Introduction to Microeconomics

Economics - Study of allocation of scarce

resources to meet unlimited human wants.

Macroeconomics The part of economics

concerned with large-scale or general
factor.

Microeconomics Concerned with

decision-making involving small units in
the economy, which are generally called
as individual economic agents.

Market equilibrium
-

Why Study Microeconomic Theory and

Practice?

Quantit
y
deman
ded

Quant
ity
suppli
ed

State of
market

100

20

80

40

60

60

40

80

20

100

Shortage
(-80)
Shortage
(-40)
Equilibriu
m (0)
Surplus
(80)
Surplus
40

Supply and Demand Interrelationships.

Steps in assessing Supply and Demand
interactions.

Price
(in
hund
reds
)
1

Systemetically examines how people

choose and the consequences of
their more important decisions.
Uses logical and mathematical
tools in examining choices and
their consequences.
Enables students to systematically
address issues ranging from
national to their professional and
personal lives.

Determine the factors or events

that will affect the supply or
demand curve.
Determine if the factor will affect
the supply or demand.

Determine how it will affect the

supply and demand curve.
Given the movement or the effect
on the curve, plot the equilibrium
point.
Given the new equilibrium point ,
plot and assess the new supply and
demand curve.

Is define as situation wherein

buyers and sellers meet to
negotiate price and trade.
Is a state implying a balance
between the opposing forces of
supply
Pressure on
and
Price

upward
upward
Neutral
downward
downward
demand.
Market Supply and Demand

Market demand and supply can be

obtained by summing up the
demand of individuals in a market
for a particular good.
Market supply also shows direct
relationships between price and
the equity supplied.
Determining market equilibrium

The law of supply and demand:

When the demand is greater

than supply price increases.
When the supply is greater than
demand price decreases.
When the demand is equal to
supply, price remain constant.

Qd 2Qd 1
Qd 1
P 2P 1

P1

Tabular Approach
Graphical Approach
Mathematical approach
Qd=Qs

Arc Elasticity

1200-20P=0+20P

ED

1200+=40P
30=P
Surplus and Shortage
Surplus The excess of quantity
supplied over quantity demanded
Shortage The excess of quantity
demanded over quantity supplied.

Elasticity
-

A measure of responsiveness of
one variable to change of another
variable.
Elasticity =

Percentage changevariable Q
Percentage change variable F
OR

Q
E=
F
Elasticity of Demand
-

The price elasticity of demand

measures the responsiveness of
quantity demanded with respect to
the change of price of a specific
good.

Point Elasticity

Q 2Q 1
Q 2+Q1
P 2P 1

P 2+ P 1

Classification of price elasticity of

demand
Price elastic demand the value of
the coefficient is greater than 1, it
means that small change in price
results to a good change in
quantity demanded, consumers
are sensitive to price changes.
Price inelastic demand- the value
of the coefficient is less than 1 but
more than 0, it means that the
change in price consumer is not
sensitive.
Unitary elastic demand - elasticity
coefficient is equal to 1, it means
that the price is equal to change in
quantity demanded.
Perfectly elastic demand- elasticity
coefficient is equal infinity; it
means that without change in
price, a change in quantity
demanded, the slightest change
demand. Products that have many
substitutes usually have perfectly
elastic demand.
Perfectly inelastic demandelasticity coefficient is 0, it means
that any change in quantity
demanded of course, technically
speaking there is no good perfectly
inelastic demand, because
consumer would run out finances
to purchase the good.
Determinants of price elasticity of demand
-

Degree of necessity of goods and

services certain product

Number of substitutes demand

for good greater number.
Proportion of income in price
changes inelastic for product.
Time period.

Elasticity of supply
Price elastic supply greater the
change of quantity supply.
Price inelastic supply lesser in
quantity supply.
Unitary elastic supply theres no
change in price.
Perfectly elastic supply when
theres no change in price but
theirs infinity change.
Perfectly inelastic supply when
theres a change in price does not
affect the quantity supply.
Determinants of supply
Time period
Monitary or intermediate perfectly
inelastic
Short run inelastic supply
Long run elastic supply.
Three Pillars of Economic Analysis

Choice
Numb
er of
cokes
0

Numb
er of
pizzas
100

Spendi
ng
coke
0

Spendi
ng
pizza
45000

50

90

4500

40500

100

80

9000

36000

150

70

13500

31500

200

60

18000

27000

250

50

22500

22500

300

40

27000

18000

Total
budg
et
4500
0
4500
0
4500
0
4500
0
4500
0
4500
0
4500
0

350

30

31500

13500

400

20

36000

9000

450

10

40500

4500

4500
0
4500
0
4500
0

Budget constraint the limit on the

consumption bundles that a
consumer can afford.
Indifference curve a curve that
presents two consumption bundles
with the same level of satisfaction
for the consumer.
Marginal rate of substitute the
rate the which a consumer is
willing to trade one good for
another.
Scarcity- societys resources are
limited
It is impossible to produce
all the goods and services
people to leave.
Also exists when human
wants exceed available
resources.
Coordination involves how the
actions to economic agents
interact.
Diseconomies of scale refer to
the property whereby long run
average total cost rises as the
quantity of output increases.
Consumers optimal choices is a
combination of the budget
constraint and the preference of
the consumer.
Less if the point is on lower
indifference curve.
Point elasticity it measures a
particular point in this type of price
elasticities of ten used when
calculating minute changes in both
price and quantity demanded on a
particular point.
Arc elasticity measures elasticity
between 2 points along the
demand curve. It is used when
dealing with large change in price
and quantity demanded.
Complementary goods are goods
utilized or consumed in
conjunction with other goods

complementary if error elasticity is

below to zero (0).
Substitute goods goods that can
be used as alternative for another
good. Substitute if elasticity is
above zero (0).

The product consider inferior if the

coefficient is negative, it means
that the income of consumer
increases the demand for
particular product line.