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MICROECONOMÍA (UC3M)

APUNTES

PROF. 16-17
UNIT 2: THE MODEL OF PERFECT COMPETITION: THE
DEMAND
2.1 The market
DEF: Institution in which buyers and sellers freely exchange a good.
The market of godos refers to:
Sellers
Rules of trade
Buyers
Supply and demand
Demand: is a buyer's willingness and ability to pay a price for a specific quantity
of a good or service. Demand refers to how much (quantity) of a product or
service is desired by buyers at various prices. The quantity demanded is the
amount of a product people are willing or able to buy at a certain price; the
relationship between price and quantity demanded is known as the demand.
Supply: is the amount of something that firms, consumers, laborers, providers
of financial assets, or other economic agents are willing to provide to
themarketplace. Supply is often plotted graphically with the quantity provided
(the dependent variable) plotted horizontally and the price (the independent
variable) plotted vertically.
The model of perfect competition
A buyer (or a seller) is a price taker if s/he cannot influence the price at which
the good is traded.
A price taker is a person or company that has no control to dictate prices for a
good or service. In the trading world, a price taker is a trader who does not
affect the price of the stock if he or she buys or sells shares.
- Competitive market
We can expect the buyers and the sellers to be price takers when
there are many buyers and sellers interested in the same good (a
homogenous good). This types of markets are called: Competitive
markets.
- Other Market Structures
Monopoly: one single seller
Oligopoly: few number of sellers
Monopolistic competition: Many sellers but with slightly different
products

The Demand(I): Introduction

 -The quantity demanded: the quantity (of a good) that buyers are willing
(and can) buy under any possible circumstances.
- The demand curve: Is a function (or a graph) that shows the quantity
demanded as a function of the price.
EXAMPLE

- Two caveats (dos advertencias):

The demand curve is constructed under the ceteris paribus
condition. ( es muy usada para facilitar la aplicación de modelos
abstractos, habiéndose constituido en un instrumento fundamental del
análisis económico. Su uso en la materia refiere a la comparación de
una variable con otras que permanecen constantes.
The demand function satisfies the law of demand: Lower prices
imply greater quantities.
EXAMPLE

The Demand (II): The Uni-Demand Case

- A simple case:
Consumers are only interested in one unit. EXAMPLE:

Reservation value: the maximum price they are willing to pay for
the unit.

The Demand (III): The General Case

- Three elements for our General Analysis
The
individual demand: The individual demand corresponds to a
 particular person.

The MgU curve is the demand curve of a price taker individual

Marginal Utilities: It is a monetary measure (ex. €) of the

increase in satisfaction of a consumer when s/-he increases the
consumption of the good in one unit.
The law of decreasing marginal utility: the satisfaction increase
resulting from the consumption of a good decreases the more
units of the good we consume.

This property (decreasing marginal utility)

holds for a majority of the goods.
The marginal utility decreases with the quantity.

Market Demand: The market demand is the total demand of all

the buyers in a market.
CALCUATED: by summing the individual quantities demanded at
each price level. This type of operation is called horizontal
summation.

The market demand and horizontal summation

Does the law of demand hold in the case of the market demand?
The market demand is a decreasing function of its own price for two reasons:
- Individual demand are decreasing functions of price
- At a lower price, there are more individuals demanding the good
The demand function in practice
- What happens when we study
demand functions in an environment with many units?
We approximate the demand with a curve
 - What happens when we study demands in an environment with many
units?
To make computations easier,
we shall use linear demands in this course.

LINEAL MARKET DEMANDS

- The linear demand
Q= 10-P

- The inverse demand

- The market demand

- The market demand from inv. Demands

 - The market demand from inv. Demands

- The market demand in diff. cases

- Compute market demand in diff. cases

MOVEMENTS AND SHIFTS

- Factors that affect the demand
Market price
Consumer’s income
Prices of other goods
- Quantity demanded and movements
There is a change in the quantity demanded or movement along
the demand if: the price of the good changes, ceteris paribus.
- Movement

- Shift on the demand

Some other factor that affects the demand other than the price of the
good changes:
There is a shift in the demand or a change in the demand.
- The demand and consumer’s income
A normal good is a good whose demand increases whenever the
consumer’s income increases.

An inferior good is a good whose demand decreases whenever

the consumer’s income increases.