KINH TẾ VI MÔ Chapter 2 microeconomics 2015

Contents
Demand
Supply
Equilibrium
Elasticity
Government Policies







The Market Forces
of Supply and Demand
Chapter 2
MICROECONOMICS

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Markets
A group of buyers and sellers of a particular good or
service






Can be highly organized
Can be less organized

2.1 DEMAND
Market: any institution,
mechanism, or arrangement
which facilitates exchange.

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Buyers determine demand...

3

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1


Demand
Demand shows the willingness to pay for a good (WTP)
Quantity demanded (QD)







Law of Demand





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Amount of a good
Buyers are willing and able to purchase
Other things equal, when the price (P) of the good rises,
quantity demanded (QD) of a good falls

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Catherine’s demand schedule and demand curve

Demand

Price of
Ice-Cream
Cones
$3.00

Relationship between Price of a good (P) and
Quantity demanded (QD) can be shown:






Demand schedule - a table:
Demand curve - a graph:




Downward sloping curve

Demand function:


QD= f (P)

Price of
Ice-cream cone

Quantity of

Cones demanded

2.50

$0.00
0.50
1.00
1.50
2.00
2.50
3.00

12 cones
10
8
6
4
2
0

2.00

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8

1. A decrease
in price . . .

2. . . . increases quantity
of cones demanded.

1.50
1.00

Demand curve

0.50
0

7

6

1 2 3 4 5 6 7 8 9 10 11 12
Quantity of Ice-Cream Cones

8

2


1.2 Individual Demand
and Market Demand

Market demand as the sum of individual demands
(demand schedule)

Individual demand:





Demand of one individual

Market demand





Sum of all individual demands for a good or service

Market demand curve





Sum - individual demand curves horizontally

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DCatherine

Price of
Ice
Cream
Cones
$3.00

2.00

2.00

2.00

1.50

1.50

1.50

1.00

1.00

1.00

0.50

0.50

0.50

0

1 2 3 4 5 6 7 8 9 10 11 12
Quantity of Ice-Cream Cones
11

0

1 2 3 4 5 6 7





Quantity of
Ice-Cream Cones

2.50

0

7
6
5
4
3
2
1

Market
=

19
16
13
10
7
4
1

Increase in demand










2 4 6 8 10 12 14 16 18

Any change that decreases the quantity demanded at every price
Demand curve shifts left

Variables that can shift the demand curve


DMarket

Any change that increases the quantity demanded at every price
Demand curve shifts right

Decrease in demand


2.50

Nicholas
+

10



$3.00

2.50

12
10
8
6
4
2
0

10



Price of
Ice
Cream
Cones

DNicholas

Catherine

$0.00
0.50
1.00
1.50
2.00
2.50
3.00

1.3 Shifts in Demand

Market demand as the sum of individual demands
Catherine’s
Nicholas’s
Market
+
=
demand

demand
demand
Price of
Ice
Cream
Cones
$3.00

Price of ice-cream cone

Income
Prices of related goods
Tastes
Expectations
Number of buyers

Quantity of Ice-Cream Cones

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3


Changes in demand

Shifts in the demand curve



Price of
Ice-Cream
Cones

Increase in
Demand

1. Income (I)


Normal good: other things constant, an increase in income
makes increase in demand




Decrease in
Demand

Demand
curve, D3
0

Demand
curve, D1

Demand
curve, D2

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


15

Change in tastes – changes the demand

4. Expectations - about the future (income, prices) (E)


Affect current demand

5. Number of buyers – increase (N)


Complements – two goods


14

3. Tastes (T)


An increase in the price of one leads to an increase in the

demand for the other




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Changes in demand

2. Prices of related goods (Py)
Substitutes - two goods


14

13

Changes in demand


Inferior good: Other things constant, an increase in income
makes decrease in demand

Quantity of Ice-Cream Cones

13



Necessary goods

Luxury goods

Market demand - increases

An increase in the price of one leads to a decrease in the
demand for the other

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Quick Review




List the determinants of
the demand for bread.
Give an example of a
demand schedule.
Give an example of

something that would
shift the demand curve.

