Notes on

Microeconomics

Prof. Theodore Tolias

(Draft Not for Quotation)

Agenda
Theory

of Demand and Supply

Elasticity
Applications
Minimum Wage and Unemployment
Sales Taxes

Possibilities,

Preferences and Consumer

Choices
The Theory of the Firm

The Theory of Demand

The

quantity demanded (Qd) of a good or

service is the amount that consumers plan
to buy during a given time period at a
particular price (p).

A linear

relationship between P and Qd,

other things remaining equal.

Mathematically
P = a bQd,
Where:
P = Price of good or service
a = y-intercept or the price where Qd = 0
b = slope of demand curve
Qd = Quantity demanded

Factors That Affect Demand

The price of the good

The prices of related goods
Income
Expected future prices
Population
Preferences

Movements Along Demand

curve
Law

of Demand

Change

in quantity demanded

Changes

in the price of the good, cause

movements along the curve, everything
else remaining the same.

Shifts of the Demand Curve

Change

in Demand

Decrease
Increase

in demand - leftward shift

in demand rightward shift

Decrease in Demand
Fall

in the price of a
substitute
Rise in the price of a
complement
Income falls (normal
good)
Expected fall in price
Population decrease

D1
D2

Increase in Demand
Rise

in the price of
a substitute

Fall

in the price of
a complement
Income

rises
(normal good)
Expected

rise in

price
Population

Increase

D2
D1

Theory of Supply
The

quantity supplied (Qs) is the amount of

a good that producers plan to sell in a given
period at a particular price (p).

A linear

relationship Qs and P, other things

remaining the same.

Mathematically
P = c + dQs,
Where:
P = Price of good or service
c = y-intercept or the price where Qs = 0
d = slope of supply curve
Qs = Quantity supplied

Factors That Affect Supply

The price of the good

The prices of factors of production
The prices of other goods produced
Expected future prices
The number of suppliers
Technology

Movements Along Supply

Curve
Law

of Supply

Change

in Quantity Supplied

Changes

in the price of the good, causes

movements along the curve, everything
else remaining the same.

Shifts of the Supply Curve

Change

in Supply

Decrease

in Supply Leftward shift

Increase

in Supply Rightward shift

Decrease in Supply
Rise

in the price of a
p
factor of production
Rise in the price of a
substitute in production
Fall in the price of a
complement in production
An expected rise in price
of the good
Fall in the number of firms

S2

S1

Increase in Supply
Fall

in the price of a

factor of production
Fall

S1

S2

in the price of a

substitute in production
Rise

in the price of a

complement in production
An

expected fall in price

of the good
Rise

in the number of firms

Technology

Price Determination Equilibrium

The

price at which the quantity demanded

equals the quantity supplied
Qd = Qs

Diagrammatically
Prices

below the
equilibrium, there is p
a shortage (excess
demand) and the
price rises.
Prices above the
equilibrium there is p*
a surplus (excess
supply) and the
price falls.

D
Q*

The Effects in the Change of Demand

When

demand
increases, both the
price and the
quantity increase

p2

D2

p1

D1
Q1 Q2

The Effect of a Change in Supply

When

supply
increases, the
quantity
increases and
the price falls.

S1

S2

p1
p2

D
Q1 Q2