply
Q1
Q2
Quantity
Price
P = 10
Price
Quantity
QS = 100
Quantity
Feedback Question
Which of the following influences does NOT cause the supply
curve to shift?
(a) A rise in the wages paid to workers.
(b) Development of new technology.
(c) People deciding that they want to buy more of the product.
(d) A decrease in the number of suppliers.
Price
50
Equilibrium Price
Supply
P*
Equilibrium
Equilibrium Quantity
10
Demand
-20
Q*
100
Quantity
Calculating Equilibrium
QD = 100
2P
QS =
20 + 2P
20 + 2P
In equilibrium QD = QS
100
2P =
120
2P = 2P
120 = 4P
30 = P
Substitute P = 30 into QD
QD = 100
2 30
Price
QD = 40
50
Supply
40
Excess Supply of
40 units
30
Quantity Demanded
Quantity Supplied
10
Demand
0
20
40
100
60
Quantity
Price
-20
50
Supply
Excess Demand of
60 units
30
Quantity
Supplied
Quantity
Demanded
15
10
Demand
-20
10
40
70
100
Quantity
Price
P2
P1
D1
Q1 Q2
Quantity
Price
D2
S1
S2
Movement
along the
demand curve
P1
P2
D
0
Q1
Q2
Quantity
Price
D1
Price
D2
Quantity
S1
S2
D1
Quantity
Feedback Question
Assume that both the price and quantity traded of wheat increase.
This can be the result of the,
(a) Demand curve for wheat shifting rightward.
(b) Demand curve for wheat shifting leftward.
(c) Supply curve for wheat shifting rightward.
(d) Supply curve for wheat shifting leftward.