2.2 SUPPLY
Sellers determine supply...

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18

Supply



Supply

Supply shows the willingness to sell (WTS) of sellers for a
goods
Quantity supplied







Relationship between: P and QS can be shown as:
Supply schedule - a table: shows the quantity supplied at
each price

Amount of a good that sellers are willing and able to sell

Law of supply


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Other things equal, when the price (P) of the good rises
quantity supplied (Qs) of a good rises

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Price of
Ice-cream cone

Quantity of
Cones supplied

$0.00
0.50
1.00
1.50
2.00
2.50

3.00

0 cones
0
1
2
3
4
5

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5


Supply







Ben’s supply schedule and supply curve
Price of
Ice-Cream
Cones
$3.00

Relationship between: P and QS can be shown as:
Supply curve - a graph:
Upward sloping curve

Supply curve
1. An increase
in price . . .

2.50

Supply function: QS = g (P)

2.00
1.50

2. . . . increases quantity
of cones supplied.

1.00
0.50
0

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



22

Individual supply: Supply of one seller
Market supply: Sum of the supplies of all sellers for a good
or service
Market supply curve


22

Market supply as the sum of individual supplies
(supply schedule)

2.2 Individual Supply and Market Supply


1 2 3 4 5 6 7 8 9 10 11 12
Quantity of Ice-Cream Cones

Sum - individual supply curves horizontally

Price of ice-cream cone

Ben

$0.00
0.50
1.00

1.50
2.00
2.50
3.00

0
0
1
2
3
4
5

Jerry
+

0
0
0
2
4
6
8

Market
=

0
0
1

4
7
10
13

At a price of $2.00, Ben supplies 3 ice-cream cones, and Jerry supplies 4 icecream cones. The quantity supplied in the market at this price is 7 cones

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6


2.3 Shifts in Supply

Market supply as the sum of individual supplies
Ben’s
supply

Price of
Ice
Cream
Cones

$3.00

Jerry’s
supply

+
Price of
Ice
Cream
Cones
$3.00

SBen

=
Price of
Ice
Cream
Cones

SJerry

2.50

2.50

2.00

2.00

2.00

1.50

1.50

1.50

1.00

1.00

1.00

0.50

0.50

0.50

Increase in supply




SMarket

$3.00

2.50



Market
supply

Decrease in supply





Any change that increases the quantity supplied at every price
Supply curve shifts right
Any change that decreases the quantity supplied at every price
Supply curve shifts left

Variables that can shift the supply curve


1. Input Prices (Pi)



2. Technology (T)




1 2 3 4 5 6 7 8 9 10 11 12

Quantity of Ice-Cream Cones

0

1 2 3 4 5 6 7
Quantity of
Ice-Cream Cones

0

2 4 6 8 10 12 14 16 18

Advance in technology – increase in supply



3. Expectations about future (E)



4. Number of sellers (N) – increase


0

Supply – negatively related to prices of inputs



Affect current supply

Market supply - increase

Quantity of Ice-Cream Cones

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25

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Shifts in the supply curve
Price of
Ice-Cream
Cones

Supply
curve, S3

Supply
curve, S1

Supply
curve, S2

Decrease in
supply

`

Increase in
Supply

2.3 Market Equilibrium
Supply and Demand Together

0

27

Quantity of Ice-Cream Cones

27

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Equilibrium




Quantity supplied = quantity demanded

2.50

Equilibrium price - PE:




Price of
Ice-Cream
Cones
$3.00

Market price has reached the level :




The equilibrium of supply and demand

Equilibrium - a situation

1.00

@KieuMinh.MSc






(a) Excess Supply
Price of
Ice
Cream
Cones

Quantity supplied > quantity demanded
Excess supply
Downward pressure on price




Supply

2.00

@KieuMinh.MSc

Supply

$2.00

Quantity demanded > quantity supplied
Excess demand
Upward pressure on price

Demand
Quantity

demanded

0

31

Surplus

(b) Excess demand
Price of
Ice
Cream
Cones

$2.50

Shortage


30

Markets not in equilibrium

Surplus


1 2 3 4 5 6 7 8 9 10 11 12
Quantity of Ice-Cream Cones

30

29

Market Surplus and Shortage

Demand

Equilibrium
quantity

0.50
0



Equilibrium

1.50

Quantity supplied and the quantity demanded at the
equilibrium price

29

Equilibrium
price

2.00

Balances quantity supplied and quantity demanded

Equilibrium quantity - QE


Supply

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32

1.50

Demand

Quantity
supplied

4
7
10
Quantity of Ice-Cream Cones

Quantity
supplied

0

Shortage

Quantity

demanded

4
7
10
Quantity of Ice-Cream Cones

32

8


Three steps to analyzing changes in
equilibrium

Quiz


Market of good A is shown as:





Decide: the event shifts the supply curve, the demand
curve, or both curves
Decide: curve shifts to right or to left
Use supply-and-demand diagram








What are the demand and supply functions?
What is the equilibrium price and quantity?
What are the market quantities at the prices of P1 =
VND 8500 và P2= VND 11500

33

Compare initial and new equilibrium
How the shift affects equilibrium price and quantity

34

How an increase in demand affects the equilibrium
Price of
Ice-Cream
Cones

Supply

2. …resulting in
a higher price . . .

Price of
Ice-Cream

Cones

New equilibrium

2.00

Initial equilibrium
Demand

D2
3. …and a higher quantity sold.

0

35

S2
S1

$2.50

Initial equilibrium
D1

1. An increase in the
price of sugar reduces
the supply of ice cream . . .

2. …resulting in
a higher price . . .

New equilibrium

2.00

34

How a decrease in supply affects the equilibrium

1. Hot weather
increases the demand
for ice cream . . .

$2.50

@KieuMinh.MSc

3. …and a smaller quantity sold.

7
10
Quantity of Ice-Cream Cones

0

35

36

4

7
Quantity of Ice-Cream Cones

36

9


What happens to price and quantity when supply or demand
shifts?

A shift in both supply and demand
Price of
(a) Price Rises, Quantity Rises
Ice
Cream
New
S2 S
equilibrium
Cones Large
1

increase
in demand

P2

Price of (b) Price Rises, Quantity Falls
Ice
S2

Cream Small
Cones increase
in demand

S1

New
equilibrium

No change
In Supply

P2
Small
decrease
in supply

P1

D2

P1

D2

Initial
equilibrium

Initial
equilibrium

D1
0

Q1

Q2

Quantity of Ice-Cream Cones

Large
decrease
in supply

0

D1

Q2 Q1

A decrease
In supply

No change
In demand

P same
Q same

P down

Q up

P up
Q down

An increase
In demand

P up
Q up

P ambiguous
Q up

P up
Q ambiguous

A decrease
In demand

P down
Q down

P Down
Q ambiguous

P ambiguous
Q down

Quantity of Ice-Cream Cones

37

37

38

38

Quick review

Quiz


True or False. Explain.



A and B are substitutes.The increasing price of A
leads the price of B decreased.






39

An increase
In Supply

What are demand
determinants?
What are supply
determinants?
What is excess demand?
What is excess supply?

40

10


The Price Elasticity of Demand
42



Definition: Measure of how much quantity demanded of a
good responds to 1% change in the price of that good

EPD 

2.3 The Elasticity


%Q D
%P

E dp < 0

Elasticity of Demand
Elasticity of Supply

Computing the price elasticity of
demand


Computing the price elasticity of
demand

Use absolute value (drop the minus sign)




Arc-elasticity of demand: Midpoint method


Two points: (Q1, P1) and (Q2, P2)

A

PA

E DP 

(Q2  Q1 )/[(Q 2  Q1 )/ 2 ]
(P2  P1 )/[(P2  P1 )/ 2 ]

(Q  Q )( P  P )
 2 1 2 1
(P2  P1 )(Q2  Q1 )

Point-elasticity of demand


P

EPD 
B

PB
QA

One points (Q*, P*)

QB

Q



%Q dQ / Q dQ P
P*


  Q' ( p ) 
%P dP / P dP Q
Q*

E.g. Demand curve Q = 50- 3P. What is the elasticity of demand at the
point of P = 5

PA = 25, QA = 150
PB = 12, QB = 320
What is the AB arc elasticity
of demand?
44

11


Determinants of price elasticity of
demand

Variety of demand curves









Elasticity = 1







Elasticity = infinity
Demand curve – horizontal

Necessities – inelastic demand
Luxuries – elastic demand

Definition of the market


Elasticity > 1

(e) Demand is perfectly elastic






(d) Demand is elastic

Goods with close substitutes: More elastic demand

Necessities vs. luxuries


Elasticity < 1



Availability of close substitutes




(c) Demand has unit elasticity




Elasticity = 0
Demand curve: vertical

(b) Demand is inelastic






(a) Demand is perfectly inelastic

Narrowly defined markets – more elastic demand

Time horizon

The flatter the demand curve, the greater the price elasticity of

demand
46

(2)Income elasticity of demand ( EDI)

Elasticity of a linear demand curve (graph)
Price


Elasticity
is larger
than 1

$7
6

Measure of how much the quantity demanded of a good
responds to 1% change in consumers’ income

E ID 

5
1. an

4
3
2



2

4

6

8

10 12 14

Normal goods: EDI >0


Demand

1
0

Elasticity
is smaller
than 1





Quantity

%QD
%I

Necessities: O< EDI <1
Luxuries:EDI >1

Inferior goods: EDI <0

The slope of a linear demand curve is constant, but its elasticity is not.

47

12


(3)Cross-price elasticity of demand

(4) The Price Elasticity of Supply
50







Measure of how much the quantity demanded of one good
X responds to 1% change in the price of another good Y

E XY 

Substitutes: Exy >0

Complements: Exy <0
Independents: Exy =0



%QDx
%PY

Measure of how much the quantity supplied of a good
responds to 1% change in the price of that good

EPS 


Computing price elasticity of supply

Depends on the flexibility of sellers to change the amount
of the good they produce

Variety of supply curves


Arc elasticity
(P1, Q1)
(P2, Q2)
Q1  Q 0
Q1  Q 0
)
2


P1  P 2
P1  P 2
(
)
2
(

E PS

Supply is perfectly inelastic


Point elasticity
A(P, Q)





dQ P
P

  Q`( P) 
dP Q
Q







Elasticity >1
Supply curve – flat

Supply is perfectly elastic



51

Elasticity =1

Elastic supply




Elasticity < 1
Supply curve – sloppy

Unit elastic supply




Elasticity =0
Supply curve – vertical

Inelastic supply



%QS
E PS 
%P

%Q S
%P

Elasticity = infinity
Supply curve – horizontal

52

13


Applications of Supply, Demand, &
Elasticity

Determinant of price elasticity of supply
Time period







Supply is more elastic in long run

Why did OPEC fail to keep the price of oil high?


Substitutions of inputs:





1970s: OPEC reduced supply of oil



Supply is more elastic when inputs have more substitutes

Increase in prices 1973-1974 and 1971-1981
Short-run: supply is inelastic




Decrease in supply: large increase in price

1982-1990 – price of oil decreased


Long-run: supply is elastic


Decrease in supply: small increase in price

54

53

8
A reduction in supply in the world market for oil
(a) The Oil Market in the Short Run

Price

1. In the short run, when supply and
demand are inelastic, a shift in supply. . .

S2

(b) The Oil Market in the Long Run

Price

1. In the long run, when supply and
demand are elastic, a shift in supply. . .

S1

S2 S
1

P2

P1

1. an

2. … leads to a
large increase
in price

2. … leads to a
small increase
in price

Demand
0

Quantity

2.4. Government Policies

1. an

P2
P1

0

In a “free”, unregulated market system, market forces establish
equilibrium prices and quantities.
While equilibrium conditions may be efficient it may be true that
not everyone, i.e. buyer or seller are satisfied.

Demand
Quantity

When the supply of oil falls, the response depends on the time horizon. In the short run,
supply and demand are relatively inelastic, as in panel (a). Thus, when the supply curve
shifts from S1 to S2, the price rises substantially. By contrast, in the long run, supply and
demand are relatively elastic, as in panel (b). In this case, the same size shift in the supply
curve (S1 to S2) causes a smaller increase in the price.

55

56

14


(1) Controls on Prices



a. Price ceiling

Enacted when policy-makers believe that the market price
is unfair to buyers and sellers.
Result in government policies,






Price ceiling: Legal maximum on the price at which a good
can be sold


Examples:
Not binding



Binding constraint



price ceilings and floors.
Tax policies
Subsidies






Above the equilibrium price
Below the equilibrium price
Shortage: Sellers must ration the scarce goods


The rationing mechanisms – not desirable

58

b. Price floor

A market with a price ceiling
(a) A price ceiling that is not binding
Price of
Ice
Cream
Cones

(b) A price ceiling that is binding
Price of
Ice
Cream
Cones

Supply



Supply

Price ceiling

$4



Equilibrium
price



$3

3
Equilibrium
price

2



Demand

Shortage

0

100
Quantity of Ice-Cream Cones



Price ceiling

Quantity
supplied

Equilibrium
quantity
0

Price floor: Legal minimum on the price at which a good
can be sold
Not binding

Demand

Binding constraint



Quantity
demanded



125
75
Quantity of Ice-Cream Cones

59

Below the equilibrium price
No effect
Above the equilibrium price
Surplus: Some seller are unable to sell what they want

The rationing mechanisms – not desirable

60

15


The minimum wage

A market with a price floor
(a) A price floor that is not binding

Price of
Ice
Cream
Cone

Supply

Price of
Ice
Cream
Cone
$4

(b) A price floor that is binding
Surplus




Price floor



3

$3
Equilibrium
price

Equilibrium
price

Price floor

2

Market for labor


Supply

If minimum wage – above equilibrium



0

Quantity

demanded

Quantity
supplied

61

(a) A free labor market

(b) A Labor Market with a
Binding Minimum Wage
Wage
Labor
supply

Labor surplus
(unemployment)

Labor
demand

Labor
demand

0

Labor
supply

Minimum

wage

Equilibrium
wage

Equilibrium
employment

Quantity
of Labor

0

Quantity
demanded

62

Quiz

How the minimum wage affects the labor market
Wage

Unemployment
Higher income - workers who have jobs
Lower income - workers who cannot find jobs

120
80
Quantity of Ice-Cream Cones

0

100
Quantity of Ice-Cream Cones



Demand

Demand
Equilibrium
quantity

Workers - supply of labor
Firms – demand for labor

Quantity Quantity
supplied of Labor

63

Market of good B has demand and supply as:
P = 3Q – 12
P = 18 – 2Q
(P: $/unit, Q:kg)
1. What is the price and quantity of the free market?
2. If the Government controls the price by a price ceiling of
$4/kg and supplies shortage, what is the price and quantity
on the market?

3. Graphing out the result.
4. How much is the total surplus of this market according to aquestion?
5. How did the total surplus change in b- question?
64

16


6

b. Taxes


A tax on sellers
P

Taxes on sellers







Equilibrium with tax

Immediate impact on sellers
Shift in supply
Supply curve shifts left
Higher equilibrium price

Lower equilibrium quantity
The tax – reduces the size of the market

Price
buyers
pay
Price
without
tax

S2

S1

A tax on sellers
shifts the supply
curve upward
by the size of
the tax

Ptax
Tax

Pe

Equilibrium without tax

Ps

Price

sellers
receive

Demand, D1
0

Qtax Qe

Q

66

Taxes on sellers



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Taxes discourage market activity
Smaller quantity sold
Buyers and sellers share the burden of tax
Buyers pay more:Worse off
Sellers receive less
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Get the higher price but pay the tax
Overall: effective price fall

Worse off

Quiz
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67

Market of good X has Demand and Supply as:
P = 100 – Q and P = 15 + 2Q
(P: $/unit; Q: 1000unit)
What is the equilibrium price and quantity of the market?
What are the price elasticities of demand and supply at the
equilibrium? (after chapter 3)
If the government impose a tax of $5 per unit on the sellers of
X, what is the new market price and quantity?
How much is the tax revenue of the government?
How is the tax burden shared between sellers and buyers?
Graph out the results.
68

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